Activision 2018 Annual Report

2018 Annual Report

Cover: Activision Blizzard has the

most talented, passionate and

dedicated team in entertainment.

To Our Shareholders

Since 1991, when we ﬁrst purchased our

stake in the company and were given the

privilege of managing it, our book value

per share has grown at a rate of 31%

compounded annually. If you had invested

$1,000 in our company 20 years ago, your

investment would have been worth $55,236

at the end of 2018, 18 times more than the

S&P 500’s $2,985 over the same period.

Net bookings is an operating metric that is deﬁned as the net amount of products and services

sold digitally or sold-in physically in the period, and includes license fees, merchandise, and

publisher incentives, among others.

We have begun our letter with this paragraph for many

years. It is inspired by our commitment to the principles we

have learned about value creation from Warren Buffett and

Charlie Munger. We do, however, recognize there are other

considerations for determining the value of our business

and we also attempt to include those in our reports as

appropriate and permitted.

In many ways, 2018 was a strong year for Activision

Blizzard. We achieved record net bookings

of $7.3 billion

and non-GAAP EPS of $2.72 (it is important to understand

the meaning of these terms and how non-GAAP EPS

reconcile to GAAP, and we explain this in the tables at

the end of this Annual Report). Our Activision and King

segments delivered more operating income than any period

in our history, and we generated $1.8 billion of operating

cash ﬂow. At the same time, we encountered issues that

negatively impacted our results in the latter part of the year

as well as our outlook for 2019.

Some of the important metrics by which we measure our

success are reach, engagement and player investment, and

while we did have record ﬁnancial results in 2018, we didn’t

achieve the reach, engagement and player investment

goals we set for ourselves. In an industry with great growth

prospects, our organic growth over the last few years has

not been satisfactory to us.

As we reﬂect on 2018, we realize that we didn’t deliver the

amount of compelling in-game content that our communities

demand and deserve, and our revenues from this part

of the business failed to meet our expectations. We also

didn’t make the progress we were hoping for on major

upfront content in our pipeline, and therefore we expect

to have fewer big franchise launches in 2019 than in past

years. While our business has become more recurring

over time, and our results are less driven by new releases

than they used to be, we will nevertheless see a ﬁnancial

impact as a result of our lighter release slate in 2019.

To address this, we realized that we needed to make

important structural changes to ensure we remain well

positioned to achieve our long-term goals. Those changes

are well under way.

For several decades, the video game industry has been

transforming at a rapid rate. That speed and depth of

evolution seems to accelerate with each passing year,

and for most of our 40 years, our company has been at

the forefront of that change.

Over 350 million customers consume Activision Blizzard’s

content each month. And, when they engage, they spend

roughly 50 minutes per day in our interactive franchises,

invest through online and physical purchasing, and watch

digital advertising. Our conﬁdence in delivering long-term

ﬁnancial success and superior shareholder returns stems

from our portfolio of some of the world’s most beloved

franchises and our track record of operational excellence.

As the industry continues to evolve, we remain motivated

by a singular purpose of ﬁnding more ways of connecting

and engaging the world through epic entertainment.

Refocusing on Our Priorities

We have always believed that prioritizing opportunities

based on our abilities to make the very best games for

our players with the very best ﬁnancial returns for our

shareholders is the key to long-term, sustained success.

Consistent with this longstanding approach, our new,

extremely talented business unit leaders have developed

a clear plan to reinforce our foundation for growth by

increasing our focus on our biggest franchises.

We are investing more in development for our leading,

internally-owned franchises, and plan to grow our

development headcount on our biggest franchises by 20%

as we pursue the vast potential for our games across

upfront releases, in-game content and mobile delivery.

This will ensure our teams can release the consistent ﬂow

of compelling content that our communities have come

to expect from our games while also creating new ways

for fans to interact with the franchises they love. We are

also increasing our focus on adjacent opportunities with

demonstrated potential to increase the reach, engagement

and monetization of our franchises, including esports for

Overwatch League and Call of Duty, and our rapidly

growing advertising business.

By increasing our investment in our biggest franchises and

selectively incubating a few new potential franchises, we are

staying true to the approach of doing a few things very, very

well that drove much of our company’s historic success.

This approach is now more relevant than ever. Gamers

are playing fewer games for longer, and we are fortunate

to have some of the most popular franchises in the world,

including Call of Duty, Candy Crush, Warcraft, Hearthstone,

Overwatch and Diablo. Player expectations are rightly

increasing and our communities are demanding more high-

quality content more frequently. Staying true to our principle

of focusing on the largest and most promising opportunities

will allow us to deliver on those expectations.

To enable our creative teams to focus on these biggest

opportunities, we are reducing or eliminating investment in

games and initiatives that we discovered weren’t living up to

player expectations or that we now believe may not live up

to player expectations in the future. In certain parts of the

business we are also reducing complexity and duplication

in back ofﬁce functions, consolidating certain commercial

operations, and revamping our consumer marketing

capabilities to reﬂect our continued migration to a largely

digital distribution network. This will enable us to better

leverage talent, expertise and scale across our company,

increasing our potential to execute against the substantial

growth opportunities that our industry affords.

It Starts and Ends with Our People

Great entertainment experiences start with great people.

Revolutionary and lasting enterprises all share one thing

in common… a steadfast commitment to talent and a culture

of excellence.

Our talent evaluation process ensures that each new

hire shares that commitment. The ability to inspire is an

attribute we have always prioritized. We search for people

with the potential to be leaders of leaders, not managers of

managers. Our leadership team is a product of this belief.

Each member of the team has demonstrated the ability to

combine creative excellence with a commercial focus on

proﬁtable growth. Identifying, retaining, and developing great

people is fundamental for our continued success.

An evolution of this scale also involves reducing complexity

and duplication in speciﬁc functions across our business

units. Eliminating costs and more effectively allocating

resources to the highest return opportunities is how we

become more efﬁcient and how we improve our overall

ﬁnancial proﬁle. This involved making the difﬁcult but

necessary choice to right-size departments across the

business. This was a difﬁcult process, but these steps

were all in the service of ensuring our creative teams

can continue to thrive and deliver our communities

groundbreaking new content for many years to come.

We are welcoming many new faces to the other parts

of the organization where we are making signiﬁcant

investments. These are the talented individuals who

possess the passion, entrepreneurial spirit and creativity

that is required to create our games.

Owning Our Future

Make no mistake, despite the near-term growth challenges

we have encountered, our pipeline is excellent, our

development talent is the very best in the world, and our

outlook for the long-term is as bright as ever. We believe the

actions we have taken position the company to return to the

operational excellence that has deﬁned Activision Blizzard

throughout its history. And as our execution excellence

returns, we expect to enjoy the dual tailwinds of strong

industry growth and company-speciﬁc opportunities that we

have crafted for our fully-owned intellectual properties.

Monthly active users is deﬁned as number of individuals who accessed a particular game

in a given month averaged across the number of months in a respective period. Refer to the

deﬁnition included in the ﬁnancial review herein for additional details.

There are more gamers than ever before. Gaming remains

the most engaging form of entertainment and has now

become the vehicle through which social activity is

increasingly occurring. We estimate that revenues in our

industry exceeded $140 billion last year and grew 13%

year-over-year. Even as one of the largest standalone

interactive entertainment companies, our share was only in

the mid-single digits, highlighting the fragmentation of our

market and the opportunity ahead of us.

The increasing sophistication of mobile devices affords

us ever-larger creative opportunities to bring our core

intellectual properties to larger audiences and to offer

current players more ways to engage with their favorite

franchises. Games are becoming ever more social, further

deepening the experience for communities and widening

the moats around the largest franchises.

Investment models continue to evolve too. Free-to-play

business models have increased the total addressable

audience for gaming, initially on PC and mobile platforms

and more recently, in certain genres on consoles. In 2018,

we saw the highest growth in industry console game

revenues in many years. We believe that we are in a strong

position to take advantage of the free-to-play opportunity

as we already operate multiple models at scale, including

free-to-play titles, micro-transaction-based games, games

with an upfront charge or with a subscription, and multiple

combinations of these models. This provides a range of

options for our product teams from which to pair the best

gameplay experience with the best economic model.

At the center of this rapidly growing industry, our franchises

continue to prove their durability. Call of Duty recently

celebrated its 15-year anniversary and the Warcraft

universe will reach its 25th birthday in November of this

year. As we look forward, we see a rich pipeline that can

enable each of our major owned franchises to continue

to thrive for many years to come, with regular content

launches and robust ongoing live operations, enhanced

by compelling mobile experiences.

In addition to the growth proﬁle of our core business,

we will strive to expand the reach, engagement and

monetization of our franchises through initiatives in

esports, in-game advertising, and consumer products.

We are only able to pursue these opportunities because

our key franchises are based on internally-owned

intellectual property created by our wholly-owned studios

around the world. We are in a strong position with clear

competitive advantages – we are a creator of premium

content that we fully own, we have multiple monetization

models at scale, and we have a direct digital connection

with more than 350 million monthly active users

2018 Successes

We made strong progress in some very important areas

this past year.

Our advertising business had a successful year as the

team executed against this signiﬁcant opportunity. As we

have discussed previously in our letters, King’s large and

highly engaged audience offers great potential upside

from the careful integration of advertising into our network.

King’s games represent a premium, safe environment for

advertisers, and we have invested in creating unique, highly

differentiated ad products that can enhance the experience

for players while delivering strong results for advertisers’

campaigns.

After extensive development and testing we started scaling

ads on the King network in 2018. As we anticipated, the

ads team, working closely with our game teams, saw a

strong response from users and advertisers. They hit some

important ﬁnancial milestones, reaching proﬁtability in Q1

and growing net bookings strongly each quarter after that.

The advertising business is starting to be a meaningful

contributor to King overall, and we expect it to cross $100

million in net bookings this year. Looking ahead, we will

continue to work to enable the delivery of advertising to

more of King’s users and educate brand advertisers on the

strong value proposition that our platform offers. And, longer

term, we see clear potential to leverage our ad platform

across our portfolio, including advertising in our other mobile

games and within our espor

ts network.

We have also seen success in our pioneering professional

esports initiative. We have paved the way as the industry

leader in esports, solidifying the enduring appeal of our

franchises and setting the foundation for substantial

shareholder value creation over time.

The inaugural season of the Overwatch League saw millions

of fans tuning in each week and culminated in a sold-out

Grand Finals event at the Barclays Center in New York that

was watched by more than 10 million viewers around the

world. Our unique approach to esports, with a focus on city-

based teams, professional players, structured economics,

and premium content is already starting to pay off.

We sold an additional eight Overwatch League teams

ahead of the second season that began this February.

We now have 20 city-based teams owned by some of the

most experienced traditional sports and esports partners

in the world. These recent sales were at substantially

higher prices than our ﬁrst team sales, reﬂecting the

ﬁnancial over-performance of the League versus our

original plans and representing further validation of our

unique approach to esports.

As the mainstream popularity of esports continues to

grow, we’re well positioned to leverage the success of our

Overwatch League model to develop esports opportunities

for other franchises, starting with Call of Duty. And just

as with the Overwatch League, we are committed to

pursuing this opportunity with a world class organization.

We are attracting the very best and brightest people who

are drawn to the excitement, opportunity and rewards our

company provides.

Our employees and players continue to support our

corporate social responsibility programs. One of the most

successful of these initiatives has been the Call of Duty

Endowment, which we founded in 2009 to help returning

veterans transition to the civilian workforce. We make

grants to some of the world’s most efﬁcient and effective

organizations that help place our veterans into high-quality

careers and we work with our grantee organizations to

raise the bar even higher, sharing best practices to further

improve our grantees’ ability to serve veterans. Over the past

10 years, we’ve funded the placement of more than 54,000

former service members into great jobs, and we expect to

place 100,000 veterans into meaningful careers by 2024.

Consistent Principles

We thank you for your continued support and investment

in Activision Blizzard. Our core principles will continue to

guide us:

Delivering innovative and compelling entertainment

experiences with continuous investment in our franchises

and communities;

Focusing on the largest and most promising

opportunities;

Recruiting, rewarding and retaining diverse world-

class talent, emphasizing our shared common value and

commitment to excellence;

Remaining disciplined in our responsibility to deliver

shareholder value.

We could easily use an entire letter like this to recognize

and celebrate the contributions of our talented teams

around the world. They remain the engine for our success.

On behalf of all of us at Activision Blizzard, we thank you for

providing the opportunity to connect and engage the world

through our epic entertainment.

With appreciation,

Bobby Kotick

Chief Executive Ofﬁcer

Activision Blizzard

Brian Kelly

Chairman of the Board

Activision Blizzard

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2018

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-15839

ACTIVISION BLIZZARD, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

95-4803544

(I.R.S. Employer Identification No.)

3100 Ocean Park Boulevard, Santa Monica, CA

(Address of principal executive offices)

90405

(Zip Code)

Registrant’s telephone number, including area code: (310) 255-2000

Securities registered pursuant to Section 12(b) of the Act:

Title of each Class

Name of Each Exchange on Which Registered

Common Stock, par value $.000001 per share

The Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act

of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such

filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to

Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit

such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be

contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or

any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting

company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging

growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x

Accelerated Filer o

Non-accelerated Filer o

Smaller Reporting Company o

Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with

any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The aggregate market value of the registrant’s Common Stock held by non-affiliates on June 30, 2018 (based on the closing sale price as reported

on the Nasdaq) was $57,447,460,580.

The number of shares of the registrant’s Common Stock outstanding at February 21, 2019 was 763,833,873.

Documents Incorporated by Reference

Portions of the registrant’s definitive Proxy Statement, to be filed with the Securities and Exchange Commission with respect to the 2019 Annual

Meeting of Shareholders which is expected to be held on June 20, 2019, are incorporated by reference into Part III of this Annual Report.

This page intentionally left blank

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

Table of Contents

Page No.

PART I. ........................................................................................................................................................................

Cautionary Statement ............................................................................................................................

Item 1.

Business ................................................................................................................................................

Item 1A.

Risk Factors ...........................................................................................................................................

Item 1B.

Unresolved Staff Comments .................................................................................................................

Item 2.

Properties ..............................................................................................................................................

Item 3.

Legal Proceedings .................................................................................................................................

Item 4.

Mine Safety Disclosures .......................................................................................................................

PART II. ......................................................................................................................................................................

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of

Equity Securities ...................................................................................................................................

Item 6.

Selected Financial Data .........................................................................................................................

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations ...............

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk ...............................................................

Item 8.

Financial Statements and Supplementary Data .....................................................................................

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...............

Item 9A.

Controls and Procedures .......................................................................................................................

Item 9B.

Other Information .................................................................................................................................

PART III. .....................................................................................................................................................................

Item 10.

Directors, Executive Officers, and Corporate Governance ...................................................................

Item 11.

Executive Compensation .......................................................................................................................

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters ..................................................................................................................................................

Item 13.

Certain Relationships and Related Transactions, and Director Independence .....................................

Item 14.

Principal Accounting Fees and Services ...............................................................................................

PART IV. .....................................................................................................................................................................

Item 15.

Exhibits, Financial Statement Schedule ................................................................................................

Item 16.

Form 10-K Summary ............................................................................................................................

Exhibit Index ...............................................................................................................................................................

E-1

SIGNATURES ............................................................................................................................................................

E-5

PART I

CAUTIONARY STATEMENT

This Annual Report on Form 10-K contains, or incorporates by reference, certain forward-looking statements within

the meaning of the Private Securities Litigation Reform Act of 1995. Such statements consist of any statement other than a

recitation of historical facts and include, but are not limited to: (1) projections of revenues, expenses, income or loss,

earnings or loss per share, cash flow, or other financial items; (2) statements of our plans and objectives, including those

related to releases of products or services and restructuring activities; (3) statements of future financial or operating

performance, including the impact of tax items thereon; and (4) statements of assumptions underlying such statements.

Activision Blizzard, Inc. generally uses words such as “outlook,” “forecast,” “will,” “could,” “should,” “would,” “to be,”

“plan,” “plans,” “believes,” “may,” “might,” “expects,” “intends,” “intends as,” “anticipates,” “estimate,” “future,”

“positioned,” “potential,” “project,” “remain,” “scheduled,” “set to,” “subject to,” “upcoming” and other similar

expressions to help identify forward-looking statements. Forward-looking statements are subject to business and economic

risks, reflect management’s current expectations, estimates, and projections about our business, and are inherently uncertain

and difficult to predict.

The company cautions that a number of important factors could cause Activision Blizzard, Inc.’s actual future

results and other future circumstances to differ materially from those expressed in any forward-looking statements. Some of

the risk factors that could cause our actual results to differ from those stated in forward-looking statements can be found in

“Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K. The forward-looking statements contained

herein are based upon information available to us as of the date of this Annual Report on Form 10-K and we assume no

obligation to update any such forward-looking statements. Although these forward-looking statements are believed to be true

when made, they may ultimately prove to be incorrect. These statements are not guarantees of our future performance and

are subject to risks, uncertainties, and other factors, some of which are beyond our control and may cause actual results to

differ materially from current expectations.

Activision Blizzard Inc.’s names, abbreviations thereof, logos, and product and service designators are all either the

registered or unregistered trademarks or trade names of Activision Blizzard. All other product or service names are the

property of their respective owners. All dollar amounts referred to in, or contemplated by, this Annual Report on Form 10-K

refer to United States (“U.S.”) dollars, unless otherwise explicitly stated to the contrary.

Item 1. BUSINESS

Overview

Activision Blizzard, Inc. is a leading global developer and publisher of interactive entertainment content and

services. We develop and distribute content and services on video game consoles, personal computers (“PC”s), and mobile

devices. We also operate esports leagues and events and create film and television content based on our intellectual property.

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

Blizzard, Inc. and its subsidiaries.

The Company was originally incorporated in California in 1979 and was reincorporated in Delaware in December

1992. In connection with the 2008 business combination by and among the Company (then known as Activision, Inc.),

Vivendi S.A. (“Vivendi”), and Vivendi Games, Inc., then an indirect wholly-owned subsidiary of Vivendi, we were renamed

Activision Blizzard, Inc.

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

The King Acquisition

On February 23, 2016 (the “King Closing Date”), we acquired King Digital Entertainment, a leading interactive

mobile entertainment company (“King”), by purchasing all of its outstanding shares (the “King Acquisition”). We made this

acquisition because we believed that the addition of King’s highly complementary mobile business positioned us as a global

leader in interactive entertainment across mobile, console, and PC platforms, and aligned us for future growth. The aggregate

purchase price of approximately $5.8 billion was funded with $3.6 billion of existing cash and $2.2 billion of cash from new

debt issued by the Company. King’s results of operations since the King Closing Date are included in our consolidated

financial statements.

Our Strategy and Vision

Our objective is to continue to be a worldwide leader in the development, publishing, and distribution of

high-quality interactive entertainment content and services, as well as related media, that deliver engaging entertainment

experiences on a year-round basis. In pursuit of this objective we focus on three strategic pillars: expanding audience reach;

driving deep consumer engagement; and providing more opportunities for player investment.

Expanding audience reach. Building on our strong established franchises and creating new franchises through

compelling new content is at the core of our business. We endeavor to reach as many consumers as possible either through:

(1) the purchase of our content and services; (2) engagement in our free-to-play games, which allow consumers to play games

with no up-front cost but provide for player investment through sales of downloadable content or via microtransactions; or

(3) engagement in other types of media based on our franchises, such as esports and film and television content.

Driving deep consumer engagement. Our high-quality entertainment content not only expands our audience reach,

but it also drives deep engagement with our franchises. We design our games, as well as related media, to provide a depth of

content that keeps consumers engaged for a long period of time following a game’s release, delivering more value to our

players and additional growth opportunities for our franchises.

Providing more opportunities for player investment. Increasingly, our consumers are connected to our games

online through consoles, PCs, and mobile devices. This allows us to offer additional digital player investment opportunities

directly to our consumers on a year-round basis. In addition to purchasing full games or subscriptions, players can invest in

certain of our games and franchises by purchasing incremental “in-game” content (including larger downloadable content or

smaller content, via microtransactions). These digital revenue streams tend to be more recurring and have relatively higher

profit margins. Further, if executed properly, additional player investment can increase engagement as it provides more

frequent and incremental content for our players. In addition, we have begun to generate revenue through offering advertising

within certain of our franchises, and we believe there are opportunities to grow new forms of player investment through

esports, film and television, and consumer products. We are in the early stages of developing these new revenue streams.

Our strategy is ultimately aimed at creating shareholder value and enhancing returns. We strive to increase

profitability, cash flows, and return on capital—and to do so while keeping our company a great place to work for our

employees.

Reportable Segments

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

(i) Activision Publishing, Inc.

Activision Publishing, Inc. (“Activision”) is a leading global developer and publisher of interactive software

products and entertainment content, particularly for the console platforms. Activision primarily delivers content through retail

and digital channels, including full-game and in-game sales, as well as by licensing software to third-party or related-party

companies that distribute Activision products. Activision develops, markets, and sells products primarily based on our

internally developed intellectual properties, as well as some licensed properties.

Activision’s key product franchise is Call of Duty

, a first-person shooter for the console and PC platforms. Call of

Duty has been the number one console franchise globally for nine of the last 10 years, based on data from The NPD Group,

GfK Chart-Track, and GSD, and our internal estimates of dollar sales on front line games.

In 2010, Activision entered into an exclusive relationship with Bungie, Inc. (“Bungie”) to publish games in the

Destiny franchise. Effective December 31, 2018, Activision and Bungie, mutually agreed to terminate their publishing

relationship related to the Destiny franchise. As part of this termination, Activision agreed to transfer its publishing rights for

the Destiny franchise to Bungie in exchange for cash and Bungie’s assumption of on-going customer obligations of

Activision. Going forward, Activision no longer has any material rights or obligations related to the Destiny franchise. As a

result of the agreement to terminate the relationship, the Company recognized net bookings, a key operating metric, of

$20 million, GAAP revenues of $164 million, and GAAP operating income of $91 million for the year ended December 31,

2018.

(ii) Blizzard Entertainment, Inc.

Blizzard Entertainment, Inc. (“Blizzard”) is a leading global developer and publisher of interactive software

products and entertainment content, particularly for the PC platform. Blizzard primarily delivers content through retail and

digital channels, including subscriptions, full-game, and in-game sales, as well as by licensing software to third-party or

related-party companies that distribute Blizzard products. Blizzard also maintains a proprietary online gaming service,

Blizzard Battle.net

, which facilitates digital distribution of Blizzard content and selected Activision content, online social

connectivity, and the creation of user-generated content. Blizzard also includes the activities of the Overwatch League

, the

first major global professional esports league with city-based teams, and our Major League Gaming (“MLG”) business,

which is responsible for various esports events and serves as a multi-platform network for Activision Blizzard esports

content.

Blizzard’s key product franchises include: World of Warcraft

, a subscription-based massive multi-player online

role-playing game for the PC platform; StarCraft

, a real-time strategy franchise for the PC platform; Diablo

, an action

role-playing franchise for the PC and console platforms; Hearthstone

, an online collectible card franchise for the PC and

mobile platforms; and Overwatch

, a team-based first-person shooter for the PC and console platforms.

(iii) King Digital Entertainment

King is a leading global developer and publisher of interactive entertainment content and services, primarily on

mobile platforms, such as Google Inc.’s (“Google”) Android and Apple Inc.’s (“Apple”) iOS. King also distributes its

content and services on the PC platform, primarily via Facebook. King’s games are free to play; however, players can acquire

in-game items, either with virtual currency or real currency, and we continue to focus on in-game advertising as a growing

source of additional revenue.

King’s key product franchises, all of which are for the mobile and PC platforms, include: Candy Crush™, which

features “match three” games; Farm Heroes™, which also features “match three” games; and Bubble Witch™, which

features “bubble shooter” games. King had two of the top 10 highest-grossing titles in the U.S. mobile app stores for the last

21 quarters in a row, according to App Annie Intelligence and internal estimates for the Apple App Store and the Google Play

Store combined.

Other

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

• the Activision Blizzard Studios (“Studios”) business, which is devoted to creating original film and television

content based on our library of globally recognized intellectual properties, and which, in September 2018,

released the third season of the animated TV series Skylanders™ Academy on Netflix; and

• the Activision Blizzard Distribution (“Distribution”) business, which consists of operations in Europe that

provide warehousing, logistics, and sales distribution services to third-party publishers of interactive

entertainment software, our own publishing operations, and manufacturers of interactive entertainment

hardware.

Products

We develop interactive entertainment content and services, principally for console, PC, and mobile devices, and we

market and sell our games through retail and digital distribution channels. Our products span various genres, including

first-person shooter, action/adventure, role-playing, strategy, and “match three,” among others. We primarily offer the

following products and services:

• full-games, which typically provide access to main game content, primarily for console or PC;

• downloadable content, which provides players with additional in-game content to purchase following the

purchase of a full game;

• microtransactions, which typically provide relatively small pieces of additional in-game content or

enhancements to gameplay, generally at relatively low price points; and

• subscriptions for players in our World of Warcraft franchise that provide for continual access to the game

content.

Providing additional opportunities for player investment outside of full-game purchases has allowed us to shift from

our historical seasonality to a more consistently recurring and year-round revenue model. In addition, if executed properly, it

allows us to increase player engagement, as it provides more frequent and incremental content for our players.

Product Development and Support

We focus on developing enduring franchises backed by well-designed, high-quality games with regular content

updates. We build interactive entertainment content with the potential for broad reach, sustainable engagement and

year-round player investment. It is our experience that enduring franchises then serve as the basis for sequels, prequels, and

related new products and content that can be released over an extended period of time. We believe that the development and

distribution of products and content based on established franchises enhances predictability of revenues and the probability of

high unit volume sales and operating profits. We intend to continue development of owned franchises in the future.

We develop and produce our titles using a model in which a group of creative, technical, and production

professionals, including designers, producers, programmers, artists, and sound engineers, in coordination with our marketing,

finance, analytics, sales, and other professionals, has responsibility for the entire development and production process,

including the supervision and coordination of internal and, where appropriate, external resources. We believe this model

allows us to deploy the best resources for a given task, by supplementing our internal expertise with top-quality external

resources on an as-needed basis.

While most of the content for our franchises is developed by internal studios, we periodically engage independent

third-party developers to create content on our behalf. From time to time, we also acquire the license rights to publish and/or

distribute software products that are, or will be, independently created by third-party developers.

We provide various forms of product support. Central technology and development teams review, assess, and

provide support to products throughout the development process. Quality assurance personnel are also involved throughout

the development and production of published content. We subject all such content to extensive testing before public release

to ensure compatibility with appropriate hardware systems and configurations and to minimize the number of bugs and other

defects found in the products. To support our content, we generally provide 24-hour game support to players through various

means, primarily online and by telephone.

Marketing, Sales, and Distribution

Many of our products contain software that enables us to connect with our gamers directly. This provides a

significant marketing tool that allows us to communicate and market directly to our customers, including through customized

advertising and in-game messaging based on customer preferences and trends. Our marketing efforts also include activities

on Facebook, Twitter, Twitch, YouTube, and other online social networks, other online advertising, other public relations

activity, print and broadcast advertising, coordinated in-store and industry promotions (including merchandising and point of

purchase displays), participation in cooperative advertising programs, direct response vehicles, and product sampling through

demonstration software distributed through the Internet or the digital online services provided by our partners. From time to

time, we also receive marketing support from hardware manufacturers, producers of consumer products related to a game,

and retailers in connection with their own promotional efforts, as well as co-marketing from promotional partners.

Our physical products are available for sale in outlets around the world. These products are sold primarily on a

direct basis to mass-market retailers (e.g., Target, Walmart), consumer electronics stores (e.g., Best Buy), discount

warehouses, game specialty stores (e.g., GameStop), and other stores (e.g., Amazon), or through third-party distribution and

licensing arrangements.

Most of our products and content are also available in a digital format, which allows consumers to purchase and

download the content at their convenience directly to their console, PC, or mobile device through our platform partners,

including Microsoft Corporation (“Microsoft”), Sony Interactive Entertainment Inc. (“Sony”), Apple, Google,

Nintendo Co., Ltd. (“Nintendo”), and Facebook. Blizzard utilizes its proprietary online gaming service, Blizzard Battle.net,

to distribute most of Blizzard’s content and selected Activision content directly to PC consumers.

In addition to serving as a distribution platform, Blizzard Battle.net offers players communications features, social

networking, player matching and digital content delivery and is designed to allow people to connect regardless of which of

our games on Blizzard Battle.net they are playing. It attracts millions of active players, making it one of the largest online

game-related services in the world.

Manufacturing

We prepare master program copies for our products on each release platform. With respect to products for

Microsoft, Sony, and Nintendo consoles, our disk duplication, packaging, printing, manufacturing, warehousing, assembly,

and shipping are performed by third-party subcontractors or distribution facilities owned by us.

Microsoft, Sony, and Nintendo generally specify or control the manufacturing and assembly of finished products

and license their hardware technologies to us. In return, we pay an applicable royalty per unit once the manufacturer fills the

product order, even if the units do not ultimately sell. We deliver the master materials to the licensor or its approved

replicator, who then manufactures the finished goods and delivers them to us for distribution under our label.

Significant Customers and Top Franchises

Customers

While the Company does sell directly to end consumers in certain instances, such as sales through Blizzard’s

proprietary online gaming service platform, Blizzard Battle.net, in other instances our customers may be platform providers,

such as Sony, Microsoft, Google, and Apple, or retailers, such as Walmart and GameStop, who act as distributors of our

content to end consumers. For the year ended December 31, 2018, we had three customers—Apple, Sony, and Google—who

accounted for 15%, 13%, and 11%, respectively, of net revenues. For the year ended December 31, 2017, we had three

customers—Apple, Sony, and Google—who accounted for 16%, 14%, and 10%, respectively, of net revenues. For the year

ended December 31, 2016, we had two customers—Sony and Apple—who each accounted for 13% of net revenues. No other

customer accounted for 10% or more of our net revenues in the respective periods discussed above.

We had two customers—Sony and NetEase, Inc.—who accounted for 15% and 12%, respectively, of consolidated

gross receivables at December 31, 2018. We had three customers—Sony, Microsoft, and Apple—who accounted for 17%,

14%, and 10%, respectively, of consolidated gross receivables at December 31, 2017. No other customer accounted for 10%

or more of our consolidated gross receivables in the respective periods discussed above.

Top Franchises

For the year ended December 31, 2018, our top three franchises—Call of Duty, Candy Crush, and World of

Warcraft—collectively accounted for 58% of our net revenues. For the years ended December 31, 2017 and 2016, our top

four franchises—Call of Duty, Candy Crush, World of Warcraft, and Overwatch—collectively accounted for 66% and 69%

of our net revenues, respectively. No other franchise comprised 10% or more of our net revenues in the respective periods

discussed above.

Competition

We compete for the leisure time and discretionary spending of consumers with other interactive entertainment

companies, as well as with providers of different forms of entertainment, such as film, television, social networking, music

and other consumer products.

The interactive entertainment industry is intensely competitive and new interactive entertainment software products

and platforms are regularly introduced. We believe that the main competitive factors in the interactive entertainment industry

include: product features, game quality, and playability; brand name recognition; compatibility of products with popular

platforms; access to distribution channels; online capability and functionality; ease of use; price; marketing support; and

quality of customer service.

We compete with other publishers of video game console, PC, and mobile interactive entertainment software. In

addition to third-party software competitors, integrated video game console hardware and software companies, such as

Microsoft, Sony, and Nintendo, compete directly with us in the development of software titles for their respective platforms.

A number of software publishers have developed and commercialized, or are currently developing, online games for use by

consumers.

Intellectual Property

Like other interactive entertainment companies, our business is significantly dependent on the creation, acquisition,

use and protection of intellectual property. Some of this intellectual property is in the form of copyrighted software code,

patented technology, and other technology and trade secrets that we use to develop and run our games. Other intellectual

property is in the form of copyrighted audio-visual elements that consumers can see, hear, and interact with when they are

playing our games.

We develop a majority of our products based on wholly-owned intellectual properties, such as Call of Duty, World

of Warcraft, and Candy Crush, among others. In other cases, we obtain intellectual property through licenses and service

agreements. Further, our products that play on consoles and mobile platforms include technology that is owned by the

platform provider and is licensed non-exclusively to us for use in the relevant product. We also license technology from

providers other than console manufacturers in developing our content and services. While we may have renewal rights for

some licenses, our business is dependent on our ability to continue to obtain the intellectual property rights from the owners

of these rights on reasonable terms and at reasonable rates.

We are actively engaged in enforcement of our copyright, trademark, patent, and trade secret rights against potential

infringers of those rights along with other protective activities, including monitoring online channels for distribution of

pirated copies and participating in various enforcement initiatives, education programs and legislative activity around the

world. For our PC products, we use technological protection measures to prevent piracy and the use of unauthorized copies of

our products. For other platforms, the platform providers typically incorporate technological protections and other security

measures in their platforms to prevent the use of unlicensed products on those platforms.

Executive Officers

Our executive officers and their biographical summaries are provided below:

Name

Age

Position

Robert A. Kotick .................................

Chief Executive Officer of Activision Blizzard

Collister Johnson .................................

President and Chief Operating Officer of Activision Blizzard

Dennis Durkin .....................................

Chief Financial Officer of Activision Blizzard and President of Emerging

Brands

Brian Stolz ...........................................

Chief People Officer of Activision Blizzard

Christopher Walther ............................

Chief Legal Officer of Activision Blizzard

Robert A. Kotick, Chief Executive Officer of Activision Blizzard

Robert A. Kotick has been a director of Activision Blizzard since February 1991, following his purchase of a

significant interest in the Company, which was then on the verge of insolvency, and serves as our Chief Executive Officer.

Mr. Kotick was our Chairman and Chief Executive Officer from February 1991 until July 2008, when he became our

President and Chief Executive Officer. He served as our President from July 2008 until June 2017, when Mr. Johnson began

serving as our President and Chief Operating Officer. Mr. Kotick is also a member of the board of directors of The

Coca-Cola Company, a multinational beverage corporation, and the boards of trustees for The Center for Early Education and

Harvard-Westlake School. He is also vice chairman of the board and chairman of the committee of trustees of the Los

Angeles County Museum of Art. In addition, Mr. Kotick is the co-founder and co-chairman of the Call of Duty Endowment,

a nonprofit, public benefit corporation that seeks to help organizations that provide job placement and training services for

veterans.

Collister Johnson, President and Chief Operating Officer of Activision Blizzard

Collister “Coddy” Johnson has served as our President and Chief Operating Officer since June 2017. From April

2016 until May 2017, he served as the chief operating officer and co-founder of Altschool, a public benefit, education

technology company, where he continues to serve on the board of directors. Prior to joining Altschool, he held a number of

positions of increasing responsibility at our Company from 2008 to 2016, serving as the chief financial officer and head of

operations of Activision, one of our principal operating units, chief operating officer of studios for Activision, and senior vice

president and chief of staff to our Chief Executive Officer. Mr. Johnson holds a B.A. degree in ethics, politics, and economics

from Yale University and an M.B.A. degree from Stanford University.

Dennis Durkin, Chief Financial Officer of Activision Blizzard and President of Emerging Brands

Dennis Durkin has served as our Chief Financial Officer and President of Emerging Businesses since January 2019.

Mr. Durkin joined the Company in March 2012 as our Chief Financial Officer and served in that role until May 2017. He

served as our Chief Corporate Officer from May 2017 until January 2019. Prior to joining the Company in 2012, Mr. Durkin

held a number of positions of increasing responsibility at Microsoft, a computing software and hardware manufacturer, most

recently serving as the corporate vice president and chief operating and financial officer of Microsoft’s interactive

entertainment business, which included the Xbox console business. Prior to joining Microsoft’s interactive entertainment

business in 2006, Mr. Durkin spent seven years on Microsoft’s corporate development and strategy team, including two years

where he was based in London, England, driving pan-European activity. Before joining Microsoft, Mr. Durkin was a

financial analyst at Alex. Brown and Company. Mr. Durkin holds a B.A. degree in government from Dartmouth College and

an M.B.A. degree from Harvard University.

Brian Stolz, Chief People Officer of Activision Blizzard

Brian Stolz has served as our Chief People Officer since May 2016. Prior to joining the Company, Mr. Stolz served

as Senior Vice President of the neurology, dental, and generics businesses of Valeant Pharmaceuticals. Before that, Mr. Stolz

served as Valeant’s Executive Vice President of Administration and Chief Human Capital Officer. Prior to joining Valeant,

Mr. Stolz held positions as a Principal at ghSMART and as an Associate Principal at McKinsey & Co. Mr. Stolz holds a B.S.

degree in finance from Georgetown University and an M.B.A. degree from Harvard University.

Christopher Walther, Chief Legal Officer of Activision Blizzard

Christopher Walther has served as our Chief Legal Officer since November 2009 and served as our Secretary from

February 2010 until February 2011. Prior to joining us, Mr. Walther held a number of positions of increasing responsibility

within the legal department of The Procter & Gamble Company from 1992 to 2009, including serving as the general counsel

for Central and Eastern Europe, Middle East and Africa, general counsel for Northeast Asia and, most recently, as general

counsel for Western Europe. Mr. Walther also led Procter & Gamble’s corporate and securities and mergers and acquisitions

practices. Before joining Procter & Gamble, Mr. Walther served as a law clerk for Senior Judge Harry W. Wellford of the

United States Sixth Circuit Court of Appeals. Since 2012, Mr. Walther has served on the board of directors of the Alliance

for Children’s Rights and currently serves as its co-chair. Mr. Walther has also served as our representative on the board of

directors of the Entertainment Software Association since 2013 and on its executive committee. Mr. Walther holds a B.A.

degree in history and Spanish from Centre College and a J.D. degree from the University of Kentucky College of Law.

Employees

At December 31, 2018, we had approximately 9,900 total full-time and part-time employees. At December 31, 2018,

approximately 140 of our full-time employees were subject to fixed-term employment agreements with us.

The majority of our employees in France, Germany, Spain, and Italy are subject to collective agreements as a part of

normal business practices in those countries. In addition, certain employees in those countries are subject to collective

bargaining agreements. To date, we have not experienced any labor-related work stoppages.

Additional Financial Information

See the Critical Accounting Policies section under Item 7 “Management’s Discussion and Analysis of Financial

Condition and Results of Operations” for a discussion of our practices with regard to several working capital items, such as

rights of return. See the “Management’s Overview of Business Trends” under Item 7 “Management’s Discussion and

Analysis of Financial Condition and Results of Operations” for a discussion of the impact of seasonality on our business.

Available Information

Our website, located at https://www.activisionblizzard.com, allows free-of-charge access to our annual reports on

Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those

documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the

“Exchange Act”). The information found on our website is not a part of, and is not incorporated by reference into, this or any

other report that we file with or furnish to the Securities and Exchange Commission (“SEC”).

Our SEC filings are also available to the public over the Internet at the SEC’s website at https://www.sec.gov.

Item 1A. RISK FACTORS

We wish to caution the reader that the following important risk factors, and those risk factors described

elsewhere in this report or in our other filings with the SEC, could cause our actual results to differ materially from

those stated in forward-looking statements contained in this document and elsewhere. These risks are not presented in

order of importance or probability of occurrence. Further, the risks described below are not the only risks that we

face. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also

impair our business operations. Any of these risks may have a material adverse effect on our business, reputation,

financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, or stock price.

If we do not consistently deliver popular, high-quality content in a timely manner, or if consumers prefer competing

products, our business may be negatively impacted.

Consumer preferences for games are usually cyclical and difficult to predict, and even the most successful content

remains popular for only limited periods of time, unless refreshed with new content or otherwise enhanced. In order to

remain competitive, we must continuously develop new products or enhancements to our existing products. These products

or enhancements may not be well-received by consumers, even if well-reviewed and of high quality. Further, competitors

may develop content that imitates or competes with our best-selling games, potentially taking sales away from them or

reducing our ability to charge the same prices we have historically charged for our products. These competing products may

take a larger share of consumer spending than anticipated, which could cause product sales to fall below expectations. If we

do not continue to develop consistently high-quality and well-received games, if our marketing fails to resonate with our

consumers, if consumers lose interest in a genre of games we produce, if the use of cross-promotion within our mobile games

to retain consumers becomes less effective, or if our competitors develop more successful products or offer competitive

products at lower prices, our revenues and profit margins could decline. Further, a failure by us to develop a high-quality

product, or our development of a product that is otherwise not well-received, could potentially result in additional

expenditures to respond to consumer demands, harm our reputation, and increase the likelihood that our future products will

not be well-received. The increased importance of downloadable content to our business amplifies these risks, as

downloadable content for poorly-received games typically generates lower-than-expected sales. In addition, our own

best-selling products could compete with our other games, reducing sales for those other games.

Additionally, consumer expectations regarding the quality, performance and integrity of our products and services

are high. Consumers may be critical of our brands, games, services, and/or business practices for a wide variety of reasons,

and such negative reactions may not be foreseeable or within our control to manage effectively. For example, if our games or

services, such as our proprietary online gaming service, do not function as consumers expect, whether because they fail to

function as advertised or otherwise, our sales may suffer. The risk that this may occur is particularly pronounced with respect

to our games with online features because they involve ongoing consumer expectations, which we may not be able to

consistently satisfy. Our games with online features are also frequently updated, increasing the risk that a game may contain

significant errors, or “bugs.” If any of these issues occur, consumers may stop playing the game and may be less likely to

return to the game as often in the future, which may negatively impact our business.

Further, delays in product releases or disruptions following the commercial release of one or more new products

could negatively impact our business and reputation and could cause our results of operations to be materially different from

expectations. If we fail to release our products in a timely manner, or if we are unable to continue to extend the life of

existing games by adding features and functionality that will encourage continued engagement with the game, our business

may be negatively impacted.

Additionally, the amount of lead time and cost involved in the development of high-quality products is increasing,

and the longer the lead time involved in developing a product and the greater the allocation of financial resources to such

product, the more critical it is that we accurately predict consumer demand for such product. If our future products do not

achieve expected consumer acceptance or generate sufficient revenues upon introduction, we may not be able to recover the

substantial up-front development and marketing costs associated with those products.

We depend on a relatively small number of franchises for a significant portion of our revenues and profits.

We follow a franchise model and a significant portion of our revenues has historically been derived from products

based on a relatively small number of popular franchises. These products are responsible for a disproportionately high

percentage of our profits. For example, revenues associated with the Call of Duty, Candy Crush, and World of Warcraft

franchises, collectively, accounted for approximately 58% of our net revenues—and a significantly higher percentage of our

operating income—for 2018. We expect that a relatively limited number of popular franchises will continue to produce a

disproportionately high percentage of our revenues and profits. Due to this dependence on a limited number of franchises, the

failure to achieve anticipated results by one or more products based on these franchises could negatively impact our business.

Additionally, if the popularity of a franchise declines, we may have to write off the unrecovered portion of the underlying

intellectual property assets, which could negatively impact our business.

We may be unable to effectively manage the continued growth in the scope and complexity of our business, including our

expansion into new business models that are untested and into adjacent business opportunities with large, established

competitors.

We have experienced significant growth in the scope and complexity of our business, including through the King

Acquisition and the development of our esports, advertising, Studios, and consumer products businesses, and remain

ambitious as to the future growth in the scope and complexity of our business. Our future success depends, in part, on our

ability to manage this expanded business and our aspirations for continued expansion. We have dedicated resources both to

new business models that are largely untested, as is the case with esports, and to adjacent business opportunities in which

very large competitors have an established presence, as is the case with our Studios and consumer products businesses. We

do not know to what extent our future expansions will be successful. Further, even if successful, the growth of our business

could create significant challenges for our management, operational, and financial resources, and could increase existing

strain on, and divert focus from, our core businesses. If not managed effectively, this growth could result in the

over-extension of our operating infrastructure, and our management systems, information technology systems, and internal

controls and procedures may not be adequate to support this growth. Failure to adequately manage our growth in any of these

ways may cause damage to our brand or otherwise negatively impact our business. Further, any failure by these new

businesses may damage our reputation or otherwise negatively impact our core business of interactive software products and

entertainment content. Conversely, the success of these new businesses is, in large part, contingent on the success of the

underlying franchises and, as such, a decline in the popularity of a franchise may impact the success of the new businesses

adjacent to that franchise.

We may not realize the expected financial and operational benefits of our recently announced restructuring plan, and its

implementation may negatively impact our business.

In February 2019, we announced a restructuring plan under which we plan to refocus our resources on our largest

opportunities and to remove unnecessary levels of complexity and duplication from certain parts of our business. While we

believe this restructuring plan will enable us to provide better opportunities for talent, and greater expertise and scale on

behalf of our business units, our ability to achieve the desired and anticipated benefits from the restructuring plan within our

desired and expected timeframe is subject to many estimates and assumptions, and the actual savings and timing for those

savings may vary materially based on factors such as local labor regulations, negotiations with third parties, and operational

requirements. These estimates and assumptions are also subject to significant economic, competitive and other uncertainties,

some of which are beyond our control. Further, there can be no assurance that our business will be more efficient or effective

than prior to implementation of the plan, or that additional restructuring plans will not be required or implemented in the

future. The implementation of this restructuring plan may also be costly and disruptive to our business or have other negative

consequences, such as attrition beyond our planned reduction in workforce or negative impacts on employee morale and

productivity, or on our ability to attract and retain highly skilled employees. Any of these consequences could negatively

impact our business.

The increasing importance of digital sales to our business exposes us to the risks of that business model, including greater

competition.

The proportion of our revenues derived from digital distributional channels, as compared to traditional retail sales,

continues to increase. The increased importance of digital channels in our industry increases our potential competition, as the

minimum capital needed to produce and publish a digitally delivered game, particularly a new game for mobile platforms,

may be significantly less than that needed to produce and publish one that is purchased through retail distribution and is

played on a game console or PC. Also, while digitally-distributed products generally have higher profit margins than retail

sales, as business shifts to digital distribution, the volume of orders from retailers for physical discs has been, and may

continue to be, reduced. Further, the providers of the platforms through which we digitally distribute content are also

publishers of their own content distributed on those platforms, and, therefore, a platform provider may give priority to its own

products or those of our competitors.

The importance of retail sales to our business exposes us to the risks of that business model.

While the proportion of our revenues derived from digital distributional channels, as compared to traditional retail

sales, continues to increase, retail sales remain important to our business. In the United States and Canada, our “boxed”

products are often sold on a direct basis to mass-market retailers, consumer electronics stores, discount warehouses and game

specialty stores. Our “boxed” products are sold internationally on a direct-to-retail basis, through third-party distribution and

licensing arrangements, and through our wholly-owned European distribution subsidiaries. Our sales are made primarily on a

purchase order basis without long-term agreements or other forms of commitments, and, due to the increased proportion of

our revenue from digital distribution channels, our retail customers and distributors have generally been reducing the levels

of inventory they are willing to carry. The loss of, or significant reduction in sales to, any of Activision’s principal retail

customers or distributors could have adverse consequences.

Moreover, the importance of retail sales to our business exposes us to the risk of product returns and price protection

with respect to our distributors and retailers. In some cases, return policies allow distributors and retailers to return defective,

shelf-worn, damaged, and certain other products in accordance with terms granted. Price protection, when granted and

applicable, allows these distributors and retailers a credit against amounts owed with respect to merchandise unsold by them.

We may permit product returns from, or grant price protection to, distributors and retail customers who meet certain

conditions. These conditions may include compliance with applicable payment terms, delivery of weekly inventory and sales

information and consistent participation in the launches of premium title releases. We may also consider other factors,

including the facilitation of slow-moving inventory and other industry factors. Activision also offers a limited warranty to

end users that Activision products will be free from manufacturing defects. Although we maintain a reserve for returns and

price protection, and although we may place limits on product returns and price protection, we could be forced to accept

substantial product returns and provide substantial price protection to maintain our relationships with retailers and our access

to distribution channels. We face similar issues and risks, including exposure to risk of chargebacks, with respect to end users

to whom we sell products directly, whether through our proprietary online gaming service or otherwise.

Further, retailers typically have a limited amount of “brick and mortar” shelf space and promotional resources, and

there is intense competition for high-quality retail shelf space and promotional support from retailers. Similarly, for online

retail sales, there is increasing competition for premium placements on websites. Competition for shelf space or premium

online placement may intensify and may require us to increase our marketing expenditures. Further, retailers with limited

shelf space typically devote the most and highest quality shelf space to those products expected to be best sellers. We cannot

be certain that our new products will consistently achieve such “best seller” status. Due to increased competition for limited

shelf space, retailers and distributors are in an increasingly better position to negotiate favorable terms of sale, including price

discounts, price protection, marketing and display fees, and product return policies. Our products constitute a relatively small

percentage of most retailers’ sales volume. We cannot be certain that retailers will continue to purchase our products or

provide those products with adequate levels of shelf space and promotional support on acceptable terms.

Additionally, we make provisions for retail inventory price protection based upon certain assumed lowest prices and

if competitive pressures force us to lower our prices below those levels, it could similarly have a negative impact on our

business. Further, because we pay a licensing fee to the console hardware manufacturer for each physical copy of a product

manufactured for that manufacturer’s game platform regardless of whether that product is actually sold, if we overestimate

demand and make too many physical “boxed” copies of any title, we will incur unrecoverable manufacturing costs for unsold

units.

Due to our reliance on third-party platforms, platform providers are frequently able to influence our products and costs.

Generally, when we develop interactive entertainment software products for hardware platforms offered by

companies such as Sony, Microsoft, or Nintendo, the physical products are replicated exclusively by that hardware

manufacturer or their approved replicator. The agreements with these manufacturers include certain provisions, such as

approval rights over all software products and related promotional materials and the ability to change the fee they charge for

the manufacturing of products, which allow the hardware manufacturers substantial influence over the cost and the release

schedule of such interactive entertainment software products. In addition, because each of the manufacturers is also a

publisher of games for its own hardware platforms and may manufacture products for other licensees, a manufacturer may

give priority to its own products or those of our competitors. Accordingly, console manufacturers like Sony, Microsoft, or

Nintendo could cause unanticipated delays in the release of our products, as well as increases to projected development,

manufacturing, marketing or distribution costs, any of which could negatively impact our business.

The platform providers also control the networks over which consumers purchase digital products and services for

their platforms and through which we provide online game capabilities for our products. The control that the platform

providers have over the fee structures and/or retail pricing for products and services for their platforms and online networks

could impact the volume of purchases of our products made over their networks and our profitability. With respect to certain

downloadable content and microtransactions, the networks provided by these platform providers are the exclusive means of

selling and distributing this content. Further, increased competition for limited premium “digital shelf space” has placed the

platform providers in an increasingly better position to negotiate favorable terms of sale. If the platform provider establishes

terms that restrict our offerings on its platform, significantly impact the financial terms on which these products or services

are offered, or does not approve the inclusion of online capabilities in our console products, our business could be negatively

impacted.

We also derive significant revenues from the distribution on third-party mobile and web platforms, such as the

Apple App Store, the Google Play Store, and Facebook, and most of the virtual currency we sell is purchased using the

payment processing systems of these platform providers. These platforms also serve as significant online distribution

platforms for, and/or provide other services critical for the operation of, a number of our games. If these platforms modify

their current discovery mechanisms, communication channels available to developers, operating systems, terms of service or

other policies (including fees), or they develop their own competitive offerings, our business could be negatively impacted.

Additionally, if these platform providers are required to change how they label free-to-play games or take payment for in-app

purchases or change how the personal information of consumers is made available to developers, our business could be

negatively impacted. These platform providers or their services may be unavailable for short periods of time or experience

issues with their in-app purchasing functionality. If either of these events occurs on a prolonged, or even short-term, basis or

other similar issues arise that impact players’ ability to access our games, access social features or make purchases, it may

result in lost revenues and otherwise negatively impact our business.

Our business is highly dependent on the success and availability of video game consoles manufactured by third parties, as

well as our ability to develop commercially successful products for these consoles.

We derive a substantial portion of our revenues from the sale of products for play on video game consoles

manufactured by third parties, such as Sony’s PS4, Microsoft’s Xbox One, and Nintendo’s Switch. For example, sales of

products for consoles accounted for 34% of our consolidated net revenues in 2018. The success of our console business is

driven in large part by our ability to accurately predict which consoles will be successful in the marketplace and our ability to

develop commercially successful products for these consoles. We also rely on the availability of an adequate supply of these

video game consoles and the continued support for these consoles by their manufacturers. We must make product

development decisions and commit significant resources well in advance of the anticipated introduction of a new console,

and development costs to create content for new consoles may be greater than those costs for the then-current consoles. If

increased costs are not offset by higher revenues and other cost efficiencies, our business could be negatively impacted. If the

consoles for which we develop new software products or modify existing products do not attain significant consumer

acceptance, we may not be able to recover our development costs, which could be significant.

The increasing importance of free-to-play games to our business exposes us to the risks of that business model, including

the dependence on a relatively small number of consumers for a significant portion of revenues and profits from any

given game.

As a result of, among other things, the King Acquisition, we are more dependent on our ability to develop, enhance,

and monetize free-to-play games, such as the games in our Candy Crush franchise and Hearthstone. As such, we are

increasingly exposed to the risks of the free-to-play business model. For example, we may invest in the development of new

free-to-play interactive entertainment products that do not achieve significant commercial success, in which case our

revenues from those products likely will be lower than anticipated and we may not recover our development costs. Further,

if: (1) we are unable to continue to offer free-to-play games that encourage consumers to purchase our virtual currency and

subsequently use it to buy our virtual items; (2) we fail to offer monetization features that appeal to these consumers;

(3) these consumers do not continue to play our free-to-play games or purchase virtual items at the same rate; (4) our

platform providers make it more difficult or expensive for players to purchase our virtual currency; or (5) we cannot

encourage significant additional consumers to purchase virtual items in our free-to-play games, our business may be

negatively impacted.

Furthermore, as there are relatively low barriers to entry to developing mobile or online free-to-play or other casual

games, we have seen, and expect to continue to see new competitors enter the market and existing competitors to allocate

more resources to developing and marketing competing games and applications. We compete, or may compete, with a vast

number of small companies and individuals who are able to create and launch casual games and other content using relatively

limited resources and with relatively limited start-up time or expertise. Competition for the attention of consumers on mobile

devices is intense, as the number of applications on mobile devices has been increasing dramatically, which, in turn, has

required increased marketing to garner consumer awareness and attention. This increased competition has negatively

impacted, and is expected to continue to negatively impact our business. In addition, a continuing industry shift to

free-to-play games could result in a deprioritization of our other products by traditional retailers and distributors.

We may be involved in legal proceedings that have a negative impact on our business.

From time to time, we are involved in claims, suits, investigations, audits and proceedings arising in the ordinary

course of our business, including with respect to intellectual property, competition and antitrust matters, regulatory matters,

tax matters, privacy matters, labor and employment matters, compliance matters, unclaimed property matters, liability and

personal injury claims, product damage claims, collection matters, and/or commercial claims. In addition, negative consumer

sentiment about our business practices may result in inquiries or investigations from regulatory agencies and consumer

groups, as well as litigation, which, regardless of their outcome, may be damaging to our reputation.

Claims, suits, investigations, audits, and proceedings are inherently difficult to predict and their results are subject to

significant uncertainties, many of which are outside of our control. Regardless of the outcome, such legal proceedings can

have a negative impact on us due to legal costs, diversion of management resources and other factors. In addition, it is

possible that a resolution of one or more such proceedings could result in reputational harm, substantial settlements,

judgments, fines or penalties, criminal sanctions, consent decrees, or orders preventing us from offering certain features,

functionalities, products or services, requiring us to change our development process or other business practices.

There is also inherent uncertainty in determining reserves for these matters. There is significant judgment required in

the analysis of these matters, including assessing the probability of potential outcomes and determining whether a potential

exposure can be reasonably estimated. In making these determinations, we, in consultation with outside counsel, examine the

relevant facts and circumstances on a quarterly basis assuming, as applicable, a combination of settlement and litigated

outcomes and strategies. Further, it may take time to develop factors on which reasonable judgments and estimates can be

based. If we fail to establish appropriate reserves, our business could be negatively impacted.

Changes in tax rates or exposure to additional tax liabilities could negatively impact our business.

We are subject to income taxes in the United States and other jurisdictions. In the ordinary course of business there

are many transactions and calculations where the ultimate income tax determination is uncertain. Significant judgment is

required in determining our worldwide income tax provision. Although we believe our income tax estimates are reasonable,

the ultimate outcomes may have a negative impact on our business.

Our income tax liability and effective tax rate could be adversely affected by a variety of factors, including changes

in our business, the mix of earnings in countries with differing statutory tax rates, changes in tax laws or tax rulings, changes

in interpretations of existing laws, or developments in tax examinations or investigations. Any of these factors could have a

negative impact on our business or require us to change the manner in which we operate our business. The tax regimes we are

subject to, or operate under, are unsettled and may be subject to significant change. A number of countries are actively

pursuing fundamental changes to the tax laws applicable to multinational companies like us. Furthermore, tax authorities may

choose to examine or investigate our tax reporting or tax liability, including under transfer pricing or permanent

establishment theories. These proceedings may lead to adjustments or proposed adjustments to our income taxes or

provisions for uncertain tax positions.

On December 22, 2017, tax reform legislation known as the Tax Cuts and Jobs Act (the “U.S. Tax Reform Act”)

was enacted in the United States. The U.S. Tax Reform Act introduced significant changes to U.S. income tax law that have

had a meaningful impact on our financial position and effective tax rate. Accounting for the income tax effects of the U.S.

Tax Reform Act and subsequent guidance issued required complex new calculations to be performed and significant

judgments in interpreting the legislation. Additional guidance may be issued on how the provisions of the U.S. Tax Reform

Act will be applied or otherwise administered that is different from our interpretation, which could result in adjustments to

the income tax effects of the U.S. Tax Reform Act we have recorded at December 31, 2018. These adjustments could have a

negative impact on our business.

In December 2017, we received a Notice of Reassessment from the French Tax Authority (“FTA”) related to

transfer pricing for intercompany transactions involving one of our French subsidiaries for the 2011 through 2013 tax years.

We disagree with the proposed assessment and intend to vigorously contest it. We plan to pursue all remedies available to us

to successfully resolve this matter, including administrative remedies with the FTA, and, if necessary, judicial remedies.

While we believe our tax provisions at December 31, 2018, are appropriate, until such time as this matter is ultimately

resolved we could be subject to significant additional tax liabilities. In addition to the risk of additional tax for the 2011

through 2013 tax years, if litigation regarding this matter were adversely determined and/or if the FTA were to seek

adjustments of a similar nature for subsequent years, we could be subject to significant additional tax liabilities.

In December 2018, we received a decision from the Swedish Tax Agency (“STA”) informing us of an audit

assessment to a Swedish subsidiary of King for the 2016 tax year. We disagree with the STA’s decision and intend to

vigorously contest it. We plan to pursue all remedies available to us to successfully resolve the matter, including

administrative remedies with the STA, multilateral procedures with other relevant taxing jurisdictions, and, if necessary,

judicial remedies. Further, we may be required to pay the full assessment to the STA in advance of the final resolution of the

matter. While we believe our tax provisions at December 31, 2018, are appropriate, until such time as this matter is ultimately

resolved we could be subject to significant additional tax liabilities.

We are also required to pay taxes other than income taxes, such as payroll, sales, use, value-added, net worth,

property, and goods and services taxes, in both the United States and various other jurisdictions. Tax authorities regularly

examine these non-income taxes. The outcomes from these examinations, changes in the business, changes in applicable tax

rules or other tax matters may have a negative impact on our business.

Our industry is subject to rapid technological change, and if we do not adapt to, and appropriately allocate our resources

among, emerging technologies and business models, our business may be negatively impacted.

Technology changes rapidly in the interactive entertainment industry. We must continually anticipate and adapt our

products, distribution channels, and business models to emerging technologies and delivery platforms to stay competitive.

Forecasting our revenues and profitability for these new products, distribution channels and business models is inherently

uncertain and volatile, and if we invest in the development of interactive entertainment products or distribution channels

incorporating a new technology or for a new platform that does not achieve significant commercial success, whether because

of competition or otherwise, we may not recover the often substantial “up front” costs of developing and marketing those

products and distribution channels, or recover the opportunity cost of diverting management and financial resources away

from other products or distribution channels. Further, our competitors may adapt to an emerging technology or business

model more quickly or effectively than we do, creating products that are technologically superior to ours, more appealing to

consumers, or both.

If, on the other hand, we elect not to pursue the development of products incorporating a new technology or for new

platforms, or otherwise elect not to pursue new business models, that achieve significant commercial success, it may have

adverse consequences. It may take significant time and expenditures to shift product development resources to that

technology, platform or business model, as the case may be, and it may be more difficult to compete against existing products

incorporating that technology or for that platform or against companies using that business model.

Competition within, and to, the interactive entertainment industry is intense, and competitors may succeed in reducing our

sales.

We compete with other publishers of interactive entertainment software, both within and outside the United States.

Our competitors include very large corporations with significantly greater financial, marketing and product development

resources than we have. Our larger competitors may be able to leverage their greater financial, technical, personnel and other

resources to provide larger budgets for development and marketing and make higher offers to licensors and developers for

commercially desirable properties, as well as adopt more aggressive pricing policies to develop more commercially

successful video game products than we do. In addition, competitors with large portfolios and popular games typically have

greater influence with platform providers, retailers, distributors and other customers who may, in turn, provide more

favorable support to those competitors’ games.

Additionally, we compete with other forms of entertainment and leisure activities. As our business continues to

expand in complexity and scope, we have increased exposure to additional competitors, including those with access to large

existing user bases and control over distribution channels. Further, it is difficult to predict and prepare for rapid changes in

consumer demand that could materially alter public preferences for different forms of entertainment and leisure activities.

Failure to adequately identify and adapt to these competitive pressures could negatively impact our business.

If we are unable to sell our products at the prices we planned to, our business may be negatively impacted.

If we are unable to sell our products at the prices we planned, whether due to competitive pressure, including the

continuing industry shift to free-to-play games, because retailers or other third parties elect to price these products at a lower

price, or otherwise, it has, and is expected to continue to have, a negative impact on our business. Further, our decisions

around the development of new game content are grounded in assumptions about eventual pricing levels. If there is price

compression in the market after these decisions are made, it could have a negative impact on our business.

If we do not continue to attract, retain, and motivate skilled personnel, we will be unable to effectively conduct our

business.

Our success depends to a significant extent on our ability to identify, attract, hire, retain, motivate, and utilize the

abilities of qualified personnel, particularly personnel with the specialized skills needed to create and sell the high-quality,

well-received content upon which our business is substantially dependent. Our industry is generally characterized by a high

level of employee mobility, competitive compensation programs, and aggressive recruiting among competitors for employees

with technical, marketing, sales, engineering, product development, creative, and/or management skills. We may have

difficulties in attracting and retaining skilled personnel or may incur significant costs to do so. If we are unable to attract

additional qualified employees or retain and utilize the services of key personnel, it could have a negative impact on our

business.

We rely on external developers to develop some of our software products.

We rely on external software developers to develop some of our software products. Because we depend on these

developers, we are subject to the following risks:

• continuing strong demand for top-tier developers’ resources, combined with the recognition they receive in

connection with their work, may cause developers who worked for us in the past either to work for a competitor

in the future or to renegotiate agreements with us on terms less favorable to us;

• limited financial resources and business expertise or the inability to retain skilled personnel may force

developers out of business prior to completing products for us or require us to fund additional costs;

• a competitor may acquire the business of one or more key developers or sign them to exclusive development

arrangements and, in either case, we would not be able to continue to engage such developers’ services for our

products, except for any period for which the developer is contractually obligated to complete development for

us; and

• reliance on external developers reduces our visibility into, and control over, development schedules and

operational outcomes compared to those when utilizing internal development resources.

We engage in strategic transactions and may encounter difficulties in integrating acquired businesses or otherwise

realizing the anticipated benefits of these transactions.

As part of our business strategy, from time to time, we acquire, make investments in, or enter into strategic alliances

and joint ventures with, complementary businesses. These transactions may involve significant risks and uncertainties,

including: (1) in the case of an acquisition, (i) the potential for the acquired business to underperform relative to our

expectations and the acquisition price, (ii) the potential for the acquired business to cause our financial results to differ from

expectations in any given period, or over the longer-term, (iii) unexpected tax consequences from the acquisition, or the tax

treatment of the acquired business’s operations going forward, giving rise to incremental tax liabilities that are difficult to

predict, (iv) difficulty in integrating the acquired business, its operations, and its employees in an efficient and effective

manner, (v) any unknown liabilities or internal control deficiencies assumed as part of the acquisition, and (vi) the potential

loss of key employees of the acquired businesses; and (2) in the case of an investment, alliance, or joint venture, (i) our

ability to cooperate with our partner, (ii) our partner having economic, business, or legal interests or goals that are

inconsistent with ours, and (iii) the potential that our partner may be unable to meet its economic or other obligations, which

may require us to fulfill those obligations alone. Further, any such transaction may involve the risk that our senior

management’s attention will be excessively diverted from our other operations, the risk that our industry does not evolve as

anticipated, and that any intellectual property or personnel skills acquired do not prove to be those needed for our future

success, and the risk that our strategic objectives, cost savings or other anticipated benefits are otherwise not achieved.

Our debt could adversely affect our business.

As of December 31, 2018, the Company had approximately $2.7 billion of long-term debt outstanding. Our debt

burden could have important consequences, including: increasing our vulnerability to general adverse economic and industry

conditions; limiting our flexibility in planning for, or reacting to, changes in our business and our industry; requiring the

dedication of a substantial portion of any cash flows from operations for the payment of principal and interest on our

indebtedness, thereby reducing the availability of cash flow to fund our operations, growth strategy, working capital, capital

expenditures, future business opportunities, and other general corporate purposes; restricting us from making strategic

acquisitions or causing us to make non-strategic divestitures; limiting our ability to obtain additional financing for working

capital, capital expenditures, research and development, acquisitions and general corporate or other purposes; limiting our

ability to adjust to changing market conditions; and placing us at a competitive disadvantage relative to competitors who have

lower levels of debt. Further, though our current long-term debt all bears fixed interest rates, if and when we have borrowings

at floating rates of interest, it could expose us to the risk of increased interest rates with respect to those borrowings.

Agreements governing our indebtedness, including our credit agreement entered into on October 11, 2013 (as

amended thereafter and from time to time, the “Credit Agreement”) and the indentures governing our notes, impose operating

and financial restrictions on our activities. These restrictions require us to comply with or maintain certain financial tests and

ratios. In addition, under certain circumstances, the Credit Agreement and our indentures may limit or prohibit other

activities. In addition, we are required to maintain a maximum total net debt ratio calculated pursuant to a financial

maintenance covenant under the Credit Agreement. Further, various risks, uncertainties, and events beyond our control could

affect our ability to comply with these covenants. Failure to comply with any of the covenants in our financing agreements

could result in a default under those agreements and under other agreements containing cross-default provisions. Such a

default would permit lenders to accelerate the maturity of the debt under these agreements. Under these circumstances, we

might not have sufficient funds or other resources to satisfy all of our obligations, including our obligations under the Credit

Agreement or the indentures governing our notes. In addition, the limitations imposed by financing agreements on our ability

to incur additional debt and to take other actions might significantly impair our ability to obtain other financing. There can be

no assurances that we will be granted waivers or amendments to these agreements if, for any reason, we are unable to comply

with these agreements or that we will be able to refinance our debt on terms acceptable to us, or at all.

We may not be able to borrow funds under our revolving credit facility if we are not able to meet the conditions to

borrowing under that facility.

We view our $1.5 billion revolving credit facility as a source of available liquidity. This facility contains various

conditions, covenants and representations with which we must be in compliance in order to borrow funds. We have not

borrowed under the revolving credit facility to date, but if we wish to do so, there can be no assurance that we will be in

compliance with these conditions, covenants and representations at such time.

The LIBOR calculation method may change and LIBOR is expected to be phased out after 2021.

Interest on our revolving credit facility, which is scheduled to mature in 2023, is calculated based on LIBOR. On

July 27, 2017, the U.K. Financial Conduct Authority (the “FCA”) announced that it will no longer require banks to submit

rates for the calculation of LIBOR after 2021. In the meantime, actions by the FCA, other regulators, or law enforcement

agencies may result in changes to the method by which LIBOR is calculated. At this time, it is not possible to predict the

effect of any such changes or any other reforms to LIBOR that may be enacted in the U.K. or elsewhere on our revolving

credit facility.

Lawsuits have been filed, and may continue to be filed, against publishers of interactive entertainment software products.

In prior years, lawsuits have been filed against numerous interactive entertainment companies, including against us,

by the families of victims of violence, alleging that interactive entertainment products influence the behavior of the

perpetrators of such violence. These lawsuits have been dismissed, but similar additional lawsuits could be filed in the future.

Although our general liability insurance carrier has agreed to defend lawsuits of this nature with respect to the prior lawsuits,

it is uncertain whether insurance carriers would do so in the future, or if such insurance carriers would cover all or any

amounts for which we might be liable if such future lawsuits are not decided in our favor. Further, any such lawsuit could

result in increased governmental scrutiny, harm to our reputation, reduced demand by consumers for our products, or

decreased willingness by our customers to purchase, or by our partners to provide marketing support for, those products.

Such results could divert development and management resources, increase legal fees and other costs, and have other

negative impacts on our business.

We are exposed to seasonality in the sale of our products.

The interactive entertainment industry is somewhat seasonal, with the highest levels of consumer demand occurring

during the calendar year-end holiday buying season. As a result, our sales have historically been highest during the fourth

quarter of the year, particularly for our Activision segment. Receivables and credit risk are likewise higher during the fourth

quarter of the year, as retailers increase their purchases of our products in anticipation of the holiday season. Delays in

development, approvals or manufacturing could affect the timing of the release of products, causing us to miss key selling

periods such as the year-end holiday buying season, which could negatively impact our business.

Our business may be harmed if our distributors, retailers, development and licensing partners, or other third parties with

whom we do business act in ways that put our brand at risk.

In many cases, our business partners are given access to sensitive and proprietary information or control over our

intellectual property to provide services and support to our team. These third parties may misappropriate our information or

intellectual property and engage in unauthorized use of it or otherwise act in a way that places our brand at risk. The failure

of these third parties to provide adequate services and technologies, the failure of third parties to adequately maintain or

update their services and technologies, or the misappropriation or misuse of this information or intellectual property could

result in a disruption to our business operations or an adverse effect on our reputation and may negatively impact our

business.

We use open source software in connection with certain of our games and services, which may pose particular risks to our

proprietary software, products, and services in a manner that could have a negative impact on our business.

We use open source software in connection with some of the games and services we offer. Some open source

software licenses require users who distribute open source software as part of their software to publicly disclose all or part of

the source code to such software or make available any derivative works of the open source code on unfavorable terms or at

no cost. The terms of various open source licenses have not been interpreted by courts, and there is a risk that such licenses

could be construed in a manner that imposes unanticipated conditions or restrictions on our use of the open source software.

Were it determined that our use was not in compliance with a particular license, we may be required to release our

proprietary source code, pay damages for breach of contract, re-engineer our games or products, discontinue distribution in

the event re-engineering cannot be accomplished on a timely basis, or take other remedial action that may divert resources

away from our game development efforts, any of which could negatively impact our business.

We may be subject to intellectual property claims.

As the number of interactive entertainment software products increases and the features and content of these

products continue to overlap, software developers have increasingly become subject to infringement claims. Further, many of

our products are highly realistic and feature materials that are based on real-world things or people, which may also be the

subject of claims of infringement of the intellectual property of others, including right of publicity, trademark, and unfair

competition claims. In addition, our products often utilize complex, cutting-edge technology that may become subject to

emerging intellectual property claims of others. Although we take steps to avoid knowingly violating the intellectual property

rights of others, third parties may still claim infringement, particularly since there are many companies that focus exclusively

on enforcing patent rights.

From time to time, we receive communications from third parties regarding such claims. Existing or future

infringement claims against us, whether meritorious or not, may be time consuming, distracting to management, and

expensive to defend. Further, intellectual property litigation or claims could force us to do one or more of the following:

• cease selling, incorporating, supporting, or using products or services that incorporate the challenged

intellectual property;

• obtain a license from the holder of the infringed intellectual property, which, if available at all, may not be

available on commercially favorable terms;

• redesign the affected interactive entertainment software products, which could result in additional costs, delay

introduction and possibly reduce commercial appeal of the affected products; or

• pay damages to the holder of the infringed intellectual property for past infringements.

Our products are subject to the threat of piracy and unauthorized copying, and inadequate intellectual property laws and

other protections could prevent us from enforcing or defending our proprietary technologies. Further, the use of

unauthorized “cheat” programs or the use of other unauthorized software modifications by users could impact

multiplayer gameplay or lead to reductions in microtransactions in our games.

We regard our software as proprietary and rely on a variety of methods, including a combination of copyright,

patent, trademark and trade secret laws and employee and third-party non-disclosure agreements, to protect our proprietary

rights. We own or license various copyrights, patents, trademarks, and trade secrets. The process of registering and protecting

these rights in various jurisdictions is expensive and time-consuming. Further, we are aware that some unauthorized copying

occurs, and if a significantly greater amount of unauthorized copying of our software products were to occur, it could

negatively impact our business.

Piracy is a persistent problem for us, and policing the unauthorized sale, distribution and use of our products is

difficult, expensive, and time-consuming. Further, the laws of some countries in which our products are, or may be,

distributed either do not protect our products and intellectual property rights to the same extent as the laws of the United

States, or are poorly enforced. In addition, though we take steps to make the unauthorized sale, distribution and use of our

products more difficult and to enforce and police our rights, as do the manufacturers of consoles and the operators of other

platforms on which many of our games are played, these efforts may not be successful in controlling the piracy of our

products in all instances. Technology designed to circumvent the protection measures used by console manufacturers and

platform operators or by us in our products, the refusal of Internet service providers to remove infringing content in certain

instances and the ability to download pirated copies of games from various Internet sites and peer-to-peer networks could

result in an expansion in piracy.

In addition, “cheating” programs or other unauthorized software tools and modifications that enable consumers to

cheat in games could negatively impact the volume of microtransactions or purchases of downloadable content. In addition,

vulnerabilities in the design of our products or the platforms upon which they run could be discovered after their release,

which may result in lost revenues from paying consumers or increased cost of developing technological measures to respond

to these, either of which could negatively impact our business.

We also cannot be certain that existing intellectual property laws will provide adequate protection for our products

in connection with emerging technologies.

The insolvency or business failure of any of our business partners could negatively impact us.

Our sales, whether digital or retail, are concentrated in a small number of large customers. This makes us more

vulnerable to collection risk if one or more of these large customers becomes unable to pay for our products or seeks

protection under the bankruptcy laws. Retailers and distributors in the interactive entertainment industry have from time to

time experienced significant fluctuations in their businesses and a number of them have failed. Challenging economic

conditions may impair the ability of our customers to pay for products they have purchased and, as a result, our reserves for

doubtful accounts and write-off of accounts receivable could increase and, even if increased, may turn out to be insufficient.

Moreover, even in cases where we have insurance to protect against a customer’s bankruptcy, insolvency, or liquidation, this

insurance typically contains a significant deductible and co-payment obligation and does not cover all instances of

non-payment. Further, the insolvency or business failure of other types of business partners could result in disruptions to the

manufacturing or distribution of our products or the cancellation of contractual arrangements that we consider to be

favorable. A payment default by, or the insolvency or business failure of, a significant business partner could negatively

impact our business. In addition, having such a large portion of our total net revenues concentrated in a few customers

reduces our negotiating leverage with these customers.

We are a global company and are subject to the risks and uncertainties of conducting business outside the U.S.

We conduct business throughout the world, and we derive a substantial amount of our revenues and profits from

international trade, particularly from Europe, Asia, and Australia. Moving forward, we expect that international sales will

continue to account for a significant portion of our total revenues and profits and, moreover, that sales in emerging markets in

Asia and elsewhere will be an increasingly important part of our international sales. As such, we are, and may be

increasingly, subject to risks inherent in foreign trade generally, as well as risks inherent in doing business in emerging

markets, including increased tariffs and duties, compliance with economic sanctions, fluctuations in currency exchange rates,

shipping delays, increases in transportation costs, international political, regulatory and economic developments, unexpected

changes to laws, regulatory requirements, and enforcement on us and our platform partners and differing local business

practices, all of which may impact profit margins or make it more difficult, if not impossible, for us to conduct business in

foreign markets.

A deterioration in relations between either us or the United States and any country in which we have significant

operations or sales, or the implementation of government regulations in such a country, could result in the adoption or

expansion of trade restrictions, including economic sanctions, that could have a negative impact on our business. For

instance, to operate in China, all games must have regulatory approval. A decision by the Chinese government to revoke its

approval for any of our games or to decline to approve any products we desire to sell in China in the future could have a

negative impact on our business. Additionally, in the past, legislation has been implemented in China that has required

modifications to our products. The future implementation of similar laws or regulations in China or any other country in

which we have operations or sales may restrict or prohibit the sale of our products or may require engineering modifications

to our products that are not cost-effective, if even feasible at all, or could degrade the consumer experience to the point where

consumers cease to purchase such products. The Chinese game approval procedure was suspended from March 2018 until

January 2019 and, due to the large number of pending applications, it remains uncertain as to if and when our new products

will be approved for release in China. Further, the enforcement of regulations relating to mobile and other games with an

online element in China remains uncertain, and further changes, either in the regulations or their enforcement, could have a

negative impact on our business in China.

We are also subject to risks that our operations outside the United States could be conducted by our employees,

contractors, third-party partners, representatives, or agents in ways that violate the Foreign Corrupt Practices Act, the U.K.

Anti-Bribery Act or other similar anti-bribery laws, as well as the 2017 U.K. Criminal Finances Act or other similar financial

crime laws. While we have policies and procedures, as well as training for our employees, intended to secure compliance

with these laws, our employees, contractors, third-party partners, representatives, or agents may take actions that violate our

policies. Moreover, it may be more difficult to oversee the conduct of any such persons who are not our employees,

potentially exposing us to greater risk from their actions.

In addition, cultural differences may affect consumer preferences and limit the international popularity of games that

are popular in the U.S. or require us to modify the content of the games or the method by which we charge our customers for

the games to be successful. If we do not correctly assess consumer preferences in the countries in which we sell our products,

or if the other risks discussed herein come to fruition, it could negatively impact our business.

Additionally, in June 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the

European Union (the “E.U.”), commonly referred to as “Brexit.” The United Kingdom commenced withdrawal proceedings

with the E.U. in March 2017, and, on March 29, 2019, is scheduled to leave the E.U. These withdrawal proceedings have

created political and economic uncertainty, particularly in the United Kingdom and the E.U., and this uncertainty may persist

for years. The uncertainty surrounding the terms of the United Kingdom’s withdrawal and its consequences could adversely

impact consumer and investor confidence and the level of sales of discretionary items, including our products. The terms of

the United Kingdom’s withdrawal could negatively impact global financial markets, including currency exchange rates and

interest rates, which could have a negative impact on our business, our suppliers and business partners, or our lenders and

financial counterparties. Further, the terms of the United Kingdom’s withdrawal and its consequences could potentially cause

adverse disruptions to our operations, including our workforce, or the workforce of our suppliers, business partners, lenders

or financial counterparties, in the United Kingdom or the E.U. as a result of potential changes to applicable employment or

immigration rules, and our systems and information technology infrastructure or that of our suppliers, business partners,

lenders or financial counterparties as a result of potential changes to regulations for data security or other data protection

rules. Given our extensive global operations, the potential widespread impacts triggered through Brexit could adversely affect

our business.

Fluctuations in currency exchange rates could negatively impact our business.

We transact business in various currencies other than the U.S. dollar and have significant international sales and

expenses denominated in currencies other than the U.S. dollar, subjecting us to currency exchange rate risks. A substantial

portion of our international sales and expenses are denominated in local currencies, including euros, British pounds,

Australian dollars, South Korean won, Chinese yuan, and Swedish krona, which could fluctuate against the U.S. dollar. Since

we have significant international sales but incur the majority of our costs in the United States, the impact of foreign currency

fluctuations, particularly the strengthening of the U.S. dollar, may have an asymmetric and disproportional impact on our

business. We have, in the past, utilized currency derivative contracts to hedge certain foreign exchange exposures and

managed these exposures with natural offsets. However, there can be no assurance that we will continue our hedging

programs, or that we will be successful in managing exposure to currency exchange rate risks whether or not we do so.

Our games are subject to scrutiny regarding the appropriateness of their content. If we fail to receive our target ratings

for certain titles, or if our retailers refuse to sell such titles due to what they perceive to be objectionable content, it could

have a negative impact on our business.

Our console and PC games are subject to ratings by the Entertainment Software Rating Board (the “ESRB”), a

self-regulatory body based in the U.S. that provides U.S. and Canadian consumers of interactive entertainment software with

ratings information, including information on the content in such software, such as violence, nudity, or sexual content, along

with an assessment of the suitability of the content for certain age groups. Certain other countries have also established

content rating systems as prerequisites for product sales in those countries. In addition, certain stores use other ratings

systems, such as Apple’s use of its proprietary “App Rating System” and Google Play’s use of the International Age Rating

Coalition (IARC) rating system. If we are unable to obtain the ratings we have targeted for our products, it could have a

negative impact on our business. In some instances, we may be required to modify our products to meet the requirements of

the rating systems, which could delay or disrupt the release of any given product, or may prevent its sale altogether in certain

territories. Further, if one of our games is “re-rated” for any reason, a ratings organization could require corrective actions,

which could include a recall, retailers could refuse to sell it and demand that we accept the return of any unsold or returned

copies or consumers could demand a refund for copies previously purchased.

Additionally, retailers may decline to sell interactive entertainment software containing what they judge to be

graphic violence or sexually explicit material or other content that they deem inappropriate for their businesses, whether

because a product received a certain rating by the ESRB or other content rating system, or otherwise. If retailers decline to

sell our products based upon their opinion that they contain objectionable themes, graphic violence or sexually explicit

material, or other generally objectionable content, we might be required to modify particular titles or forfeit the revenue

opportunity of selling such titles with that retailer.

Further, throughout the history of the interactive entertainment industry, many interactive software products have

included hidden content and/or hidden gameplay features, some of which have been accessible through the use of in-game

codes or other technological means, that are intended to enhance the gameplay experience. In some cases, such undisclosed

content or features have been considered to be objectionable. While publishers are required to disclose pertinent hidden

content during the ESRB ratings process, in a few cases, publishers have failed to disclose hidden content, and the ESRB has

required the recall of the game, changed the rating or associated content descriptors originally assigned to the product,

required the publisher to change the game or game packaging and/or imposed fines on the publisher. Retailers have on

occasion reacted to the discovery of such undisclosed content by removing these games from their shelves, refusing to sell

them, and demanding that their publishers accept them as product returns. Likewise, some consumers have reacted to the

revelation of undisclosed content by refusing to purchase such games, demanding refunds for games they have already

purchased, refraining from buying other games published by the company whose game contained the objectionable material,

and, on at least one occasion, filing a lawsuit against the publisher of the product containing such content.

We have implemented preventive measures designed to reduce the possibility of objectionable undisclosed content

from appearing in the interactive software products we publish. Nonetheless, these preventive measures are subject to human

error, circumvention, overriding, and reasonable resource constraints. If an interactive software product we publish is found

to contain undisclosed content, we could be subject to any of these consequences.

Our results of operations or reputation may be harmed as a result of objectionable third party-created content.

Certain of our games support collaborative online features that allow consumers to post narrative comments, in real

time, that are visible to other consumers. Additionally, certain of our games allow consumers to create and share

“user-generated content” that is visible to other consumers. From time to time, objectionable and offensive consumer content

may be distributed within our games through these features or to gaming websites or forums that allow consumers to post

comments. Additionally, we have begun to generate revenue through offering advertising within certain of our franchises.

The content of in-game advertisements is generally created and delivered by third-party advertisers without our pre-approval,

and, as such, objectionable content may be published in our games by these advertisers. This objectionable third party-created

content may expose us to regulatory action or claims related to content, or otherwise negatively impact our business.

Our business, products, and distribution are subject to increasing regulation in key territories. If we do not successfully

respond to these regulations, our business could be negatively impacted.

The video game industry continues to evolve, and new and innovative business opportunities are often subject to

new attempts at regulation. As such, legislation is continually being introduced, and litigation and regulatory enforcement

actions are taking place, that may affect the way in which we, and other industry participants, may offer content and features,

and distribute and advertise our products. These laws, regulations, and investigations are related to protection of minors,

gambling, consumer privacy, accessibility, advertising, taxation, payments, intellectual property, distribution, and antitrust,

among others.

For example, many foreign countries have laws that permit governmental entities to restrict or prohibit marketing or

distribution of interactive entertainment software products because of the content therein (and similar legislation has been

introduced at one time or another at the federal and state levels in the United States, including legislation that attempts to

impose additional taxes based on content). In addition, certain jurisdictions have laws that restrict or prohibit marketing or

distribution of interactive entertainment software products with random digital item mechanics, which some of our online

games and services include, or subject to such products to additional regulation and oversight, such as reporting to regulators.

Also, although we have structured and operate our skill tournaments with applicable laws in mind, including any applicable

laws relating to gambling, and believe that playing these games does not constitute gambling, our skill tournaments could in

the future become subject to gambling-related rules and regulations and expose us to civil and criminal penalties. We also

sometimes offer consumers of our online and casual games various types of contests and promotional opportunities. We are

subject to laws in a number of jurisdictions concerning the operation and offering of tournaments and games, many of which

are still evolving and could be interpreted in ways that could harm our business. Further, the growth and development of

electronic commerce and virtual items and currency may prompt calls for more stringent consumer protection laws that may

impose additional burdens or limitations on operations of companies such as ours conducting business through the Internet

and mobile devices. Also, existing laws or new laws regarding the marketing of in-app purchases, regulation of currency,

banking institutions, unclaimed property, and money laundering may be interpreted to cover virtual currency or goods.

Further, in 2018, gaming addiction was listed as a mental health condition for the first time by the World Health

Organization, and some countries have introduced legislation attempting to address this issue. Moreover, the public dialogue

concerning interactive entertainment may have an adverse impact on our reputation and consumers’ willingness to purchase

our products.

The adoption and enforcement of legislation that restricts the marketing, content, business model, or sales of our

products in countries in which we do business may harm the sales of our products, as the products we are able to offer to our

customers and the size of the potential audience for our products may be limited. We may be required to modify certain

product development processes or products or alter our marketing strategies to comply with regulations, which could be

costly or delay the release of our products. In addition, the laws and regulations affecting our products vary by territory and

may be inconsistent with one another, imposing conflicting or uncertain restrictions. Failure to comply with any applicable

legislation may also result in government-imposed fines or other penalties, as well as harm to our reputation. Because the

King Acquisition significantly increased our user population, we are subject us to laws and regulations in additional

jurisdictions, which may exacerbate the potential adverse impact on our business.

Change in government regulations relating to the Internet could negatively impact our business.

We rely on our consumers’ access to significant levels of Internet bandwidth for the sale and digital delivery of our

content and the functionality of our games with online features. Changes in laws or regulations that adversely affect the

growth, popularity or use of the Internet, including laws impacting “net neutrality,” could impair our consumers’ online video

game experiences, decrease the demand for our products and services or increase our cost of doing business. Although certain

jurisdictions have implemented laws and regulations intended to prevent Internet service providers from discriminating

against particular types of legal traffic on their networks, other jurisdictions may lack such laws and regulations or repeal

existing laws or regulations. For example, in December 2017, the Federal Communications Commission voted to repeal net

neutrality regulations in the U.S. and, following that decision, several states enacted net neutrality regulations. Given

uncertainty around these rules relating to the Internet, including changing interpretations, amendments, or repeal of those

rules, coupled with the potentially significant political and economic power of local Internet service providers and the

relatively significant level of Internet bandwidth access our products and services require, we could experience

discriminatory or anti-competitive practices that could impede our growth, cause us to incur additional expenses, or otherwise

negatively impact our business.

The laws and regulations concerning data privacy are continually evolving. Failure to comply with these laws and

regulations could harm our business.

Consumers play certain of our games online using our own distribution platforms, including Blizzard Battle.net,

third-party platforms and networks, through online social platforms, and on mobile devices. We collect and store information

about our consumers, including consumers who play these games. In addition, we collect and store information about our

employees. We are subject to laws from a variety of jurisdictions regarding privacy and the protection of this information,

including the E.U.’s General Data Protection Regulation (the “GDPR”), the U.S. Children’s Online Privacy Protection Act

(“COPPA”), which regulates the collection, use, and disclosure of personal information from children under 13 years of age,

and the California Consumer Privacy Act. Failure to comply with any of these laws or regulations may increase our costs,

subject us to expensive and distracting government investigations, and result in substantial fines.

Data privacy protection laws are rapidly changing and likely will continue to do so for the foreseeable future and

may be inconsistent from jurisdiction to jurisdiction. For example, the E.U. has traditionally taken a broader view than the

United States and certain other jurisdictions as to what is considered personal information and has imposed greater

obligations under data privacy and protection regulations, including those imposed under the GDPR. The U.S. government,

including the Federal Trade Commission and the Department of Commerce, as well as various U.S. state governments, are

continuing to review the need for greater regulation over the collection of personal information and information about

consumer behavior on the Internet and on mobile devices. Complying with emerging and changing laws could require us to

incur substantial costs or impact our approach to operating and marketing our games. Due to the rapidly changing nature of

these data privacy protection laws, there is not always clear guidance from the respective governments and regulators

regarding the interpretation of the law, which may create the risk of an inadvertent violation. For example, the California

legislature recently passed the California Consumer Privacy Act and the E.U. has proposed further reforms to its existing data

protection legal framework, in addition to the GDPR, which may further change our compliance obligations. Various

government and consumer agencies worldwide have also called for new regulation and changes in industry practices. In

addition, in some cases, we are dependent upon our platform providers and external data processors to assist us in ensuring

compliance with these various types of regulations, and a violation by one of these third parties may also subject us to

government investigations and result in substantial fines.

Player interaction with our games is subject to our privacy policies, end user license agreements (“EULAs”), and

terms of service. If we fail to comply with our posted privacy policies, EULAs, or terms of service, or if we fail to comply

with existing privacy-related or data protection laws and regulations, it could result in proceedings or litigation against us by

governmental authorities or others, which could result in fines or judgments against us, damage our reputation, impact our

financial condition, and harm our business. If regulators, the media, consumers, or employees raise any concerns about our

privacy and data protection or consumer protection practices, even if unfounded, this could also result in fines or judgments

against us, damage our reputation, negatively impact our financial condition, or damage our business.

We depend on servers and networks to operate our games with online features and our proprietary online gaming service.

If we were to lose functionality in any of these areas for any reason, our business may be negatively impacted.

Our business relies on the continuous operation of servers, some of which are owned and operated by third parties.

Although we strive to maintain more than sufficient server capacity, and provide for active redundancy in the event of limited

hardware failure, any broad-based catastrophic server malfunction, a significant service-disrupting attack or intrusion by

hackers that circumvents security measures, a failure of disaster recovery service or the failure of a company on which we are

relying for server capacity to provide that capacity for whatever reason would likely degrade or interrupt the functionality of

our games with online features, and could prevent the operation of such games altogether, any of which could result in the

loss of sales for, or in, such games. The risk is particularly pronounced with respect to the mobile games published by King,

which rely on a small number of third-party owned data centers located in one city, with respect to the functioning of our

proprietary online gaming service, Blizzard Battle.net, the disruption of which could prevent Blizzard from delivering content

digitally or render all of Blizzard games, as well as selected Activision content for the PC platform, unavailable, or with

Activision’s multiplayer game services which rely on systems hosted in a hybrid of data centers across the world as well as

cloud providers.

We also rely on networks operated by third parties, such as the PlayStation Network, Xbox Live and Steam, for the

sale and digital delivery of downloadable console and PC game content and the functionality of our games with online

features. Similarly, we rely on the continued operation of the Apple App Store, the Google Play Store, and Facebook for the

sale of virtual currency for our free-to-play games. An extended interruption to any of these services could adversely affect

our ability to sell and distribute our digital products and operate our games with online features, which could result in a loss

of revenue and otherwise negatively impact our business.

Further, insufficient server capacity could also negatively impact our business. Conversely, if we overestimate the

amount of server capacity required by our business, we may incur additional operating costs.

Any cybersecurity-related attack, significant data breach or disruption of the information technology systems or networks

on which we rely could negatively impact our business.

In the course of our day-to-day business, we and third parties operating on our behalf create, store, and/or use

commercially sensitive information, such as the source code and game assets for our interactive entertainment software

products and sensitive and confidential information with respect to our customers, consumers, and employees. A malicious

cybersecurity-related attack, intrusion, or disruption by hackers (including through spyware, viruses, phishing, denial of

service, and similar attacks) or other breach of the systems on which such source code and assets, account information

(including personal information), and other sensitive data is stored could lead to piracy of our software, fraudulent activity,

disclosure or misappropriation of, or access to, our customers’, consumers’ or employees’ personal information (including

personally identifiable information), or our own business data. Such incidents could also lead to product code-base and game

distribution platform exploitation, should undetected viruses, spyware, or other malware be inserted into our products,

services, or networks, or systems used by our consumers. We have implemented cybersecurity programs and the tools,

technologies, processes, and procedures intended to secure our data and systems, and prevent and detect unauthorized access

to, or loss of, our data, or the data of our customers, consumers, or employees. However, because these cyberattacks may

remain undetected for prolonged periods of time and the techniques used by criminal hackers and other third parties to breach

systems change frequently, we may be unable to anticipate these techniques or implement adequate preventative measures. A

data intrusion into a server for a game with online features or for our proprietary online gaming service could also disrupt the

operation of such game or platform. If we are subject to cybersecurity breaches, or a security-related incident that materially

disrupts the availability of our products and services, we may have a loss in sales or subscriptions or be forced to pay

damages or incur other costs, including from the implementation of additional cyber and physical security measures, or suffer

reputational damage. Additionally, while we maintain insurance policies, they may be insufficient to reimburse the Company

for all losses or all types of claims that may be caused by cyberbreaches or system or network disruptions. Moreover, if there

were a public perception that our data protection measures are inadequate, whether or not the case, it could result in

reputational damage and potential harm to our business relationships or the public perception of our business model. In

addition, such cybersecurity breaches may subject us to legal claims or proceedings, including regulatory investigations and

actions, especially if there is loss, disclosure, or misappropriation of, or access to, our customers’ personal information or

other sensitive information, or there is otherwise an intrusion into our customers’ privacy.

Our reported financial results could be significantly impacted by changes in financial accounting standards or by the

application of existing or future accounting standards to our business as it evolves.

Our reported financial results are impacted by the accounting policies promulgated by the SEC and national

accounting standards bodies and the methods, estimates, and judgments that we use in applying our accounting policies.

Policies affecting revenue recognition have affected, and could further significantly affect, the way we report revenues

related to our products and services. We recognize a majority of the revenues from video games that include an online service

on a deferred basis over an estimated service period for such games. In addition, we defer the cost of revenues of those

products. Further, as we increase our downloadable content and add new features to our online services, our estimate of the

service period may change, and we could be required to recognize revenues, and defer related costs, over a shorter or longer

period of time. As we enhance, expand and diversify our business and product offerings, the application of existing or future

financial accounting standards, particularly those relating to the way we account for revenues and income taxes, could have a

significant impact on our reported net revenues, net income and earnings per share under accounting principles generally

accepted in the United States in any given period.

Provisions in our corporate documents and Delaware state law could delay or prevent a change of control.

Our Fourth Amended and Restated Bylaws contain a provision regulating the ability of shareholders to bring matters

for action before annual and special meetings. The regulations on shareholder action could make it more difficult for any

person seeking to acquire control of the Company to obtain shareholder approval of actions that would support this effort. In

addition, our Third Amended and Restated Certificate of Incorporation authorizes the issuance of so-called “blank check”

preferred stock. This ability of our Board of Directors to issue and fix the rights and preferences of preferred stock could

effectively dilute the interests of any person seeking control or otherwise make it more difficult to obtain control.

Historically, our stock price has been highly volatile.

The trading price of our common stock has been, and could continue to be, subject to wide fluctuations in response

to many factors, including for example, but without limitation:

• quarter-to-quarter variations in the results of our operations;

• the announcement of new products;

• the announcement of lower prices on competing products;

• product development or release schedules;

• general conditions in the computer, software, entertainment, media or electronics industries, or in the worldwide

economy;

• announcements of developments in the overall worldwide audience for interactive entertainment, including

announcements of industry sales data;

• the timing of the introduction of new platforms and delays in the actual release of new platforms;

• hardware manufacturers’ announcements of price changes for hardware platforms;

• consumer acceptance of hardware platforms;

• consumer spending trends;

• the outcome of lawsuits or regulatory investigations in which we are, or may become, involved;

• changes in earnings estimates or buy/sell recommendations by analysts;

• sales or acquisitions of common stock by our directors or executive management; and

• investor perceptions and expectations regarding our products, plans and strategic position, and those of our

competitors and customers.

Catastrophic events may disrupt our business.

Our corporate headquarters and our primary corporate data center are located in the Los Angeles, California area,

which is near a major earthquake fault. A major earthquake or other catastrophic event that results in the destruction or

disruption of any of our critical business or information technology systems, or otherwise prevents us from conducting our

normal business operations, could require significant expenditures to resume operations and negatively impact our business.

While we maintain insurance coverage for some of these events, the potential liabilities associated with such events could

exceed the insurance coverage we maintain. Further, our system redundancy may be ineffective or inadequate and our

disaster recovery planning may not be sufficient for all eventualities. Any such event could also limit the ability of retailers,

distributors or our other customers to sell or distribute our products.

If general economic conditions decline, demand for our products could decline.

Purchases of our products and services involve discretionary spending on the part of consumers. Consumers are

generally more willing to make discretionary purchases, including purchases of products and services like ours, during

periods in which favorable economic conditions prevail. As a result, our products are sensitive to general economic

conditions and economic cycles. A reduction or shift in domestic or international consumer spending could result in an

increase in our selling and promotional expenses, in an effort to offset that reduction, and could negatively impact our

business.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

Our principal corporate and administrative offices, which includes our Activision segment’s headquarters, are

located in Santa Monica, California and consist of approximately 165,000 square feet of leased office space.

Our Activision segment primarily leases office space for development studio personnel, with a total of

approximately 475,000 square feet of leased spaces throughout the U.S., primarily in California, New York, and Wisconsin.

We also lease approximately 721,000 square feet of office space in Irvine, CA for our Blizzard segment’s headquarters,

which includes administrative and development studio space, and approximately 68,000 square feet of office space in

London, United Kingdom for our King segment’s headquarter offices. King also leases approximately 210,000 square feet of

office space in Barcelona, Spain for additional administrative and development studio space.

In total, we have approximately 100 facility leases, primarily for other administrative and sales functions and

development studio personnel, in the following countries: Australia, Brazil, Canada, China, France, Germany, Ireland, Italy,

Japan, Malta, Mexico, the Netherlands, Romania, Singapore, South Korea, Spain, Sweden, Taiwan, the United Kingdom, and

the United States.

The only facilities currently owned by the Company are two European warehouses utilized by the Distribution

segment, one located in Burglengenfeld, Germany, and the other in Venlo, the Netherlands.

We anticipate no difficulty in extending the leases of our facilities or obtaining comparable facilities in suitable

locations, as needed, and we consider our facilities to be adequate for our current needs.

Item 3. LEGAL PROCEEDINGS

In December 2018, we received a decision from the STA informing us of an audit assessment to a Swedish

subsidiary of King for the 2016 tax year. The STA decision described the basis for issuing a transfer pricing assessment of

approximately 3.5kr billion (approximately $400 million) primarily concerning an alleged intercompany asset transfer. We

disagree with the STA’s decision and intend to vigorously contest it. We plan to pursue all remedies available to us to

successfully resolve the matter, including administrative remedies with the STA, multilateral procedures with other relevant

taxing jurisdictions, and, if necessary, judicial remedies. Further, we may be required to pay the full assessment to the STA in

advance of the final resolution of the matter. While we believe our tax provisions at December 31, 2018, are appropriate,

until such time as this matter is ultimately resolved we could be subject to significant additional tax liabilities.

In December 2017, we received a Notice of Reassessment from the FTA related to transfer pricing for intercompany

transactions involving one of our French subsidiaries for the 2011 through 2013 tax years. The total assessment, including

penalties and interest, was approximately €571 million (approximately $652 million). We disagree with the proposed

assessment and intend to vigorously contest it. We plan to pursue all remedies available to us to successfully resolve this

matter, including administrative remedies with the FTA and, if necessary, judicial remedies. While we believe our tax

provisions at December 31, 2018, are appropriate, until such time as this matter is ultimately resolved we could be subject to

significant additional tax liabilities. In addition to the risk of additional tax for the 2011 through 2013 tax years, if litigation

regarding this matter were adversely determined and/or if the FTA were to seek adjustments of a similar nature for

subsequent years, we could be subject to significant additional tax liabilities.

In addition, we are party to routine claims, suits, investigations, audits, and other proceedings arising in the ordinary

course of business, including with respect to intellectual property, competition and antitrust matters, regulatory matters, tax

matters, privacy matters, labor and employment matters, compliance matters, unclaimed property matters, liability and

personal injury claims, product damage claims, collection matters, and/or commercial claims. In the opinion of management,

after consultation with legal counsel, such routine claims and lawsuits are not significant and we do not expect them to have a

material adverse effect on our business, financial condition, results of operations, or liquidity.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND

ISSUER PURCHASES OF EQUITY SECURITIES

Market Information and Holders

Our common stock is quoted on the Nasdaq National Market under the symbol “ATVI”. At February 21, 2019, there

were 1,616 holders of record of our common stock.

Stock Performance Graph

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise

subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of

Activision Blizzard, Inc. under the Exchange Act or the Securities Act of 1933.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN

among Activision Blizzard, Inc., the Nasdaq Composite Index, the S&P 500 Index,

and the RDG Technology Composite Index

The following graph and table compare the cumulative total stockholder return on our common stock, the Nasdaq

Composite Index, the S&P 500 Index, and the RDG Technology Composite Index. The graph and table assume that $100 was

invested on December 31, 2013, and that dividends were reinvested daily. The stock price performance on the following

graph and table is not necessarily indicative of future stock price performance.

Fiscal year ending December 31:

12/13

12/14

12/15

12/16

12/17

12/18

Activision Blizzard, Inc. ................................................

$100.00

$114.08

$221.39

$208.19

$367.28

$271.51

Nasdaq Composite .........................................................

100.00

114.62

122.81

133.19

172.11

165.84

S&P 500 .........................................................................

100.00

113.69

115.26

129.05

157.22

150.33

RDG Technology Composite ........................................

100.00

117.81

122.23

138.28

189.14

190.13

12/13 12/14 12/15 12/16 12/17 12/18

$400

$350

$300

$250

$200

$150

$100

$50

Activision Blizzard, Inc. NASDAQ Composite S&P 500 RDG Technology Composite

▲

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND

ISSUER PURCHASES OF EQUITY SECURITIES

Market Information and Holders

Our common stock is quoted on the Nasdaq National Market under the symbol “ATVI”. At February 21, 2019, there

were 1,616 holders of record of our common stock.

Stock Performance Graph

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise

subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of

Activision Blizzard, Inc. under the Exchange Act or the Securities Act of 1933.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN

among Activision Blizzard, Inc., the Nasdaq Composite Index, the S&P 500 Index,

and the RDG Technology Composite Index

The following graph and table compare the cumulative total stockholder return on our common stock, the Nasdaq

Composite Index, the S&P 500 Index, and the RDG Technology Composite Index. The graph and table assume that $100 was

invested on December 31, 2013, and that dividends were reinvested daily. The stock price performance on the following

graph and table is not necessarily indicative of future stock price performance.

Fiscal year ending December 31:

12/13

12/14

12/15

12/16

12/17

12/18

Activision Blizzard, Inc. ................................................

$100.00

$114.08

$221.39

$208.19

$367.28

$271.51

Nasdaq Composite .........................................................

100.00

114.62

122.81

133.19

172.11

165.84

S&P 500 .........................................................................

100.00

113.69

115.26

129.05

157.22

150.33

RDG Technology Composite ........................................

100.00

117.81

122.23

138.28

189.14

190.13

Cash Dividends

We have paid a dividend annually since 2010. Below is a summary of cash dividends paid over the past three fiscal

years, along with the dividend most recently declared by the Board of Directors that will be paid in May 2019:

Year

Per Share

Amount

Record

Date

Dividend

Payment

Date

2019 ...........................................................................................................................

$0.37

3/28/2019

5/9/2019

2018 ...........................................................................................................................

$0.34

3/30/2018

5/9/2018

2017 ...........................................................................................................................

$0.30

3/30/2017

5/10/2017

2016 ...........................................................................................................................

$0.26

3/30/2016

5/11/2016

Future dividends will depend upon our earnings, financial condition, cash requirements, anticipated future prospects,

and other factors deemed relevant by our Board of Directors. There can be no assurances that dividends will be declared in

the future.

10b5-1 Stock Trading Plans

The Company’s directors and employees may, at a time they are not aware of material non-public information, enter

into plans to purchase or sell shares of our common stock that satisfy the requirements of Exchange Act Rule 10b5-1

(“Rule 10b5-1 Plans”). Rule 10b5-1 Plans permit persons whose ability to purchase or sell our common stock may otherwise

be substantially restricted (by quarterly and special stock-trading blackouts and by their possession from time to time of

material nonpublic information) to trade on a pre-arranged, “automatic-pilot” basis.

Trading under Rule 10b5-1 Plans is subject to certain conditions, including that the person for whom the plan is

created (or anyone else aware of material non-public information acting on such person’s behalf) not exercise any subsequent

influence regarding the amount, price, and dates of transactions under the plan. In addition, the Company requires

Rule 10b5-1 Plans to be established and maintained in accordance with the Company’s “Policy on Establishing and

Maintaining 10b5-1 Trading Plans.”

Trades under a Rule 10b5-1 Plan by our directors and employees are not necessarily indicative of their respective

opinions of our current or potential future performance at the time of the trade. Trades by our directors and executive officers

pursuant to a Rule 10b5-1 Plan will be disclosed publicly through Form 144 and Form 4 filings with the SEC, in accordance

with applicable laws, rules, and regulations.

Issuer Purchase of Equity Securities

On January 31, 2019, our Board of Directors authorized a stock repurchase program under which we are authorized

to repurchase up to $1.5 billion of our common stock during the two-year period from February 14, 2019 until the earlier of

February 13, 2021 and a determination by the Board of Directors to discontinue the repurchase program.

On February 2, 2017, our Board of Directors authorized a stock repurchase program under which we were

authorized to repurchase up to $1 billion of our common stock during the two-year period from February 13, 2017 through

February 12, 2019. We did not repurchase any shares under this program.

Item 6. SELECTED FINANCIAL DATA

The following table summarizes certain selected consolidated financial data, which should be read in conjunction

with our consolidated financial statements and notes thereto in Item 8 and with “Management’s Discussion and Analysis of

Financial Condition and Results of Operations” included under Item 7 in this Annual Report on Form 10-K. The selected

consolidated financial data presented below at and for each of the years in the five-year period ended December 31, 2018, is

derived from our consolidated financial statements and include the operations of King commencing on the King Closing

Date. All amounts set forth in the following tables are in millions, except per share data.

For the Years Ended December 31,

2018

2017

2016

2015

2014

Statement of Operations Data:

Net revenues ....................................................................................

$7,500

$7,017

$6,608

$4,664

$4,408

Net income (1) .................................................................................

1,813

273

966

892

835

Basic net income per share ..............................................................

2.38

0.36

1.30

1.21

1.14

Diluted net income per share ...........................................................

2.35

0.36

1.28

1.19

1.13

Cash dividends declared per share ..................................................

0.34

0.30

0.26

0.23

0.20

Operating cash flows .......................................................................

$1,790

$2,213

$2,155

$1,259

$1,331

Balance Sheet Data:

Cash and investments (2) .................................................................

$4,380

$4,775

$3,271

$1,840

$4,867

Total assets ......................................................................................

17,835

18,668

17,452

15,246

14,637

Long-term debt, net (3) ....................................................................

2,671

4,390

4,887

4,074

4,319

Long-term debt, gross ......................................................................

2,700

4,440

4,940

4,119

4,369

Net debt (4) ......................................................................................

—

1,669

2,279

—

(1) Net income for 2018 and 2017 includes the impact of significant discrete tax-related impacts, including incremental

income tax expense due to the application of the U.S. Tax Reform Act. See further discussion in Note 18 of the

notes to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

(2) Cash and investments consists of cash and cash equivalents along with short-term and long-term investments. We

had short-term investments of $155 million and did not have any long-term investments as of December 31, 2018.

We had short-term investments of $62 million and did not have any long-term investments as of December 31,

2017. We had short-term and long-term investments of $13 million and $13 million, respectively, as of

December 31, 2016, $8 million and $9 million, respectively, as of December 31, 2015, and $10 million and

$9 million, respectively, as of December 31, 2014. Cash and investments as of December 31, 2015, excludes

$3,561 million of cash placed in escrow for the King Acquisition.

(3) For discussion on our debt obligations, see Note 13 of the notes to the consolidated financial statements included in

Item 8 of this Annual Report on Form 10-K.

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

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Business Overview

Activision Blizzard, Inc. is a leading global developer and publisher of interactive entertainment content and

services. We develop and distribute content and services on video game consoles, PC, and mobile devices. We also operate

esports leagues and events and create film and television content based on our intellectual property. The terms “Activision

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

subsidiaries.

The King Acquisition

On February 23, 2016, we completed the King Acquisition for an aggregate purchase price of approximately

$5.8 billion, as further described in Note 23 of the notes to the consolidated financial statements. Our consolidated financial

statements include the operations of King commencing on February 23, 2016.

Reportable Segments

Based upon our organizational structure, we conduct our business through three reportable segments: Activision,

Blizzard, and King.

(i) Activision

Activision is a leading global developer and publisher of interactive software products and entertainment content,

particularly for the console platforms. Activision primarily delivers content through retail and digital channels, including

full-game and in-game sales, as well as by licensing software to third-party or related-party companies that distribute

Activision products. Activision develops, markets, and sells products primarily based on our internally developed intellectual

properties, as well as some licensed properties.

In 2010, Activision entered into an exclusive relationship with Bungie to publish games in the Destiny franchise.

Effective December 31, 2018, Activision and Bungie mutually agreed to terminate their publishing relationship related to the

Destiny franchise. As part of this termination, Activision agreed to transfer its publishing rights for the Destiny franchise to

Bungie in exchange for cash and Bungie’s assumption of on-going customer obligations of Activision. Going forward,

Activision no longer has any material rights or obligations related to the Destiny franchise. As a result of the agreement to

terminate the relationship, the Company recognized net bookings—a key operating metric—of $20 million, GAAP revenues

of $164 million, and GAAP operating income of $91 million for the year ended December 31, 2018.

(ii) Blizzard

Blizzard is a leading global developer and publisher of interactive software products and entertainment content,

particularly for the PC platform. Blizzard primarily delivers content through retail and digital channels, including

subscriptions, full-game, and in-game sales, as well as by licensing software to third-party or related-party companies that

distribute Blizzard products. Blizzard also maintains a proprietary online gaming service, Blizzard Battle.net, which

facilitates digital distribution of Blizzard content and selected Activision content, online social connectivity, and the creation

of user-generated content. Blizzard also includes the activities of the Overwatch League, the first major global professional

esports league with city-based teams, and our MLG business, which is responsible for various esports events and serves as a

multi-platform network for Activision Blizzard esports content.

(iii) King

King is a leading global developer and publisher of interactive entertainment content and services, primarily on

mobile platforms, such as Google’s Android and Apple’s iOS. King also distributes its content and services on the PC

platform, primarily via Facebook. King’s games are free to play; however, players can acquire in-game items, either with

virtual currency or real currency, and we continue to focus on in-game advertising as a growing source of additional revenue.

Other

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

• the Studios business, which is devoted to creating original film and television content based on our library of

globally recognized intellectual properties; and

• the Distribution business, which consists of operations in Europe that provide warehousing, logistics, and sales

distribution services to third-party publishers of interactive entertainment software, our own publishing

operations, and manufacturers of interactive entertainment hardware.

Business Results and Highlights

Financial Results

The Company’s 2018 financial results are presented in accordance with a new revenue accounting standard that was

adopted in the first quarter of 2018. Prior period results have not been restated to reflect this change in accounting standards.

Further information about our adoption of the new standard is provided in Notes 2 and 3 of the notes to the consolidated

financial statements included in Item 8 of this Annual Report on Form 10-K.

2018 financial highlights included:

• consolidated net revenues increased 7% to $7.5 billion and consolidated operating income increased 52% to

$2.0 billion, as compared to consolidated net revenues of $7.0 billion and consolidated operating income of

$1.3 billion in 2017;

• revenues from digital online channels increased 6% to $5.8 billion, or 77% of consolidated net revenues, as

compared to $5.5 billion, or 78% of consolidated net revenues, in 2017;

• operating margin was 26.5%, as compared to 18.7% in 2017;

• cash flows from operating activities were approximately $1.79 billion, a decrease of 19%, as compared to

$2.21 billion in 2017;

• consolidated net income increased to $1.8 billion, as compared to $273 million in 2017, which included

significant discrete tax-related impacts in both 2017 and 2018—refer to Consolidated Results discussion below

for details; and

• diluted earnings per common share increased to $2.35, as compared to $0.36 in 2017.

Since certain of our games are hosted online or include significant online functionality that represents a separate

performance obligation, we defer the transaction price allocable to the online functionality from the sale of these games and

recognize the attributable revenues over the relevant estimated service periods, which are generally less than a year. Net

revenues and operating income for the year ended December 31, 2018, include net effects of $238 million and $100 million,

respectively, from the recognition of deferred net revenues and related cost of revenues.

Content Release and Event Highlights

Games and downloadable content that were released during 2018, include:

• Activision’s four downloadable content packs for Call of Duty: WWII;

• Activision’s Warmind and Forsaken, the second and third expansions to Destiny 2;

• Activision’s Call of Duty: Black Ops 4;

• Activision’s Spyro™ Reignited Trilogy, a remastered version of the first three Spyro the Dragon games;

• Blizzard’s latest expansions to Hearthstone—The Witchwood™ , The Boomsday Project™, and Rastakhan’s

Rumble™;

• Blizzard’s World of Warcraft: Battle for Azeroth™, the seventh expansion to World of Warcraft; and

• King’s Candy Crush Friends Saga™, the latest title in the Candy Crush franchise.

The Overwatch League, the first major global professional esports league with city-based teams, completed its

inaugural season in 2018 with 12 initial teams. During 2018, we also completed the sale of an additional eight teams, which

are competing in the league’s second season that began in February 2019.

International Sales

International sales are a fundamental part of our business. An important element of our international strategy is to

develop content that is specifically directed toward local cultures and customs. Net revenues from international sales

accounted for approximately 54%, 55%, and 55% of our total consolidated net revenues for the years ended December 31,

2018, 2017, and 2016, respectively. The majority of our net revenues from foreign countries are generated by consumers in

Australia, Canada, China, France, Germany, Italy, Japan, the Netherlands, South Korea, Spain, Sweden, and the United

Kingdom. Our international business is subject to risks typical of an international business, including, but not limited to,

foreign currency exchange rate volatility and changes in local economies. Accordingly, our future results could be materially

and adversely affected by changes in foreign currency exchange rates and changes in local economies.

Operating Metrics

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

Net Bookings

We monitor net bookings as a key operating metric in evaluating the performance of our business. Net bookings is

the net amount of products and services sold digitally or sold-in physically in the period, and includes license fees,

merchandise, and publisher incentives, among others. Net bookings is equal to net revenues excluding the impact from

deferrals.

Net bookings was as follows (amounts in millions):

For the years ended

December 31,

Increase

(Decrease)

Increase

(Decrease)

2018

2017

2016

2018 v 2017

2017 v 2016

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

$7,262

$7,156

$6,599

$106

$557

2018 vs. 2017

The increase in net bookings for 2018, as compared to 2017, was primarily due to:

• higher net bookings from World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was

released in August 2018, with no comparable release in 2017;

• higher net bookings from Call of Duty: WWII, which was released in November 2017, as compared to Call of

Duty: Infinite Warfare

(which, when referred to herein, is inclusive of Call of Duty: Modern Warfare

Remastered), which was released in November 2016;

• higher net bookings from the Candy Crush franchise, primarily due to in-game advertisements, increased

monetization, and the launch of Candy Crush Friends Saga, the latest title in the Candy Crush franchise, in

October 2018; and

• net bookings from the Spyro Reignited Trilogy, which was released in November 2018, with no comparable

release in 2017.

The increase was partially offset by:

• lower net bookings from the Destiny franchise, driven by the release of Destiny 2 in September 2017, with no

comparable full-game release in 2018;

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

• lower net bookings from Call of Duty: Infinite Warfare, as compared to prior catalog releases.

2017 vs. 2016

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

• higher net bookings from King titles, as 2017 included King net bookings for the full year, while 2016 only

included King net bookings for the partial period following the King Closing Date, as well as higher net

bookings from the Candy Crush franchise, due to in-game events and features;

• higher net bookings from the Destiny franchise, driven by the release of Destiny 2;

• higher net bookings from Call of Duty: WWII, as compared to Call of Duty: Infinite Warfare, the comparable

2016 title;

• higher net bookings from the continued strength of Call of Duty: Black Ops III, as compared to prior catalog

releases, driven by the downloadable content pack, Zombies Chronicles, which was released in May 2017, and

the continued strength of microtransactions; and

• net bookings from Crash Bandicoot

N. Sane Trilogy, which was released in June 2017.

The increase was partially offset by:

• lower net bookings from Call of Duty: Infinite Warfare, as compared to the performance of Call of Duty: Black

Ops III, the comparable 2015 title;

• lower net bookings from Overwatch;

• lower net bookings from World of Warcraft, driven by the release of World of Warcraft: Legion™ in August

2016, with no comparable release in 2017; and

• lower net bookings from the Skylanders

franchise, due to the release of Skylanders Imaginators in October

2016, with no comparable release in 2017.

Monthly Active Users

We monitor monthly active users (“MAUs”) as a key measure of the overall size of our user base. MAUs are the

number of individuals who accessed a particular game in a given month. We calculate average MAUs in a period by adding

the total number of MAUs in each of the months in a given period and dividing that total by the number of months in the

period. An individual who accesses two of our games would be counted as two users. In addition, due to technical limitations,

for Activision and King, an individual who accesses the same game on two platforms or devices in the relevant period would

be counted as two users. For Blizzard, an individual who accesses the same game on two platforms or devices in the relevant

period would generally be counted as a single user.

The number of MAUs for a given period can be significantly impacted by the timing of new content releases, since

new releases may cause a temporary surge in MAUs. Accordingly, although we believe that overall trending in the number of

MAUs can be a meaningful performance metric, period-to-period fluctuations may not be indicative of longer-term trends.

The following table details our average MAUs on a sequential quarterly basis for each of our reportable segments (amounts

in millions):

December 31,

2018

September 30,

2018

June 30,

2018

March 31,

2018

December 31,

2017

September 30,

2017

Activision .................

Blizzard .....................

King ..........................

268 262 270 285 290 293

Total ..........................

356 345 352 374 385 384

Average MAUs increased by 11 million, or 3%, for the three months ended December 31, 2018, as compared to the

three months ended September 30, 2018. The increase in Activision’s average MAUs is driven by the Call of Duty franchise,

due to the launch of Call of Duty: Black Ops 4 in October 2018. The increase in King’s average MAUs is due to the launch of

Candy Crush Friends Saga in October 2018.

Average MAUs decreased by 29 million, or 8%, for the three months ended December 31, 2018, as compared to the

three months ended December 31, 2017. The year-over-year decrease in King’s average MAUs is due to decreases across

King’s franchises from less engaged users leaving the network. King MAUs were also negatively impacted by a King

network outage resulting from changes made in the second quarter of 2018 by a third-party partner which inadvertently

impacted some users’ ability to play and spend money in King games. The year-over-year decrease in Blizzard’s average

MAUs is due to lower MAUs for Hearthstone and Overwatch.

Management’s Overview of Business Trends

Interactive Entertainment Growth, Including Mobile Gaming

Our business participates in the global interactive entertainment industry. Games have become an increasingly

popular form of entertainment, and we estimate the total industry has grown, on average, 18% annually from 2015 to 2018.

The industry continues to benefit from additional players entering the market as interactive entertainment becomes more

commonplace across age groups and as more developing regions gain access to this form of entertainment.

Further, the wide adoption of smart phones globally and the free-to-play business model on those platforms has

increased the total addressable audience for gaming significantly by introducing gaming to new age groups and new regions

and allowing gaming to occur more widely outside the home. Mobile gaming is estimated to be larger than console and PC

gaming, and continues to grow at a significant rate. King is a leading developer of mobile and free-to-play games and our

other business units have mobile efforts underway that present the opportunity for us to expand the reach of, and drive

additional player investment from, our franchises.

Opportunities to Expand Franchises Outside of Games

Our fans spend significant time investing in our franchises through purchases of our game content, whether through

purchases of full games or downloadable content or via microtransactions. Given the passion our players have for our

franchises, we believe there are emerging opportunities to drive additional engagement and investment in our franchises

outside of games. These opportunities include esports, film and television, and consumer products. Our efforts to build these

adjacent opportunities are still relatively nascent, but we view them as potentially significant sources of future revenues.

For example, as part of our efforts to take advantage of the esports opportunity, during 2017 we completed the sale

of 12 teams for the Overwatch League, the first major global professional esports league with city-based teams, which

completed its inaugural season in July 2018. During 2018, we also completed the sale of eight additional teams, which are

competing in the league’s second season that began in February 2019.

Concentration of Sales Among the Most Popular Franchises

The concentration of retail revenues among key titles has continued as a trend in the overall interactive

entertainment industry. According to The NPD Group, the top 10 titles accounted for 38% of the retail sales in the U.S.

interactive entertainment industry in 2018. Similarly, a significant portion of our revenues historically has been derived from

video games based on a few popular franchises and these video games have been responsible for a disproportionately high

percentage of our profits. For example, the Call of Duty, Candy Crush, and World of Warcraft franchises, collectively,

accounted for 58% of our consolidated net revenues—and a significantly higher percentage of our operating income—for

2018.

The top titles in the industry are also becoming more consistent as players and revenues concentrate more heavily in

established franchises. Of the top 10 console franchises in the U.S. in 2018, all 10 are from established franchises. Similarly,

according to U.S rankings for the Apple App Store and Google Play store per App Annie Intelligence as of December 2018,

the top 10 mobile games have held such ranking for an average of 28 months.

In addition to investing in, and developing sequels and content for, our top franchises, we are continually exploring

additional ways to expand those franchises. Further, while there is no guarantee of success, we invest in new properties in an

effort to develop future top franchises. For example, in 2014, we released Hearthstone, and in 2016, we released Overwatch.

Additionally, to diversify our portfolio of key franchises and increase our presence on the mobile platform, in 2016 we

acquired King.

Overall, we do expect that a limited number of popular franchises will continue to produce a disproportionately high

percentage of our, and the industry’s, revenues and profits in the near future. Accordingly, our ability to maintain our top

franchises and our ability to successfully compete against our competitors’ top franchises can significantly impact our

performance.

Recurring Revenue Business Models and Seasonality

Increased consumer online connectivity has allowed us to offer players new investment opportunities and to shift

our business further towards a more consistently recurring and year-round model. Offering downloadable content and

microtransactions, in addition to full games, allows our players to access and invest in new content throughout the year. This

incremental content not only provides additional high-margin revenues, it can also increase player engagement. Also, mobile

games, and free-to-play games more broadly, are generally less seasonal than games developed primarily for the console or

PC platforms.

While our business is shifting toward a year-round engagement model, the interactive entertainment industry

remains somewhat seasonal. We have historically experienced our highest sales volume, particularly for Activision, in the

calendar year-end holiday buying season. Following the acquisition of King, which focuses on free-to-play games, which are

generally less seasonal, and as we otherwise make the shift to a year-round model, less of our revenues are generated during

the fourth quarter. For our reportable segments, the aggregate percentage of our revenue represented by the fourth quarter in

2018 was 39%, as compared to 52% in 2013.

Outlook

In 2019, we expect to have a lighter slate of full game releases than in 2018. We plan to release our latest Call of

Duty game in the second half of 2019, along with Sekiro: Shadows Die Twice and Crash Team Racing Nitro-Fueled in the

first half of 2019. In addition, we expect to deliver ongoing content for our various franchises, including continued in-game

content for Call of Duty: Black Ops 4, expansion packs for Hearthstone, and in-game events for Overwatch. Overall, we

expect lower revenues and earnings per share in 2019 as compared to 2018.

We will also continue to invest in new opportunities that we think have the potential to drive our growth over the

long-term, including building on our advertising and esports initiatives.

Focusing Development Resources and Restructuring Plan

In order to better capitalize on long-term growth opportunities, on February 12, 2019, the Company committed to a

Board-authorized restructuring plan under which the Company plans to refocus its resources on its largest opportunities and

to remove unnecessary levels of complexity and duplication from certain parts of the business. More specifically, we intend

to:

• increase our investment in development for our largest, internally-owned franchises—across upfront releases,

in-game content, mobile and geographic expansion;

• reduce certain non-development and administrative-related costs across our business; and

• integrate our global and regional sales and “go-to-market,” partnerships, and sponsorships capabilities across

the business, which we believe will enable us to provide better opportunities for talent, and greater expertise and

scale on behalf of our business units.

We expect to incur aggregate pre-tax restructuring charges of approximately $150 million in 2019, related to

severance, including, in many cases, above legally required amounts (approximately 65% of the aggregate charge), facilities

costs (approximately 20% of the aggregate charge), and asset write-downs and other costs (approximately 15% of the

aggregate charge). We expect the majority of these charges to be incurred in the first quarter of 2019, with most of the

balance expected to be incurred in the remainder of 2019. The total pre-tax charge associated with the restructuring will be

paid almost entirely in cash and the outlays are expected to be incurred throughout 2019.

Consolidated Statements of Operations Data

The following table sets forth consolidated statements of operations data for the periods indicated in dollars

(amounts in millions) and as a percentage of total net revenues, except for cost of revenues, which are presented as a

percentage of associated revenues:

For the Years Ended December 31,

2018

2017

2016

Net revenues

Product sales ............................................................................................

$2,255

30%

$2,110

30%

$2,196

33%

Subscription, licensing, and other revenues ............................................

5,245

4,907

4,412

Total net revenues .......................................................................................

7,500

100

7,017

100

6,608

100

Costs and expenses

Cost of revenues—product sales:

Product costs ........................................................................................

719

733

741

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

371

300

331

Cost of revenues—subscription, licensing, and other:

Game operations and distribution costs ...............................................

1,028

984

851

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

399

484

471

Product development ...............................................................................

1,101

1,069

958

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

1,062

1,378

1,210

General and administrative ...................................................................... 832 11 760 11 634 10

Total costs and expenses ............................................................................. 5,512 73 5,708 81 5,196 79

Operating income ........................................................................................

1,988

1,309

1,412

Interest and other expense (income), net .....................................................

146

214

Loss on extinguishment of debt (1) ............................................................. 40 1 12 — 92 1

Income before income tax expense .............................................................

1,877

1,151

1,106

Income tax expense .....................................................................................

878

140

Net income ..................................................................................................

$1,813

24%

$273

$966

15%

(1) Represents the loss on extinguishment of debt we recognized associated with our debt financing activities as

follows:

• the 2018 loss on extinguishment is comprised of a $25 million premium payment and an $8 million write-off of

unamortized discount and deferred financing costs associated with the redemption in August 2018 of our

unsecured senior notes due September 2023 that we issued on September 19, 2013 (the “2023 Notes”), along

with a $7 million write-off of unamortized discount and deferred financing costs associated with the

extinguishment of our outstanding term loans;

• the 2017 loss on extinguishment is comprised of a $12 million write-off of unamortized discount and deferred

financing costs associated with refinancing activities on our term loans; and

• and the 2016 loss on extinguishment is comprised of a premium payment of $63 million and a write-off of

unamortized discount and financing costs of $29 million associated with the extinguishment of certain term loan

and senior note facilities through our refinancing activities.

Consolidated Net Revenues

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

recognized (amounts in millions):

For the Years Ended December 31,

2018 2017 2016

Increase/

(decrease)

2018 v 2017

Increase/

(decrease)

2017 v 2016

% Change

2018 v 2017

% Change

2017 v 2016

Consolidated net revenues ....................................

$7,500

$7,017

$6,608

$483

$409

Net effect from recognition (deferral) of

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

238

(139)

377

(148)

Consolidated net revenues

2018 vs. 2017

The increase in consolidated net revenues for 2018, as compared to 2017, was primarily due to:

• an increase of $455 million in revenues recognized from Activision, primarily due to (1) higher revenues

recognized from the Destiny franchise, driven by Destiny 2, which was released in September 2017, with no

comparable release in 2016, and by revenues recognized in connection with the sale of our Destiny publishing

rights to Bungie, (2) higher revenues recognized from Call of Duty: WWII, which was released in November

2017, as compared to Call of Duty: Infinite Warfare, which was released in November 2016, (3) higher

revenues recognized from Call of Duty: Black Ops 4, which was released in October 2018, as compared to Call

of Duty: WWII, and (4) revenues from the Spyro Reignited Trilogy, which was released in November 2018, with

no comparable release in 2017, partially offset by lower revenues recognized from Call of Duty: Infinite

Warfare, as compared to prior catalog releases; and

• an increase of $105 million in revenues from King, despite the impact from the network outage in the second

quarter of 2018 as discussed above, primarily driven by the Candy Crush franchise’s higher revenues due to

in-game advertisements, increased monetization, and the launch of Candy Crush Friends Saga, the latest title in

the Candy Crush franchise, in October 2018.

The increase was partially offset by a decrease of $74 million in revenues recognized from Blizzard, primarily due

to lower revenues recognized from Overwatch, which was released in May 2016, partially offset by higher revenues

recognized from World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was released in August 2018,

with no comparable release in 2017.

2017 vs. 2016

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

• higher revenues from King titles, as 2017 included King revenues for the full year, while 2016 only included

King revenues for the partial period following the King Closing Date, as well as higher revenues from the

Candy Crush franchise, due to in-game events and features;

• higher revenues recognized from the continued strength of Call of Duty: Black Ops III, as compared to prior

catalog releases, driven by the downloadable content pack, Zombies Chronicles, which was released in May

2017, and the continued strength of microtransactions;

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

• higher revenues recognized from Call of Duty: WWII, as compared to Call of Duty: Infinite Warfare, the

comparable 2016 title.

The increase was partially offset by:

• lower revenues recognized from Call of Duty: Infinite Warfare, as compared to the performance of Call of

Duty: Black Ops III, the comparable 2015 title; and

• lower revenues from the Skylanders franchise, due to the release of Skylanders Imaginators in October 2016,

with no comparable release in 2017.

Change in Deferred Revenues Recognized

2018 vs. 2017

The increase in net deferred revenues recognized for 2018, as compared to 2017, was primarily due to an increase of

$625 million in net deferred revenues recognized from Activision, primarily due to higher net deferred revenues recognized

from the Destiny franchise, driven by Destiny 2, which was released in September 2017, and its associated in-game content,

with no comparable release in 2016.

The increase was partially offset by a decrease of $226 million in net deferred revenues recognized from Blizzard,

primarily due to a net deferral of revenues for World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was

released in August 2018, with no comparable release in 2017.

2017 vs. 2016

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

• a net deferral of revenues for the Destiny franchise, primarily due to Destiny 2, as compared to net deferred

revenues recognized in the comparable prior period; and

• a higher net deferral of revenues from the Call of Duty franchise, primarily due to the stronger performance of

Call of Duty: WWII in the fourth quarter of 2017, as compared to Call of Duty: Infinite Warfare in the fourth

quarter of 2016.

The decrease was partially offset by:

• net deferred revenues recognized from Overwatch in 2017, as compared to a net deferral of revenues in 2016

due to the release of Overwatch in May 2016; and

• net deferred revenues recognized from World of Warcraft in 2017, as compared to a net deferral of revenues in

2016 due to the release of World of Warcraft: Legion in August 2016.

Foreign Exchange Impact

Changes in foreign exchange rates had a positive impact of $102 million, a positive impact of $42 million, and a

negative impact of $81 million on Activision Blizzard’s consolidated net revenues in 2018, 2017, and 2016, respectively, as

compared to the same periods in the previous year. The changes are primarily due to changes in the value of the U.S. dollar

relative to the euro and the British pound.

Operating Segment Results

Currently, we have three reportable segments—Activision, Blizzard, and King. Our operating segments are

consistent with the manner in which our operations are reviewed and managed by our Chief Executive Officer, who is our

chief operating decision maker (“CODM”). The CODM reviews segment performance exclusive of: the impact of the change

in deferred revenues and related cost of revenues with respect to certain of our online-enabled games; share-based

compensation expense; amortization of intangible assets as a result of purchase price accounting; fees and other expenses

(including legal fees, expenses, and accruals) related to acquisitions, associated integration activities, and financings; certain

restructuring costs; and certain other non-cash charges. The CODM does not review any information regarding total assets on

an operating segment basis, and accordingly, no disclosure is made with respect thereto.

Our operating segments are also consistent with our internal organizational structure, the way we assess operating

performance and allocate resources, and the availability of separate financial information. We do not aggregate operating

segments.

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

millions):

For the Year Ended

December 31, 2018 Increase / (decrease) 2018 v 2017

Activision

Blizzard

King

Total

Activision

Blizzard

King

Total

Segment Revenues

Net revenues from external customers .........

$2,458

$2,238

$2,086

$6,782

$(170)

$118

$88

$36

Intersegment net revenues (1) ...................... — 53 — 53 — 34 — 34

Segment net revenues ...................................

$2,458

$2,291

$2,086

$6,835

$(170)

$152

$88

$70

Segment operating income .............................

$1,011

$685

$750

$2,446

$(27)

$50

$29

For the Year Ended

December 31, 2017 Increase / (decrease) 2017 v 2016

Activision

Blizzard

King

Total

Activision

Blizzard

King

Total

Segment Revenues

Net revenues from external customers ..........

$2,628

$2,120

$1,998

$6,746

$408

$(319)

$412

$501

Intersegment net revenues (1) .......................

—

Segment net revenues ....................................

$2,628

$2,139

$1,998

$6,765

$408

$(300)

$412

$520

Segment operating income ..............................

$1,005

$712

$700

$2,417

$217

$(283)

$163

$97

For the Year Ended

December 31, 2016

Activision

Blizzard

King

Total

Segment Revenues

Net revenues from external customers .........

$2,220

$2,439

$1,586

$6,245

Intersegment net revenues (1) ......................

—

Segment net revenues ...................................

$2,220

$2,439

$1,586

$6,245

Segment operating income .............................

$788

$995

$537

$2,320

(1) Intersegment revenues reflect licensing and service fees charged between segments.

Reconciliations of total segment net revenues and total segment operating income to consolidated net revenues and

consolidated income before income tax expense are presented in the table below (amounts in millions):

For the Years Ended December 31,

2018

2017

2016

Reconciliation to consolidated net revenues:

Segment net revenues ................................................................................................................

$6,835

$6,765

$6,245

Revenues from other segments (1) ............................................................................................

480

410

354

Net effect from recognition (deferral) of deferred net revenues (2) ..........................................

238

(139)

Elimination of intersegment revenues (3) .................................................................................

(53)

(19)

—

Consolidated net revenues .........................................................................................................

$7,500

$7,017

$6,608

Reconciliation to consolidated income before income tax expense:

Segment operating income ........................................................................................................

$2,446

$2,417

$2,320

Operating income (loss) from other segments (1) .....................................................................

(19)

Net effect from recognition (deferral) of deferred net revenues and related cost of

revenues (2) ...........................................................................................................................

100

(71)

(10)

Share-based compensation expense ..........................................................................................

(209)

(178)

(159)

Amortization of intangible assets ..............................................................................................

(370)

(757)

(706)

Fees and other expenses related to the acquisition of King (4) .................................................

—

(15)

(47)

Restructuring costs (5) ...............................................................................................................

(10)

(15)

—

Other non-cash charges (6) ........................................................................................................

—

(14)

—

Discrete tax-related items (7) ....................................................................................................

—

(39)

—

Consolidated operating income .................................................................................................

1,988

1,309

1,412

Interest and other expense (income), net ...................................................................................

146

214

Loss on extinguishment of debt .................................................................................................

Consolidated income before income tax expense .....................................................................

$1,877

$1,151

$1,106

(1) Includes other income and expenses from operating segments managed outside the reportable segments, including

our Studios and Distribution businesses. Also includes unallocated corporate income and expenses.

(2) We have determined that some of our titles’ online functionality represents an essential component of gameplay and,

as a result, represents a distinct and separate deliverable. As such, we are required to recognize revenues from these

titles over the estimated service periods, which are generally less than twelve months. The related cost of revenues

are deferred and recognized when the related revenues are recognized. In the operating segment results table, we

reflect the net effect from the deferrals of revenues and (recognition) of deferred revenues, along with the related

cost of revenues, on certain of our online enabled products.

(3) Intersegment revenues reflect licensing and service fees charged between segments.

(4) Reflects fees and other expenses, such as legal, banking, and professional services fees, related to the acquisition of

King and associated integration activities, inclusive of related debt financings.

(5) Reflects restructuring charges, primarily severance costs.

(6) Reflects a non-cash accounting charge to reclassify certain cumulative translation gains (losses) into earnings due to

the substantial liquidation of certain of our foreign entities.

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

Segment Net Revenues

Activision

2018 vs. 2017

The decrease in Activision’s net revenues for 2018, as compared to 2017, was primarily due to:

• lower revenues from the Destiny franchise, driven by the release of Destiny 2 in September 2017, with no

comparable full-game release in 2018; and

• lower revenues from Call of Duty: Infinite Warfare, which was released in November 2016, as compared to

prior catalog releases.

The decrease was partially offset by:

• higher revenues from Call of Duty: WWII, which was released in November 2017, as compared to Call of Duty:

Infinite Warfare; and

• revenues from the Spyro Reignited Trilogy, which was released in November 2018, with no comparable release

in 2017.

2017 vs. 2016

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

• higher revenues from the Destiny franchise, driven by the release of Destiny 2, with no comparable release in

2016;

• higher revenues from Call of Duty: WWII, as compared to Call of Duty: Infinite Warfare, the comparable 2016

title;

• higher revenues from from the continued strength of Call of Duty: Black Ops III, as compared to prior catalog

releases, driven by the downloadable content pack, Zombies Chronicles, which was released in May 2017, and

the continued strength of microtransactions; and

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

The increase was partially offset by:

• lower revenues from Call of Duty: Infinite Warfare including its associated digital content, as compared to the

performance of Call of Duty: Black Ops III, the comparable 2015 title; and

• lower revenues from the Skylanders franchise, due to the release of Skylanders Imaginators in October 2016,

with no comparable release in 2017.

Blizzard

2018 vs. 2017

The increase in Blizzard’s net revenues for 2018, as compared to 2017, was primarily due to higher revenues from

World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable

release in 2017, partially offset by lower revenues from Overwatch, which was released in May 2016.

2017 vs. 2016

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

• lower revenues from Overwatch; and

• lower revenues from World of Warcraft, driven by the release of World of Warcraft: Legion in August 2016,

with no comparable release in 2017.

The decrease was partially offset by:

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

• higher revenues from Diablo III, primarily due to the release of Rise of the Necromancer, a downloadable

content pack for Diablo III that was released in June 2017.

King

2018 vs. 2017

The increase in King’s net revenues for 2018, as compared to 2017, was primarily due to higher revenues from the

Candy Crush franchise, driven by in-game advertisements, increased monetization, and the launch of Candy Crush Friends

Saga, the latest title in the Candy Crush franchise, in October 2018.

2017 vs. 2016

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

• 2017 including King revenues for the full year, while 2016 only included King revenues for the partial period

following the King Closing Date; and

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

Segment Income from Operations

Activision

2018 vs. 2017

Activision’s operating income for 2018 was comparable to 2017. Decreases in operating income were primarily

from:

• lower revenues, as discussed above;

• higher developer costs to support existing and upcoming title releases; and

• higher software royalties, amortization, and intellectual property licenses recognized from Call of Duty: Black

Ops 4, which was released in October 2018, as compared to Call of Duty: WWII, which was released in

November 2017.

These were largely offset by increases to operating income from:

• lower product costs, lower software royalties, amortization, and intellectual property licenses, and lower sales

and marketing costs, all primarily driven by the Destiny franchise, as 2017 included the full game release of

Destiny 2, with no comparable full game franchise release in 2018; and

• higher capitalization of software development costs due to increased costs and the timing of game development

cycles.

2017 vs. 2016

The increase in Activision’s operating income for 2017, as compared to 2016, was primarily due to higher revenues,

as discussed above, and lower costs associated with the Skylanders franchise, as there was not a new title released in 2017.

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

Destiny 2.

Blizzard

2018 vs. 2017

The decrease in Blizzard’s operating income for 2018, as compared to 2017, was primarily due to:

• higher costs to operate and support Blizzard’s existing business and adjacent areas of opportunity; and

• higher software royalties, amortization, and intellectual property licenses driven by World of Warcraft: Battle

for Azeroth, which was released in August 2018.

The decrease was partially offset by higher revenues, as discussed above, and higher capitalization of software

development costs due to the timing of game development cycles.

2017 vs. 2016

The decrease in Blizzard’s operating income for 2017, as compared to 2016, was primarily due to lower revenues, as

discussed above, along with higher product development costs resulting from lower capitalization of software development

costs due to the timing of game development cycles.

The decrease was partially offset by lower sales and marketing costs and software amortization for Overwatch and

World of Warcraft: Legion, due to their respective launches in 2016, with no comparable releases in 2017.

King

2018 vs. 2017

The increase in King’s operating income for 2018, as compared to 2017, was primarily due to higher revenues from

the Candy Crush franchise, as discussed above.

2017 vs. 2016

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

• 2017 including King’s results of operations for the full year, while 2016 only included King’s results of

operations for the partial period following the King Closing Date; and

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

Foreign Exchange Impact

Changes in foreign exchange rates had a positive impact of $48 million, a positive impact of $85 million, and a

negative impact of $30 million on reportable segment net revenues for 2018, 2017, and 2016, respectively, as compared to

the same periods in the previous year. The changes are primarily due to changes in the value of the U.S. dollar relative to the

euro and British pound.

Consolidated Results

Net Revenues by Distribution Channel

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

For the Years Ended December 31,

2018

2017

2016

Increase/

(decrease)

2018 v 2017

Increase/

(decrease)

2017 v 2016

% Change

2018 v 2017

% Change

2017 v

2016

Net revenues by distribution

channel:

Digital online channels (1) ..............

$5,786

$5,479

$4,865

$307

$614

13%

Retail channels .................................

1,107

1,033

1,386

(353)

(25)

Other (2) ..........................................

607

505

357

102

148

20 41

Total consolidated net revenues ......

$7,500

$7,017

$6,608

$483

$409

7 6

(1) Net revenues from “Digital online channels” include revenues from digitally-distributed subscriptions,

downloadable content, microtransactions, and products, as well as licensing royalties.

(2) Net revenues from “Other” include revenues from our Studios and Distribution businesses, as well as revenues from

MLG and the Overwatch League.

Digital Online Channel Net Revenues

2018 vs. 2017

The increase in net revenues from digital online channels for 2018, as compared to 2017, was primarily due to:

• higher revenues recognized from the Destiny franchise, driven by Destiny 2, which was released in September

2017, with no comparable release in 2016, and by revenues recognized in connection with the sale of our

Destiny publishing rights to Bungie;

• higher revenues from the Candy Crush franchise, primarily due to in-game advertisements, increased

monetization, and the launch of Candy Crush Friends Saga, the latest title in the Candy Crush franchise, in

October 2018;

• higher revenues recognized from Call of Duty: Black Ops 4, which was released in October 2018, as compared

to Call of Duty: WWII, which was released in November 2017; and

• higher revenues recognized from Call of Duty: WWII, as compared to Call of Duty: Infinite Warfare, which was

released in November 2016.

The increase was partially offset by:

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

• lower revenues recognized from Call of Duty: Infinite Warfare, as compared to prior catalog releases.

2017 vs. 2016

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

• higher revenues from King titles, as 2017 included King revenues for the full year, while 2016 only included

King revenues for the partial period following the King Closing Date, as well as higher revenues from the

Candy Crush franchise due to in-game events and features; and

• higher revenues recognized from the continued strength of Call of Duty: Black Ops III, as compared to prior

catalog releases, driven by the downloadable content pack, Zombies Chronicles, which was released in May

2017, and the continued strength of microtransactions.

The increase was partially offset by lower revenues recognized from Call of Duty: Infinite Warfare, as compared to

the performance of Call of Duty: Black Ops III, the comparable 2015 title.

Retail Channel Net Revenues

2018 vs. 2017

The increase in net revenues from retail channels for 2018, as compared to 2017, was primarily due to:

• higher revenues recognized from Call of Duty: WWII, which was released in November 2017, as compared to

Call of Duty: Infinite Warfare, which was released in November 2016; and

• revenues from the Spyro Reignited Trilogy, which was released in November 2018, with no comparable release

in 2017.

2017 vs. 2016

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

• lower revenues recognized from Call of Duty: Infinite Warfare, as compared to the performance of Call of

Duty: Black Ops III, the comparable 2015 title; and

• lower revenues from the Skylanders franchise, due to the release of Skylanders Imaginators in October 2016,

with no comparable release in 2017.

The decrease was partially offset by:

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

• higher revenues recognized from Call of Duty: WWII, as compared to Call of Duty: Infinite Warfare, the

comparable 2016 title.

Net Revenues by Geographic Region

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

For the Years Ended December 31,

2018 2017 2016

Increase/

(decrease)

2018 v 2017

Increase/

(decrease)

2017 v 2016

% Change

2018 v 2017

% Change

2017 v 2016

Net revenues by geographic

region:

Americas ........................................

$3,880

$3,607

$3,423

$273

$184

EMEA (1) ......................................

2,618

2,464

2,221

154

243

Asia Pacific ....................................

1,002

946

964

(18)

6 (2)

Consolidated net revenues .................

$7,500

$7,017

$6,608

$483

$409

7 6

(1) “EMEA” consists of the Europe, Middle East, and Africa geographic regions.

Americas

2018 vs. 2017

The increase in net revenues in the Americas region for 2018, as compared to 2017, was primarily due to:

• higher revenues recognized from the Destiny franchise, driven by Destiny 2, which was released in September

2017, with no comparable release in 2016, and by revenues recognized in connection with the sale of our

Destiny publishing rights to Bungie;

• higher revenues recognized from Call of Duty: WWII, which was released in November 2017, as compared to

Call of Duty: Infinite Warfare, which was released in November 2016; and

• higher revenues from the Candy Crush franchise, primarily due to in-game advertisements, increased

monetization, and the launch of Candy Crush Friends Saga, the latest title in the Candy Crush franchise, in

October 2018.

The increase was partially offset by:

• lower revenues recognized from Call of Duty: Infinite Warfare, as compared to prior catalog releases; and

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

2017 vs. 2016

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

• higher revenues from King titles, as 2017 included King’s revenues for the full year, while 2016 only included

King’s revenues for the partial period following the King Closing Date, as well as higher revenues from the

Candy Crush franchise due to in-game events and features;

• higher revenues recognized from the continued strength of Call of Duty: Black Ops III, as compared to prior

catalog releases, driven by the downloadable content pack, Zombies Chronicles, which was released in May

2017, and the continued strength of microtransactions; and

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

The increase was partially offset by lower revenues recognized from Call of Duty: Infinite Warfare, as compared to

the performance of Call of Duty: Black Ops III, the comparable 2015 title.

EMEA

2018 vs. 2017

The increase in net revenues in the EMEA region for 2018, as compared to 2017, was primarily due to higher

revenues recognized from Call of Duty: WWII, which was released in November 2017, as compared to Call of Duty: Infinite

Warfare, which was released in November 2016.

2017 vs. 2016

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

drivers and partially offsetting factors as those for the Americas region discussed above, as well as higher revenues from our

Distribution business, primarily due to higher sales during the holiday season.

Asia Pacific

2018 vs. 2017

The increase in net revenues in the Asia Pacific region for 2018, as compared to 2017, was primarily due to:

• higher revenues recognized from Hearthstone, driven by additional digital content delivered in connection with

the renewal of our contract with NetEase, Inc. that was entered into in December 2018; and

• higher revenues from the Candy Crush franchise, primarily due to in-game advertisements and the launch of

Candy Crush Friends Saga, the latest title in the Candy Crush franchise, in October 2018.

The increase was partially offset by lower revenues recognized from Overwatch, which was released in May 2016.

2017 vs. 2016

The slight decrease in net revenues in the Asia Pacific region for 2017, as compared to 2016, was primarily due to

slightly lower revenues recognized from Overwatch and Hearthstone, mostly offset by higher revenues from King titles and

Crash Bandicoot N. Sane Trilogy.

Net Revenues by Platform

The following tables detail our net revenues by platform (amounts in millions):

For the Years Ended December 31,

2018

2017

2016

Increase/

(decrease)

2018 v 2017

Increase/

(decrease)

2017 v 2016

% Change

2018 v 2017

% Change

2017 v 2016

Net revenues by platform:

Console ...............................................................

$2,538

$2,389

$2,453

$149

$(64)

(3)%

PC .......................................................................

2,180

2,042

2,124

138

(82)

(4)

Mobile and ancillary (1) .....................................

2,175

2,081

1,674

407

Other (2) .............................................................

607

505

357

102

148

Total consolidated net revenues .............................

$7,500

$7,017

$6,608

$483

$409

7 6

(1) Net revenues from “Mobile and ancillary” include revenues from mobile devices, as well as non-platform-specific

game-related revenues, such as standalone sales of toys and accessories from our Skylanders

franchise and other

physical merchandise and accessories.

(2) Net revenues from “Other” include revenues from our Studios and Distribution businesses, as well as revenues from

MLG and the Overwatch League.

Console

2018 vs. 2017

The increase in net revenues from console for 2018, as compared to 2017, was primarily due to:

• higher revenues recognized from Call of Duty: WWII, which was released in November 2017, as compared to

Call of Duty: Infinite Warfare, which was released in November 2016; and

• higher revenues recognized from the Destiny franchise, driven by Destiny 2, which was released in September

2017, with no comparable release in 2016, and by revenues recognized in connection with the sale of our

Destiny publishing rights to Bungie.

The increase was partially offset by:

• lower revenues recognized from Call of Duty: Infinite Warfare, as compared to prior catalog releases; and

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

2017 vs. 2016

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

recognized from Call of Duty: Infinite Warfare, as compared to the performance of Call of Duty: Black Ops III, the

comparable 2015 title. The decrease is partially offset by:

• higher revenues recognized from the continued strength of Call of Duty: Black Ops III, as compared to prior

catalog releases, driven by the downloadable content pack, Zombies Chronicles, which was released in May

2017, and the continued strength of microtransactions;

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

• higher revenues recognized from Call of Duty: WWII, as compared to Call of Duty: Infinite Warfare, the

comparable 2016 title.

2018 vs. 2017

The increase in net revenues from PC for 2018, as compared to 2017, was primarily due to:

• higher revenues recognized from Destiny 2, which was released on the PC platform in October 2017, and its

associated in-game content, with no comparable release in 2016; and

• higher revenues from World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was released

in August 2018, with no comparable release in 2017.

The increase was partially offset by lower revenues recognized from Overwatch, which was released in May 2016.

2017 vs. 2016

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

• lower revenues recognized from the World of Warcraft franchise; and

• lower revenues recognized from Overwatch.

Mobile and Ancillary

2018 vs. 2017

The increase in net revenues from mobile and ancillary for 2018, as compared to 2017, was primarily due to higher

revenues from the Candy Crush franchise, driven by in-game advertisements, increased monetization, and the launch of

Candy Crush Friends Saga, the latest title in the Candy Crush franchise, in October 2018.

2017 vs. 2016

The increase in net revenues from mobile and ancillary for 2017, as compared to 2016, was primarily due to higher

revenues from King titles, as 2017 included King’s revenues for the full year, while 2016 only included King’s revenues for

the partial period following the King Closing Date, as well as higher revenues from the Candy Crush franchise due to

in-game events and features.

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

Skylanders franchise.

Costs and Expenses

Cost of Revenues

The following tables detail the components of cost of revenues in dollars and as a percentage of associated net

revenues (amounts in millions):

Year Ended

December 31,

2018

% of

associated

net revenues

Year Ended

December 31,

2017

% of

associated

net revenues

Year Ended

December 31,

2016

% of

associated

net revenues

Increase

(Decrease)

2018 v 2017

Increase

(Decrease)

2017 v 2016

Cost of revenues—product sales:

Product costs ...................................................

$719

32%

$733

35%

$741

34%

$(14)

$(8)

Software royalties, amortization,

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

371

300

331

(31)

Cost of revenues—subscription,

licensing, and other revenues:

Game operations and distribution costs ..........

1,028

984

851

133

Software royalties, amortization,

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

399

484

471

(85)

Total cost of revenues .....................................

$2,517

34%

$2,501

36%

$2,394

36%

$16

$107

Cost of Revenues—Product Sales:

2018 vs. 2017

The slight decrease in product costs for 2018, as compared to 2017, was primarily due to a decrease of $20 million

in product costs from Activision, primarily related to the absence of title releases for the Guitar Hero

and Skylanders

franchises, which was partially offset by higher product costs from our lower margin Distribution business due to increased

product sales.

The increase in software royalties, amortization, and intellectual property licenses related to product sales for 2018,

as compared to 2017, was primarily due to an increase of $89 million in software amortization and royalties from Activision,

primarily due to higher software amortization and royalties for (1) the Destiny franchise and (2) Call of Duty: Black Ops 4,

which was released in October 2018, as compared to Call of Duty: WWII, which was released in November 2017, partially

offset by lower software amortization and royalties from Call of Duty: WWII, as compared to Call of Duty: Infinite Warfare,

which was released in November 2016.

2017 vs. 2016

Product costs for 2017, were comparable to 2016, primarily due to lower product costs from the Skylanders

franchise as there was no new release in 2017, offset by higher product costs resulting from the increased revenues of our

relatively lower-margin Distribution business.

The decrease in software royalties, amortization, and intellectual property licenses related to product sales for 2017,

as compared to 2016, was primarily due to:

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

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

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

The decrease was partially offset by higher software amortization associated with the Destiny franchise, primarily

due to the release of Destiny 2 in September 2017.

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

2018 vs. 2017

The increase in game operations and distribution costs for 2018, as compared to 2017, was primarily due to higher

personnel, facilities, and equipment costs of $50 million associated with our esports broadcasting operations and online

games.

The decrease in software royalties, amortization, and intellectual property licenses related to subscription, licensing,

and other revenues for 2018, as compared to 2017, was primarily due to a decrease of $121 million in amortization of

internally-developed franchise intangible assets acquired as part of our acquisition of King. The decrease was partially offset

by an increase of $35 million in software amortization and royalties from Activision, primarily due to the release of

expansions for Destiny 2.

2017 vs. 2016

The increase in game operations and distribution costs for 2017, as compared to 2016, was primarily due to platform

provider fees associated with the increase in revenues from King.

Software royalties, amortization, and intellectual property licenses related to subscription, licensing, and other

revenues for 2017 were comparable to 2016.

Product Development (amounts in millions)

Year Ended

December 31,

2018

% of

consolidated

net revenues

Year Ended

December 31,

2017

% of

consolidated

net revenues

Year Ended

December 31,

2016

% of

consolidated

net revenues

Increase

(Decrease)

2018 v 2017

Increase

(Decrease)

2017 v 2016

Product development .........

$1,101

15%

$1,069

15%

$958

14%

$32

$111

2018 vs 2017

The increase in product development costs for 2018, as compared to 2017, was primarily due to an increase of

$101 million in personnel and external developer costs to support existing and upcoming title releases. The higher costs were

partially offset by an increase of $68 million in capitalization of software development costs due to the increased costs

previously noted and the timing of game development cycles.

2017 vs 2016

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

• higher Blizzard product development costs resulting from lower capitalization of software development costs

due to the timing of game development cycles; and

• increased product development costs for King, as 2017 included King’s costs for a full year, while 2016 only

included King’s costs for the partial period following the King Closing Date.

Sales and Marketing (amounts in millions)

Year Ended

December 31,

2018

% of

consolidated

net revenues

Year Ended

December 31,

2017

% of

consolidated

net revenues

Year Ended

December 31,

2016

% of

consolidated

net revenues

Increase

(Decrease)

2018 v 2017

Increase

(Decrease)

2017 v 2016

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

$1,062

14%

$1,378

20%

$1,210

18%

$(316)

$168

2018 vs. 2017

The decrease in sales and marketing expenses for 2018, as compared to 2017, was primarily due to:

• a decrease of $263 million in amortization of the customer base intangible asset acquired as part of our

acquisition of King, as the asset was fully amortized during the first quarter of 2018; and

• a decrease of $49 million in marketing spending and personnel costs, primarily associated with (1) the Destiny

franchise, due to the release of Destiny 2 in September 2017, with no comparable full-game release in 2018,

(2) the Bubble Witch franchise, as Bubble Witch 3 Saga

was released during the first quarter of 2017, and

(3) Overwatch, partially offset by an increases in marketing spending and personnel costs for the Candy Crush

franchise, which had the release of Candy Crush Friends Saga in October 2018.

2017 vs. 2016

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

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

and

• increased amortization of the customer base intangible assets acquired in the King Acquisition and increased

sales and marketing costs to support King’s titles, as 2017 included a full year of costs, while 2016 only

included King’s costs for the partial period following the King Closing Date.

General and Administrative (amounts in millions)

Year Ended

December 31,

2018

% of

consolidated

net revenues

Year Ended

December 31,

2017

% of

consolidated

net revenues

Year Ended

December 31,

2016

% of

consolidated

net revenues

Increase

(Decrease)

2018 v 2017

Increase

(Decrease)

2017 v 2016

General and

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

$832

11%

$760

11%

$634

10%

$72

$126

2018 vs. 2017

The increase in general and administrative expenses for 2018, as compared to 2017, was primarily due to an increase

of $65 million in personnel costs (including stock-based compensation expense), professional fees, and facilities costs to

support the growth of our existing business and adjacent areas of opportunity.

2017 vs. 2016

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

• increased personnel costs, including stock compensation expenses, to support the growth in our business and

adjacent areas of opportunity;

• the inclusion of a non-cash accounting charge to reclassify certain losses included in our cumulative translation

adjustments into earnings due to the substantial liquidation of certain of our foreign entities, with no comparable

activity in 2016;

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

• higher foreign currency transaction losses.

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

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

Year Ended

December 31,

2018

% of

consolidated

net revenues

Year Ended

December 31,

2017

% of

consolidated

net revenues

Year Ended

December 31,

2016

% of

consolidated

net revenues

Increase

(Decrease)

2018 v 2017

Increase

(Decrease)

2017 v 2016

Interest and other

expense (income),

net ..................................

$71

$146

$214

$(75)

$(68)

2018 vs. 2017

The decrease in interest and other expense (income), net, for 2018, as compared to 2017, was primarily due to:

• an increase of $41 million in interest income from our cash and cash equivalents, due to higher average cash

balances and higher interest rates as compared to the prior-year period; and

• a decrease of $22 million in interest expense and amortization of deferred financing costs associated with our

debt obligations due to our lower total debt outstanding as a result of our debt redemptions and repayment

activities.

2017 vs. 2016

The decrease in interest and other expense (income), net, for 2017, as compared to 2016, was primarily due to our

lower total outstanding debt and lower interest rates on our current debt instruments as a result of our refinancing activities in

2016 and 2017. See further discussion below under “Liquidity and Capital Resources.”

Income Tax Expense (amounts in millions)

Year Ended

December 31,

2018

% of

Pretax

income

Year Ended

December 31,

2017

% of

Pretax

income

Year Ended

December 31,

2016

% of

Pretax

income

Increase

(Decrease)

2018 v 2017

Increase

(Decrease)

2017 v 2016

Income tax expense .........

$64

$878

76%

$140

13%

$(814)

$738

For the years ended December 31, 2018, 2017, and 2016, the Company’s income before income tax expense was

$1.88 billion, $1.15 billion, and $1.11 billion, respectively, and our income tax expense was $64 million (or a 3% effective

tax rate), $878 million (or a 76% effective tax rate), and $140 million (or a 13% effective tax rate), respectively. Our full year

2018 effective tax rate of 3% is lower than the U.S. statutory rate of 21% primarily due to one-time tax benefits related to the

U.S. Tax Reform Act (discussed further below), earnings taxed at relatively lower rates in foreign jurisdictions, recognition

of excess tax benefits from shared-based payments, and research and development (“R&D”) credits, partially offset by

changes in the Company’s liability for uncertain tax positions.

In 2018, 2017, and 2016, our U.S. income before income tax expense was $432 million, $185 million, and

$228 million, respectively, and comprised 23%, 16%, and 21%, respectively, of our consolidated income before income tax

expense. In 2018, 2017 and 2016, our foreign income before income tax expense was $1,445 million, $966 million, and

$878 million, respectively, and comprised 77%, 84%, and 79%, respectively, of our consolidated income before income tax

expense.

In 2018, 2017 and 2016, earnings taxed at lower rates in foreign jurisdictions, as compared to domestic earnings

taxed at the U.S. federal statutory tax rate, lowered our effective tax rate by 11 percentage points, 24 percentage points, and

22 percentage points, respectively. The decrease in the foreign rate differential is due to the reduction of U.S. corporate tax

rate from 35% to 21% beginning in 2018.

The overall effective income tax rate in future periods will depend on a variety of factors, such as changes in pre-tax

income or loss by jurisdiction, applicable accounting rules, applicable tax laws and regulations, and rulings and

interpretations thereof, developments in tax audits and other matters, and variations in the estimated and actual level of

annual pre-tax income or loss.

IRS Closing Agreement

On June 27, 2018, we entered into a closing agreement with the Internal Revenue Service (“IRS”) to resolve certain

intercompany transfer pricing arrangements for tax periods starting in 2009 (the “Closing Agreement”). The primary

adjustments related to the Closing Agreement were recognized in the second quarter of 2018 and consisted of a tax expense

of $70 million and a reduction in unrecognized tax benefits of $437 million. In addition, we recognized $185 million of tax

benefits related to other tax adjustments resulting from the changes in U.S. tax attributes and taxable income caused by the

primary adjustments. The Closing Agreement resulted in federal and state cash tax payments totaling approximately

$345 million, of which federal tax payments of $334 million were made in October 2018.

We evaluate deferred tax assets each period for recoverability. We record a valuation allowance for assets that do

not meet the threshold of “more likely than not” to be realized in the future. To make that determination, we evaluate the

likelihood of realization based on the weight of all positive and negative evidence available. As of December 31, 2017, we

had a deferred tax asset for California research and development credit carryforwards (“CA R&D Credits”), which can be

carried forward indefinitely. The Closing Agreement impacts historical and prospective filings in certain states, including

California, and after considering the impact of the Closing Agreement on its prospective California taxable income, we

determined that our remaining CA R&D Credits no longer met the threshold of more likely than not to be realized in the

future. As such, for the year ended December 31, 2018, we recorded a full valuation allowance of $61 million. We will

reassess this determination quarterly and record a tax benefit if and when future evidence allows for a partial or full release of

this valuation allowance.

U.S. Tax Reform Act

On December 22, 2017, the U.S. Tax Reform Act was enacted. The U.S. Tax Reform Act, among other things,

reduced the U.S. corporate income tax rate from 35% to 21% beginning in 2018 and implemented a modified territorial tax

system that imposed a one-time tax on deemed repatriated earnings of foreign subsidiaries (the “Transition Tax”).

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides

guidance on how to account for the effects of the U.S. Tax Reform Act under Accounting Standards Codification (“ASC”)

740. SAB 118 enabled companies to record a provisional amount for the effects of the U.S. Tax Reform Act based on a

reasonable estimate, subject to adjustment during a measurement period of up to one year, until accounting is complete.

During the fourth quarter of 2017, we recorded provisional amounts of $636 million for the effects of the U.S. Tax Reform

Act in accordance with SAB 118. In addition, as of December 31, 2017, we no longer considered the available cash balances

related to undistributed earnings held outside of the U.S. by our foreign subsidiaries to be indefinitely reinvested.

In the fourth quarter of 2018, we completed our analysis of the effect of the U.S. Tax Reform Act. For the year

ended December 31, 2018, we recorded an additional tax benefit of $285 million for the effects of the U.S. Tax Reform Act.

This is primarily related to the election to record deferred U.S. taxes with respect to earnings of our foreign subsidiaries

subject to global intangible low-taxed income (“GILTI”) and the adjustment for the remeasurement of certain deferred tax

assets and liabilities as a result of the U.S. corporate income tax rate reduction. The aggregate U.S. Tax Reform Act impact

for 2017 and 2018 is a net tax expense of $351 million, which consists of a $570 million tax expense related to the Transition

Tax, partially offset by a net benefit of $219 million, mainly related to the adoption of GILTI deferred tax accounting and

remeasurement of deferred tax assets and liabilities.

Further analysis of the differences between the U.S. federal statutory rate and the consolidated effective tax rate, as

well as other information about our income taxes, is provided in Note 18 of the notes to the consolidated financial statements

included in Item 8 of this Annual Report on Form 10-K.

Foreign Exchange Impact

Changes in foreign exchange rates had a positive impact of $68 million, a positive impact of $27 million, and a

positive impact of $10 million on Activision Blizzard’s consolidated operating income in 2018, 2017, and 2016, respectively.

The changes are primarily due to changes in the value of the U.S. dollar relative to the euro and British pound and its impact

on our foreign operating income.

Liquidity and Capital Resources

We believe our ability to generate cash flows from operating activities is one of our fundamental financial strengths.

In the near term, we expect our business and financial condition to remain strong and to continue to generate significant

operating cash flows, which, we believe, in combination with our existing balance of cash and cash equivalents and

short-term investments of $4.4 billion, our access to capital, and the availability of our $1.5 billion revolving credit facility,

will be sufficient to finance our operational and financing requirements for the next 12 months. Our primary sources of

liquidity, which are available to us to fund cash outflows such as our anticipated dividend payments, share repurchases, and

scheduled debt maturities, include our cash and cash equivalents, short-term investments, and cash flows provided by

operating activities.

As of December 31, 2018, the amount of cash and cash equivalents held outside of the U.S. by our foreign

subsidiaries was $1.4 billion, as compared to $3.0 billion as of December 31, 2017. Following the enactment of the U.S. Tax

Reform Act and the current period expense on unrepatriated earnings, we no longer consider these available cash balances,

which primarily consist of undistributed earnings of our most significant foreign subsidiaries, to be indefinitely reinvested.

Our cash provided from operating activities is somewhat impacted by seasonality. Working capital needs are

impacted by weekly sales, which are generally highest in the fourth quarter due to seasonal and holiday-related sales patterns.

We consider, on a continuing basis, various transactions to increase shareholder value and enhance our business results,

including acquisitions, divestitures, joint ventures, share repurchases, and other structural changes. These transactions may

result in future cash proceeds or payments.

Sources of Liquidity (amounts in millions)

For the Years Ended

December 31,

2018

2017

Increase

(Decrease)

2018 v 2017

Cash and cash equivalents .................................................................................................

$4,225

$4,713

$(488)

Short-term investments ......................................................................................................

155

$4,380

$4,775

$(395)

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

25%

26%

For the Years Ended December 31,

2018

2017

2016

Increase

(Decrease)

2018 v 2017

Increase

(Decrease)

2017 v 2016

Net cash provided by operating activities .............................

$1,790

$2,213

$2,155

$(423)

$58

Net cash used in investing activities ......................................

(230)

(207)

(4,729)

(23)

4,522

Net cash (used in) provided by financing activities ..............

(2,020)

(624)

500

(1,396)

(1,124)

Effect of foreign exchange rate changes ...............................

(31)

(56)

(107)

132

Net increase (decrease) in cash and cash equivalents and

restricted cash ....................................................................

$(491)

$1,458 $(2,130) $(1,949) $3,588

Net Cash Provided by Operating Activities

The primary driver of net cash flows associated with our operating activities is the collection of customer

receivables generated from the sale of our products and services. These collections are typically partially offset by: payments

to vendors for the manufacturing, distribution, and marketing of our products; payments for customer service support for our

consumers; payments to third-party developers and intellectual property holders; payments for interest on our debt; payments

for software development; payments for tax liabilities; and payments to our workforce.

2018 vs 2017

Net cash provided by operating activities for 2018 was $1.79 billion, as compared to $2.21 billion for 2017. The

decrease was primarily due to:

• higher tax payments, primarily due to payments in the U.S.; and

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

The decrease was partially offset by higher net income in 2018 as compared to 2017.

2017 vs 2016

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

increase was primarily due to:

• increased earnings after excluding the effects of charges due to impacts from the U.S. Tax Reform Act, which

did not result in current year cash outflows, and other non-cash charges for depreciation and amortization and

share-based compensation expenses;

• a full year of King operating cash flows; and

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

Net cash provided by operating activities for 2017 included $145 million of interest paid on our outstanding debt, as

compared to $209 million paid in 2016.

Net Cash Used in Investing Activities

The primary drivers of net cash flows associated with investing activities typically include capital expenditures,

purchases and sales of investments, changes in restricted cash balances, and cash used for acquisitions.

2018 vs 2017

Net cash used in investing activities for 2018 was $230 million, as compared to $207 million for 2017. The increase

in the cash used in investing activities was primarily due to higher purchases of available-for-sale investments of

$209 million for 2018, as compared to $135 million in 2017, partially offset by:

• higher proceeds from maturities of available-for-sale investments of $116 million in 2018, as compared to

$80 million in 2017; and

• lower capital expenditures of $131 million in 2018, as compared to $155 million in 2017.

2017 vs 2016

Net cash used in investing activities for 2017 was $207 million, as compared to $4.7 billion for 2016. The decrease

in the cash used was primarily due to cash used for the King Acquisition in 2016, with no comparable transaction in 2017.

The decrease was partially offset by purchases of available-for-sale investments, net of proceeds from maturities, of

$55 million in 2017, with no comparable transactions in 2016.

Net Cash Provided by (Used in) Financing Activities

The primary drivers of net cash flows associated with financing activities typically include the proceeds from, and

repayments of, our long-term debt and transactions involving our common stock, including the issuance of shares of common

stock to employees upon the exercise of stock options, as well as the payment of dividends.

2018 vs 2017

Net cash used in financing activities for 2018 was $2.0 billion, as compared to $624 million for 2017. The increase

was primarily attributed to our debt financing activities. For 2018, we had debt repayments, inclusive of premium payments,

of $1.8 billion, as compared to net debt repayments of $500 million for 2017. The increase in cash used in financing activities

was further impacted by:

• lower proceeds from stock option exercises of $99 million for 2018, as compared to $178 million for 2017;

• higher tax payments made for net share settlements on restricted stock units of $94 million for 2018, as

compared to $56 million for 2017; and

• higher dividends paid of $259 million for 2018, as compared to $226 million for 2017.

2017 vs 2016

Net cash used in financing activities for 2017 was $624 million, as compared to net cash provided by financing

activities of $500 million for 2016. The changes were primarily attributed to our debt financing activities. For 2017, we had

net debt repayments of $500 million, as compared to approximately $700 million of net debt proceeds, inclusive of a

premium payment, for 2016. The cash flows used in financing activities for 2017, were partially offset by:

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

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

to $115 million in 2016.

Effect of Foreign Exchange Rate Changes

Changes in foreign exchange rates had a negative impact of $31 million, a positive impact of $76 million, and a

negative impact of $56 million on our cash and cash equivalents for the years ended December 31, 2018, 2017, and 2016,

respectively. The change is primarily due to changes in the value of the U.S. dollar relative to the euro and British pound.

Debt

As of December 31, 2018 and December 31, 2017, our total outstanding debt was $2.7 billion and $4.4 billion,

respectively, bearing interest at a weighted average rate of 3.18% and 3.58%, respectively. During the year ended

December 31, 2018, we had the following significant activity associated with our debt instruments:

• on August 16, 2018, using available cash on hand, we redeemed the $750 million of outstanding 2023 Notes in

full at a redemption price equal to (1) 100% of the principal amount of the 2023 Notes plus (2) a “make-whole”

premium calculated as set forth in the indenture governing the 2023 Notes and (3) accrued and unpaid interest

to the redemption date, resulting in a “Loss on extinguishment of debt” recorded in the consolidated statement

of operations of $33 million, comprised of premium payments of $25 million and a write-off of unamortized

discount and deferred financing costs of $8 million;

• on August 24, 2018, using available cash on hand, we made a voluntary prepayment of $990 million to fully

repay and extinguish our outstanding term loans resulting in a write-off of unamortized discount and deferred

financing costs of $7 million, which is included in “Loss on extinguishment of debt” in the consolidated

statement of operations; and

• on August 24, 2018, we also entered into the seventh amendment to our Credit Agreement which, among other

things, replaced our prior revolving credit facility of $250 million with a new revolving credit facility in an

aggregate principal amount of $1.5 billion, which is scheduled to mature on August 24, 2023.

A summary of our outstanding debt as of December 31, 2018, is as follows (amounts in millions):

December 31, 2018

Gross

Carrying

Amount

Unamortized

Discount and Deferred

Financing Costs

Net

Carrying

Amount

2021 Notes ..................................................................................................

$650

$(3)

$647

2022 Notes ..................................................................................................

400

(3)

397

2026 Notes ..................................................................................................

850

(8)

842

2027 Notes ..................................................................................................

400

(5)

395

2047 Notes ..................................................................................................

400

(10)

390

Total debt ....................................................................................................

$2,700

$(29)

$2,671

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

December 31, 2017

Gross

Carrying

Amount

Unamortized

Discount and Deferred

Financing Costs

Net

Carrying

Amount

2017 TLA ..................................................................................................

$990

$(8)

$982

2021 Notes .................................................................................................

650

(4)

646

2022 Notes .................................................................................................

400

(4)

396

2023 Notes .................................................................................................

750

(9)

741

2026 Notes .................................................................................................

850

(9)

841

2027 Notes .................................................................................................

400

(6)

394

2047 Notes .................................................................................................

400

(10)

390

Total debt ...................................................................................................

$4,440

$(50)

$4,390

Refer to Note 13 of the notes to the consolidated financial statements included in Item 8 of this Annual Report on

Form 10-K for further disclosures regarding our debt obligations.

Dividends

On February 12, 2019, our Board of Directors declared a cash dividend of $0.37 per common share, payable on

May 9, 2019, to shareholders of record at the close of business on March 28, 2019.

On February 8, 2018, our Board of Directors declared a cash dividend of $0.34 per common share. On May 9, 2018,

we made an aggregate cash dividend payment of $259 million to shareholders of record at the close of business on March 30,

2018.

Capital Expenditures

We made capital expenditures of $131 million in 2018, as compared to $155 million in 2017. In 2019, we anticipate

total capital expenditures of approximately $125 million, primarily for leasehold improvements, computer hardware, and

software purchases.

Commitments

Refer to Note 22 of the notes to the consolidated financial statements included in Item 8 of this Annual Report on

Form 10-K for disclosures regarding our commitments.

Off-balance Sheet Arrangements

At December 31, 2018 and 2017, Activision Blizzard had no significant relationships with unconsolidated entities or

financial parties, often referred to as “structured finance” or “special purpose” entities, established for the purpose of

facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, that have or are reasonably

likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or

expenses, results of operations, liquidity, capital expenditures, or capital resources.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and

assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported

amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and

assumptions. The impact and any associated risks related to these policies on our business operations are discussed

throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies

affect our reported and expected financial results. The policies, estimates, and assumptions discussed below are considered

by management to be critical because they are both important to the portrayal of our financial condition and results of

operations and because their application places the most significant demands on management’s judgment, with financial

reporting results relying on estimates and assumptions about the effect of matters that are inherently uncertain. Specific risks

for these critical accounting policies, estimates, and assumptions are described in the following paragraphs.

Adoption of Accounting Standards Codification 606: Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to

revenue recognition. The new standard replaces all current U.S. GAAP guidance on this topic, eliminating all

industry-specific guidance and providing a unified model to determine when and how revenue is recognized. The core

principle is that a company should recognize revenue upon the transfer of promised goods or services to customers in an

amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

On January 1, 2018, we adopted the new accounting standard and related amendments. As a result, we have updated our

accounting policy disclosures for revenue recognition herein. Refer to Note 3 of the notes to the consolidated financial

statements included in Item 8 of this Annual Report on Form 10-K and see “Recently Issued Accounting Pronouncements”

below for further details on the impact of adoption on our consolidated financial statements.

Revenue Recognition

We generate revenue primarily through the sale of our interactive entertainment content and services, principally for

the console, PC, and mobile platforms, as well as through the licensing of our intellectual property. Our products span

various genres, including first-person shooter, action/adventure, role-playing, strategy, and “match three.” We primarily offer

the following products and services:

• full games, which typically provide access to main game content, primarily for the console or PC platform;

• downloadable content, which provides players with additional in-game content to purchase following the

purchase of a full game;

• microtransactions, which typically provide relatively small pieces of additional in-game content or

enhancements to gameplay; and

• subscriptions to players in our World of Warcraft franchise, which provide continual access to the game

content.

When control of the promised products and services is transferred to our customers, we recognize revenue in the

amount that reflects the consideration we expect to receive in exchange for these products and services.

We determine revenue recognition by:

• identifying the contract, or contracts, with a customer;

• identifying the performance obligations in each contract;

• determining the transaction price;

• allocating the transaction price to the performance obligations in each contract; and

• recognizing revenue when, or as, we satisfy performance obligations by transferring the promised goods or

services.

Certain products are sold to customers with a “street date” (which is the earliest date these products may be sold by

retailers). For these products, we recognize revenues on the later of the street date and the date the product is sold to our

customer. For digital full-game downloads sold to customers, we recognize revenue when it is available for download or is

activated for gameplay. Revenues are recorded net of taxes assessed by governmental authorities that are imposed at the time

of the specific revenue-producing transaction between us and our customer, such as sales and value-added taxes.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment

immediately upon purchase or within 30 to 90 days. In instances where the timing of revenue recognition differs from the

timing of invoicing, we do not adjust the promised amount of consideration for the effects of a significant financing

component when we expect, at contract inception, that the period between our transfer of a promised product or service to our

customer and payment for that product or service will be one year or less.

Product Sales

Product sales consist of sales of our games, including physical products and digital full-game downloads. We

recognize revenues from the sale of our products after both (1) control of the products has been transferred to our customers

and (2) the underlying performance obligations have been satisfied.

Revenues from product sales are recognized after deducting the estimated allowance for returns and price protection,

which are accounted for as variable consideration when estimating the amount of revenue to recognize. Returns and price

protection are estimated at contract inception and updated at the end of each reporting period as additional information

becomes available.

Sales incentives and other consideration given by us to our customers, such as rebates and product placement fees,

are considered adjustments of the transaction price of our products and are reflected as reductions to revenues. Sales

incentives and other consideration that represent costs incurred by us for distinct goods or services received, such as the

appearance of our products in a customer’s national circular ad, are recorded as “Sales and marketing” expense when the

benefit from the sales incentive is separable from sales to the same customer and we can reasonably estimate the fair value of

the good or service.

Products with Online Functionality

For our software products that include both offline functionality (i.e., do not require an Internet connection to

access) and significant online functionality, such as for most of our titles from the Call of Duty franchise, we evaluate

whether the license of our intellectual property and the online functionality are distinct and separable. This evaluation is

performed for each software product or product add-on, including downloadable content. If we determine that our software

products contain a license of intellectual property separate from the online functionality, we consider market conditions and

other observable inputs to estimate the transaction price for the license, since we do not generally sell the software license on

a standalone basis. These products may be sold in a bundle with other products and services, which often results in the

recognition of additional performance obligations.

We recognize revenue for arrangements that include both a license of intellectual property and separate online

functionality when control of the license transfers to our customers for the portion of the transaction price allocable to the

license and ratably over the estimated service period for the portion of the transaction price allocable to the online

functionality. Similarly, we defer a portion of the cost of revenues on these arrangements and recognize the costs as the

related revenues are recognized. The cost of revenues that are deferred include product costs, distribution costs, and software

royalties, amortization, and intellectual property licenses, and excludes intangible asset amortization.

Online Hosted Software Arrangements

For our online hosted software arrangements, such as titles for the Overwatch, World of Warcraft, and Candy Crush

franchises, substantially all gameplay and functionality are obtained through our continuous hosting of the game content for

the player. Similar to our software products with online functionality, these arrangements may include other products and

services, which often results in the recognition of additional performance obligations. Revenues related to online hosted

software arrangements are generally recognized ratably over the estimated service period.

Subscription Arrangements

Subscription revenue arrangements are mostly derived from World of Warcraft, which is playable through

Blizzard’s servers and is generally sold on a subscription-only basis. Revenues associated with the sales of subscriptions are

deferred until the subscription service is activated by the consumer and are then recognized ratably over the subscription

period as the performance obligations are satisfied.

Revenues attributable to the purchase of World of Warcraft software by our customers, including expansion packs,

are classified as “Product sales,” whereas revenues attributable to subscriptions and other in-game revenues are classified as

“Subscription, licensing, and other revenues.”

Licensing Revenues

In certain countries, we utilize third-party licensees to distribute and host our games in accordance with license

agreements, for which the licensees typically pay us a fixed minimum guarantee and sales-based royalties. These

arrangements typically include multiple performance obligations, such as an upfront license of intellectual property and rights

to specified or unspecified future updates. Our estimate of the selling price is comprised of several factors including, but not

limited to, prior selling prices, prices charged separately by other third-party vendors for similar service offerings, and a

cost-plus-margin approach. Based on the allocated transaction price, we recognize revenue associated with the minimum

guarantee (1) when we transfer control of the upfront license of intellectual property, (2) upon transfer of control of future

specified updates, and/or (3) ratably over the contractual term in which we provide the customer with unspecified future

updates. Royalty payments in excess of the minimum guarantee are generally recognized when the licensed product is sold

by the licensee.

Other Revenues

Other revenues primarily include revenues from downloadable content (e.g., multi-player content packs),

microtransactions, and licensing of intellectual property other than software to third-parties.

Microtransaction revenues are derived from the sale of virtual currencies and goods to our players to enhance their

gameplay experience. Proceeds from these sales of virtual currencies and goods are initially recorded in deferred revenue.

Proceeds from the sales of virtual currencies are recognized as revenues when a player uses the virtual goods purchased with

a virtual currency. Proceeds from the sales of virtual goods directly are similarly recognized as revenues when a player uses

the virtual goods. We categorize our virtual goods as either “consumable” or “durable.” Consumable virtual goods represent

goods that can be consumed by a specific player action; accordingly, we recognize revenues from the sale of consumable

virtual goods as the goods are consumed and our performance obligation is satisfied. Durable virtual goods represent goods

that are accessible to the player over an extended period of time; accordingly, we recognize revenues from the sale of durable

virtual goods ratably over the period of time the goods are available to the player and our performance obligation is satisfied,

which is generally the estimated service period.

Revenues from the licensing of intellectual property other than software to third parties primarily include the

licensing of our (1) brand, logo, or franchise to customers and (2) media content. Fixed fee payments from customers for the

license of our brand or franchise are generally recognized over the license term. Fixed fee payments from customers for the

license of our media content are generally recognized when control has transferred to the customer, which may be upfront or

over time.

Significant Judgment around Revenue Arrangements with Multiple Deliverables

Our contracts with customers often include promises to transfer multiple products and services. Determining

whether products and services are considered distinct performance obligations that should be accounted for separately versus

together may require significant judgment. Certain of our games, such as titles in the Call of Duty franchise, may contain a

license of our intellectual property to play the game offline, but also depend on a significant level of integration and

interdependency with the online functionality. In these cases, significant judgment is required to determine whether this

license of our intellectual property should be considered distinct and accounted for separately, or not distinct and accounted

for together with the online functionality provided and recognized over time. Generally, for titles in which the software

license is functional without the online functionality and a significant component of gameplay is available offline, we believe

we have separate performance obligations for the license of the intellectual property and the online functionality.

Significant judgment is also required to determine the standalone selling price for each distinct performance

obligation and to determine whether there is a discount that needs to be allocated based on the relative standalone selling

price of the various products and services. To estimate the standalone selling price we consider market data, including our

pricing strategies for the product being evaluated and other similar products we may offer, competitor pricing to the extent

data is available, and costs to determine whether the estimated selling price yields an appropriate profit margin.

Estimated Service Period

We consider a variety of data points when determining the estimated service period for players of our games,

including the weighted average number of days between players’ first and last days played online, the average total hours

played, the average number of days in which player activity stabilizes, and the weighted-average number of days between

players’ first purchase date and last date played online. We also consider known online trends, the service periods of our

previously released games, and, to the extent publicly available, the service periods of our competitors’ games that are similar

in nature to ours. We believe this provides a reasonable depiction of the transfer of services to our customers, as it is the best

representation of the time period during which our customers play our games. Determining the estimated service period is

subjective and requires management’s judgment. Future usage patterns may differ from historical usage patterns, and

therefore the estimated service period may change in the future. The estimated service periods for players of our current

games are generally less than 12 months.

Principal Agent Considerations

We evaluate sales of our products and content via third-party digital storefronts, such as Microsoft’s Xbox Games

Store, Sony’s PSN, the Apple App Store, and the Google Play Store, to determine whether our revenues should be reported

gross or net of fees retained by the storefront. Key indicators that we evaluate in determining whether we are the principal in

the sale (gross reporting) or an agent (net reporting) include, but are not limited to:

• which party is primarily responsible for fulfilling the promise to provide the specified good or service; and

• which party has discretion in establishing the price for the specified good or service.

Based on our evaluation of the above indicators, we report revenues on a gross basis for sales arrangements via the

Apple App Store and the Google Play Store, and we report revenues on a net basis (i.e., net of fees retained by the digital

storefront) for sales arrangements via Microsoft’s Xbox Games Store and Sony’s PSN.

Income Taxes

We record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance

with ASC Topic 740, the provision for income taxes is computed using the asset and liability method, under which deferred

tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the

financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses and

tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable

income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax

assets and liabilities due to a change in tax rates is recognized in income in the period that includes the enactment date. We

evaluate deferred tax assets each period for recoverability. For those assets that do not meet the threshold of “more likely

than not” that they will be realized in the future, a valuation allowance is recorded.

Management believes it is more likely than not that forecasted income, including income that may be generated as a

result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully

recover the remaining deferred tax assets. In the event that all or part of the net deferred tax assets are determined not to be

realizable in the future, an adjustment to the valuation allowance would be charged to tax expense in the period such

determination is made. The calculation of tax liabilities involves significant judgment in estimating the impact of

uncertainties in the application of ASC Topic 740 and complex tax laws. Resolution of these uncertainties in a manner

inconsistent with management’s expectations could have a material impact on our business and results of operations in an

interim period in which the uncertainties are ultimately resolved.

Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income

taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters

will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these

reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To

the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the

provision for income taxes in the period in which such determination is made. The provision for income taxes includes the

impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest and

penalties.

Our provision for income taxes is subject to volatility and could be adversely impacted by: (1) changes in the mix of

earnings in countries with differing statutory tax rates, (2) changes in the valuation of our deferred tax assets and liabilities;

(3) tax effects of nondeductible compensation; (4) tax costs related to intercompany realignments; (5) differences between

amounts included in our tax filings and the estimate of such amounts included in our tax expenses; (6) changes in accounting

principles; or (7) changes in tax laws, regulations, administrative practices, principles or interpretations, including

fundamental changes to the tax laws applicable to multinational corporations. Significant judgment is required to determine

the recognition and measurement attributes prescribed in the accounting guidance for uncertainty in income taxes. The

accounting guidance for uncertainty in income taxes applies to all income tax positions, including the potential recovery of

previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes. In addition, we are

subject to the continuous examination of our income tax returns by the IRS and are regularly subject to audit by other tax

authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the

adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous

examinations will not have an adverse impact on our operating results and financial condition.

As further described in “Consolidated Results” above, on December 22, 2017, the U.S. Tax Reform Act was

enacted. The U.S. Tax Reform Act, among other things, reduced the U.S. corporate income tax rate from 35% to 21%

beginning in 2018 and implemented a modified territorial tax system that imposed a one-time tax on deemed repatriated

earnings of foreign subsidiaries.

On December 22, 2017, the SEC staff issued SAB 118, which provided guidance on how to account for the effects

of the U.S. Tax Reform Act under ASC 740. SAB 118 enabled companies to record a provisional amount for the effects of

the U.S. Tax Reform Act based on a reasonable estimate, subject to adjustment during a measurement period of up to one

year, until accounting is complete. In the fourth quarter of 2018, we completed our analysis to determine the effects of the

U.S. Tax Reform Act. As a result, we made an election to record deferred U.S. taxes with respect to earnings of our foreign

subsidiaries subject to GILTI.

Allowances for Returns and Price Protection

We closely monitor and analyze the historical performance of our various titles, the performance of products

released by other publishers, market conditions, and the anticipated timing of other releases to assess future demand of

current and upcoming titles. Initial volumes shipped upon title launch and subsequent reorders are evaluated with the goal of

ensuring that quantities are sufficient to meet the demand from the retail markets, but at the same time are controlled to

prevent excess inventory in the channel. We benchmark units to be shipped to our customers using historical and industry

data.

We may permit product returns from, or grant price protection to, our customers under certain conditions. In general,

price protection refers to the circumstances in which we elect to decrease, on a short- or longer-term basis, the wholesale

price of a product by a certain amount and, when granted and applicable, allow customers a credit against amounts owed by

such customers to us with respect to open and/or future invoices. The conditions our customers must meet to be granted the

right to return products or receive price protection credits include, among other things, compliance with applicable trading

and payment terms, and consistent return of inventory and delivery of sell-through reports to us. We may also consider other

factors, including achievement of sell-through performance targets, the facilitation of slow-moving inventory, and other

market factors.

Significant management judgments and estimates with respect to potential future product returns and price

protection related to current period product revenues must be made and used when establishing the allowance for returns and

price protection in any accounting period. We estimate the amount of future returns and price protection for current period

product revenues utilizing historical experience and information regarding inventory levels and the demand and acceptance of

our products by the end consumer. The following factors are used to estimate the amount of future returns and price

protection for a particular title: historical performance of titles in similar genres; historical performance of the hardware

platform; historical performance of the franchise; console hardware life cycle; sales force and retail customer feedback;

industry pricing; future pricing assumptions; weeks of on-hand retail channel inventory; absolute quantity of on-hand retail

channel inventory; our warehouse on-hand inventory levels; the title’s recent sell-through history (if available); marketing

trade programs; and the performance of competing titles. The relative importance of these factors varies among titles

depending upon, among other things, genre, platform, seasonality, and sales strategy.

Based upon historical experience, we believe that our estimates are reasonable. However, actual returns and price

protection could vary materially from our allowance estimates due to a number of reasons, including, among others: a lack of

consumer acceptance of a title; the release in the same period of a similarly themed title by a competitor; or technological

obsolescence due to the emergence of new hardware platforms. There may be material differences in the amount and timing

of our revenues for any period if factors or market conditions change or if matters resolve in a manner that is inconsistent

with management’s assumptions utilized in determining the allowances for returns and price protection. For example, a 1%

change in our December 31, 2018 allowance for sales returns, price protection, and other allowances would have impacted

net revenues by approximately $2 million.

Software Development Costs

Software development costs include payments made to independent software developers under development

agreements, as well as direct costs incurred for internally developed products. Software development costs are capitalized

once the technological feasibility of a product is established and such costs are determined to be recoverable. Technological

feasibility of a product requires both technical design documentation and game design documentation, or the completed and

tested product design and a working model. Significant management judgments and estimates are utilized in the assessment

of when technological feasibility is established and the evaluation is performed on a product-by-product basis. For products

where proven technology exists, this may occur early in the development cycle. Software development costs related to online

hosted revenue arrangements are capitalized after the preliminary project phase is complete and it is probable that the project

will be completed and the software will be used to perform the function intended. Prior to a product’s release, if and when we

believe capitalized costs are not recoverable, we expense the amounts as part of “Cost of revenues—software royalties,

amortization, and intellectual property licenses.” Capitalized costs for products that are canceled or are expected to be

abandoned are charged to “Product development” in the period of cancellation. Amounts related to software development

which are not capitalized are charged immediately to “Product development.”

Commencing upon a product’s release, capitalized software development costs are amortized to “Cost of

revenues—software royalties, amortization, and intellectual property licenses” based on the ratio of current revenues to total

projected revenues for the specific product, generally resulting in an amortization period of six months to approximately two

years.

We evaluate the future recoverability of capitalized software development costs on a quarterly basis. For products

that have been released in prior periods, the primary evaluation criterion is the actual performance of the title to which the

costs relate. For products that are scheduled to be released in future periods, recoverability is evaluated based on the expected

performance of the specific products to which the costs relate. Criteria used to evaluate expected product performance

include: historical performance of comparable products developed with comparable technology; market performance of

comparable titles; orders for the product prior to its release; general market conditions; and, for any sequel product, estimated

performance based on the performance of the product on which the sequel is based.

Significant management judgments and estimates are utilized in assessing the recoverability of capitalized costs. In

evaluating the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales

amounts and estimates of additional costs to be incurred. If revised forecasted or actual product sales are less than the

originally forecasted amounts utilized in the initial recoverability analysis, the net realizable value may be lower than

originally estimated in any given quarter, which could result in an impairment charge. Material differences may result in the

amount and timing of expenses for any period if matters resolve in a manner that is inconsistent with management’s

expectations.

Fair Value Estimates

The preparation of financial statements often requires us to determine the fair value of a particular item to fairly

present in our consolidated financial statements. Without an independent market or another representative transaction,

determining the fair value of a particular item requires us to make several assumptions that are inherently difficult to predict

and can have a material impact on the conclusion of the appropriate accounting.

There are various valuation techniques used to estimate fair value. These include: (1) the market approach, where

market transactions for identical or comparable assets or liabilities are used to determine the fair value; (2) the income

approach, which uses valuation techniques to convert future amounts (for example, future cash flows or future earnings) to a

single present amount; and (3) the cost approach, which is based on the amount that would be required to replace an asset.

For many of our fair value estimates, including our estimates of the fair value of acquired intangible assets, we use the

income approach. Using the income approach requires the use of financial models, which require us to make various

estimates including, but not limited to: (1) the potential future cash flows for the asset, liability or equity instrument being

measured; (2) the timing of receipt or payment of those future cash flows; (3) the time value of money associated with the

delayed receipt or payment of such cash flows; and (4) the inherent risk associated with the cash flows (that is, the risk

premium). Determining these cash flow estimates is inherently difficult and subjective, and, if any of the estimates used to

determine the fair value using the income approach turns out to be inaccurate, our financial results may be negatively

impacted. Furthermore, relatively small changes in many of these estimates can have a significant impact on the estimated

fair value resulting from the financial models or the related accounting conclusion reached. For example, a relatively small

change in the estimated fair value of an asset may change a conclusion as to whether an asset is impaired. While we are

required to make certain fair value assessments associated with the accounting for several types of transactions, the following

areas are the most sensitive to the assessments:

Business Combinations.

Assets acquired and liabilities assumed in a business combination are recorded based on their estimated fair value.

Our assessment of the estimated fair value of each of these can have a material effect on our reported results as intangible

assets are amortized over various estimated useful lives. Furthermore, a change in the estimated fair value of an asset or

liability often has a direct impact on the amount we recognize as goodwill, which is an asset that is not amortized. Often

determining the fair value of these assets and liabilities assumed requires an assessment of the expected use of the asset, the

expected cost to extinguish the liability or our expectations related to the timing and the successful completion of

development of an acquired in-process technology. Such estimates are inherently difficult and subjective and can have a

material impact on our financial statements.

Assessment of Impairment of Definite-lived Intangible and Other Long-lived Assets.

We evaluate the recoverability of our identifiable amortizable intangible assets and other long-lived assets when

events or circumstances (referred to as a “triggering event”) indicate a potential impairment exists. We consider certain

events and circumstances in determining whether a triggering event has occurred that could indicate the carrying value of

identifiable definite-lived intangible assets and other long-lived assets, may not be recoverable, including, but not limited to:

(1) significant changes in performance relative to expected operating results; (2) significant changes in the use of the assets;

(3) significant negative industry or economic trends; (4) a significant decline in our stock price for a sustained period of time;

and (5) changes in our business strategy. If it is determined that a triggering event has occurred, we determine if an

impairment exists based on an estimate of the undiscounted cash flows to be generated from the use and ultimate disposition

of the asset group. If the undiscounted cash flows are lower than the carrying values of the related asset group, an impairment

exists and the impairment loss is measured as the amount by which the carrying amount of the group’s assets exceeds the fair

value of the asset group. We did not record an impairment charge to any of our definite-lived intangible assets as of

December 31, 2018, 2017, or 2016.

Assessment of Impairment of Goodwill and Indefinite-lived Intangible Assets.

We are required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and,

if current events or circumstances require, on an interim basis. ASC Topic 350 provides companies an option to first perform

a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its

carrying value before performing a quantitative two-step approach to testing goodwill for impairment. We perform our

impairment test for each reporting unit as part of our annual impairment test performed as of December 31. The first step of

the quantitative test measures for impairment by applying fair value-based tests at the reporting unit level. The second step (if

necessary) measures the amount of impairment by applying fair value-based tests to the individual assets and liabilities

within each reporting unit.

To determine the fair values of the reporting units used in the first step, we use a discounted cash flow approach.

Each step requires us to make judgments and involves the use of significant estimates and assumptions. These estimates and

assumptions include long-term growth rates and operating margins used to calculate projected future cash flows,

risk-adjusted discount rates based on our weighted average cost of capital, and future economic and market conditions. These

estimates and assumptions must be made for each reporting unit evaluated for impairment. Our estimates for market growth,

our market share and costs are based on historical data, various internal estimates and certain external sources, as well as on

assumptions that are consistent with the plans and estimates we are using to manage the underlying business. If future

forecasts are revised, they may indicate or require future impairment charges. We base our fair value estimates on

assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ

from those estimates.

In determining the fair value of our significant reporting units—namely Activision, Blizzard, and King—we

assumed discount rates ranging from 9.0% to 9.5% and terminal growth rates of 0.0% to 3.0%, depending on the reporting

unit and its specific characteristics and risk profiles. Based on our quantitative evaluation, we determined the estimated fair

value of all of the reporting units exceeded their carrying values as of December 31, 2018. Changes in our assumptions

underlying our estimates of fair value, which will be a function of our future financial performance and changes in economic

conditions, could result in future impairment charges.

We test our acquired trade names for possible impairment by using a discounted cash flow model to estimate fair

value. At December 31, 2018, 2017, and 2016, we concluded that no impairment had occurred and that no impairment was

reasonably likely to occur. In determining the fair value of these trade names, we assumed a discount rate of 9.5%, and

royalty saving rates of approximately 1.5%. Changes in our assumptions underlying our estimates of fair value, which will be

a function of our future financial performance and changes in economic conditions, could result in future impairment

charges.

Share-Based Payments

We account for share-based payments in accordance with ASC Subtopic 718-10 and ASC Subtopic 505-50.

Share-based compensation expense for a given grant is recognized over the requisite service period (that is, the period for

which the employee is being compensated) and is based on the value of share-based payment awards after a reduction for

estimated forfeitures. Forfeitures are estimated at the time of grant and are revised, if necessary, in subsequent periods if

actual forfeitures differ from those estimates.

We generally estimate the value of stock options using a binomial-lattice model. This estimate is affected by our

stock price, as well as assumptions regarding a number of highly complex and subjective variables, including our expected

stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors.

We generally determine the fair value of restricted stock units based on the closing market price of the Company’s

common stock on the date of grant, reduced by the present value of the estimated future dividends during the vesting period

in which the restricted stock units holder will not participate. Certain restricted stock units granted to our employees and

senior management vest based on the achievement of pre-established performance or market conditions. For

performance-based restricted stock units, each quarter we update our assessment of the probability that the specified

performance criteria will be achieved. We amortize the fair values of performance-based restricted stock units over the

requisite service period, adjusting for estimated forfeitures for each separately vesting tranche of the award. For market-based

restricted stock units, we estimate the fair value at the date of grant using a Monte Carlo valuation methodology and amortize

those fair values over the requisite service period, adjusting for estimated forfeitures for each separately vesting tranche of

the award. The Monte Carlo methodology that we use to estimate the fair value of market-based restricted stock units at the

date of grant incorporates into the valuation the possibility that the market condition may not be satisfied. Provided that the

requisite service is rendered, the total fair value of the market-based restricted stock units at the date of grant must be

recognized as compensation expense even if the market condition is not achieved. However, the number of shares that

ultimately vest can vary significantly with the performance of the specified market criteria.

For a detailed discussion of the application of these and other accounting policies, see Note 2 of the notes to the

consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

Recently Issued Accounting Pronouncements

Below are the recently issued accounting pronouncements that were most significant to our accounting policy

activities for fiscal 2018. For a detailed discussion of recently issued accounting pronouncements, see Note 3 of the notes to

the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

Recently Adopted Accounting Pronouncements

Revenue Recognition

As discussed in Note 3 of the notes to the consolidated financial statements included in Item 8 of this Annual Report

on Form 10-K, in May 2014, the FASB issued new accounting guidance related to revenue recognition and on January 1,

2018, we adopted the new accounting standard and related amendments (collectively, the “new revenue accounting

standard”), utilizing the modified retrospective method. Additionally, we elected to apply the new revenue accounting

standard only to contracts not completed as of the adoption date. For contracts that were modified before the period of

adoption, we elected to reflect the aggregate effect of all modifications when (1) identifying the satisfied and unsatisfied

performance obligations, (2) determining the transaction price, and (3) allocating the transaction price to the satisfied and

unsatisfied performance obligations. We recognized the cumulative effect of initially applying the new revenue accounting

standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and

continues to be reported under the accounting standards in effect for those periods. The cumulative effect adjustment

recorded to our retained earnings at January 1, 2018, was $88 million.

The most significant impacts of the new revenue accounting standard for us are:

• The accounting for our sales of our games with significant online functionality for which we do not have

vendor-specific objective evidence (“VSOE”) for unspecified future updates and ongoing online services

provided. Under the prior accounting standards, VSOE for undelivered elements was required. This

requirement was eliminated under the new revenue accounting standard. Accordingly, we are required to

recognize as revenue a portion of the sales price upon delivery of this software, as compared to recognizing the

entire sales price ratably over an estimated service period, as previously required. This difference in accounting

primarily impacts revenues from most of the titles within our Call of Duty franchise, where approximately 20%

of the sales price is now recognized as revenue upon delivery of the games to our customers. The amount of

revenue recognized upon delivery of games to our customers is analyzed on a title-by-title basis and may

change in the future. For example, the entire sales price from our Call of Duty: Black Ops 4 release is being

recognized ratably over an estimated service period, as the gameplay has an increased focus towards the online

competitive and cooperative game modes with no single-player campaign mode. Many of our other franchises,

such as Overwatch, World of Warcraft, and Candy Crush, are online hosted arrangements, and the accounting

for our sales of these games under the new standard is relatively unchanged; and

• The accounting for certain of our software licensing arrangements. While the impact of the new revenue

accounting standard may differ on a contract-by-contract basis (as the actual revenue recognition treatment

required under the standard will depend on contract-specific terms), the new revenue accounting standard

generally results in earlier revenue recognition for these arrangements.

For additional discussion regarding the impact of our adoption of the new revenue accounting standard, including

the impacts to our consolidated balance sheet and statement of operations, see Note 3 of the notes to the consolidated

financial statements included in Item 8 of this Annual Report on Form 10-K.

Statement of Cash Flows-Restricted Cash

In November 2016, the FASB issued new guidance related to the classification of restricted cash in the statement of

cash flows. The new standard requires that a statement of cash flows explain any change during the period in total cash, cash

equivalents, and restricted cash. Therefore, restricted cash will be included with “Cash and cash equivalents” when

reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new standard

is effective for fiscal years beginning after December 15, 2017, and should be applied retrospectively.

We adopted the new standard during the first quarter of 2018 and applied the standard retrospectively for all periods

presented. The application of this new standard did not have a material impact on our consolidated statements of cash flows

for the years ended December 31, 2018 and 2017. See Note 3 of the notes to the consolidated financial statements included in

Item 8 of this Annual Report on Form 10-K for impacts on our consolidated statement of cash flows for the year ended

December 31, 2016.

Derivatives and Hedging

In August 2017, the FASB issued new guidance related to the accounting for derivatives and hedging. The new

guidance expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition

and presentation of the effects of hedging instruments and hedged items in the financial statements, and includes certain

targeted improvements to ease the application of current guidance related to the assessment of a hedge’s effectiveness. The

new standard is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. We adopted the

standard during the first quarter of 2018. The adoption of the standard did not have a material impact to our consolidated

financial statements.

Recent Accounting Pronouncements Not Yet Adopted

Leases

In February 2016, the FASB issued new guidance related to the accounting for leases. The new standard will replace

all current U.S. GAAP guidance on this topic. The new standard, among other things, requires a lessee to classify a lease as

either an operating or financing lease, and to recognize a lease liability and a right-of-use asset for its leases. Classification

will be based on criteria that are largely similar to those applied in current lease accounting. The lease liability will be equal

to the present value of lease payments. The asset will be based on the lease liability, subject to adjustment for initial direct

costs, lease incentives received, and any prepaid lease payments. Operating leases will result in a straight-line expense

pattern, while finance leases will result in a front-loaded expense pattern. The standard is effective for fiscal years, and

interim periods within those fiscal years, beginning after December 15, 2018. Adoption guidance provides for an optional

adoption method that allows companies to use the effective date of the new lease standard as the initial date of application on

transition, and therefore does not require prior periods to be restated.

This standard is effective for us beginning with the first quarter of 2019, and we will report our adoption in our

Form 10-Q for the first quarter of 2019. Upon adoption, we will elect to apply the available transition practical expedients,

including the optional adoption method discussed above. We estimate the impact of adoption to result in the establishment of

lease liabilities of approximately $275 million to $325 million, with a similar corresponding impact to total assets.

Additionally, we expect that the new disclosure requirements will require us to design and implement additional internal

controls over financial reporting, and we are in process of adjusting our processes and internal controls in preparation for

adopting the new standard.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures

primarily include fluctuations in foreign currency exchange rates and interest rates.

Foreign Currency Exchange Rate Risk

We transact business in many different foreign currencies and may be exposed to financial market risk resulting

from fluctuations in foreign currency exchange rates. Revenues and related expenses generated from our international

operations are generally denominated in their respective local currencies. Primary currencies include euros, British pounds,

Australian dollars, South Korean won, Chinese yuan, and Swedish krona. To the extent the U.S. dollar strengthens against

foreign currencies, the translation of these foreign currency-denominated transactions will result in reduced revenues,

operating expenses, net income, and cash flows from our international operations. Similarly, our revenues, operating

expenses, net income, and cash flows will increase for our international operations if the U.S. dollar weakens against foreign

currencies. Since we have significant international sales, but incur the majority of our costs in the United States, the impact of

foreign currency fluctuations, particularly the strengthening of the U.S. dollar, may have an asymmetric and disproportional

impact on our business. We monitor currency volatility throughout the year.

To mitigate our foreign currency risk resulting from our foreign currency-denominated monetary assets, liabilities,

and earnings and our foreign currency risk related to functional currency-equivalent cash flows resulting from our

intercompany transactions, we periodically enter into currency derivative contracts, principally forward contracts. These

forward contracts generally have a maturity of less than one year. The counterparties for our currency derivative contracts are

large and reputable commercial or investment banks.

The fair values of our foreign currency contracts are estimated based on the prevailing exchange rates of the various

hedged currencies as of the end of the period.

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

For a detailed discussion of our accounting policies for our foreign currency forward contracts, see Note 2 of the

notes to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

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

The total gross notional amounts and fair values of our Cash Flow Hedges are as follows (amounts in millions):

As of December 31,

2018

As of December 31,

2017

Notional

amount

Fair value

gain (loss)

Notional

amount

Fair value

gain (loss)

Foreign Currency:

Buy USD, Sell Euro ..............................................................................

$723

$12

$521

$(5)

At December 31, 2018, our Cash Flow Hedges have remaining maturities of 12 months or less. Additionally,

$11 million of net realized but unrecognized gains are recorded within “Accumulated other comprehensive income (loss)” at

December 31, 2018, for Cash Flow Hedges that had settled but were deferred and will be amortized into earnings, along with

the associated hedged revenues. Such amounts will be reclassified into earnings within the next 12 months.

The amount of pre-tax net realized gains (losses) associated with our Cash Flow Hedges that were reclassified out of

“Accumulated other comprehensive income (loss)” and into earnings was as follows (amounts in millions):

December 31, 2018, for Cash Flow Hedges that had settled but were deferred and will be amortized into earnings, along with

the associated hedged revenues. Such amounts will be reclassified into earnings within the next 12 months.

The amount of pre-tax net realized gains (losses) associated with our Cash Flow Hedges that were reclassified out of

“Accumulated other comprehensive income (loss)” and into earnings was as follows (amounts in millions):

For the Years Ended

December 31,

Statement of

Operations

2018

2017

2016

Classification

Cash Flow Hedges ...................................................................................................

$(1)

Net revenues

Foreign Currency Forward Contracts Not Designated as Hedges

The total gross notional amounts and fair values of our foreign currency forward contracts not designated as hedges

are as follows (amounts in millions):

As of December 31,

2018

As of December 31,

2017

Notional

amount

Fair value

gain (loss)

Notional

amount

Fair value

gain (loss)

Foreign Currency:

Buy USD, Sell GBP ................................................................

$55

$—

For the years ended December 31, 2018, 2017, and 2016, pre-tax net gains associated with these forward contracts

were recorded in “General and administrative expenses” and were not material.

In the absence of hedging activities for the year ended December 31, 2018, a hypothetical adverse foreign currency

exchange rate movement of 10% would have resulted in a theoretical decline of our net income of approximately

$140 million. This sensitivity analysis assumes a parallel adverse shift of all foreign currency exchange rates against the U.S.

dollar; however, all foreign currency exchange rates do not always move in this manner and actual results may differ

materially.

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio, as our

outstanding debt is all at fixed rates. Our investment portfolio consists primarily of money market funds and government

securities with high credit quality and short average maturities. Because short-term securities mature relatively quickly and

must be reinvested at the then-current market rates, interest income on a portfolio consisting of cash, cash equivalents, or

short-term securities is more subject to market fluctuations than a portfolio of longer-term securities. Conversely, the fair

value of such a portfolio is less sensitive to market fluctuations than a portfolio of longer-term securities. At December 31,

2018, our $4.2 billion of cash and cash equivalents was comprised primarily of money market funds.

The Company has determined that, based on the composition of our investment portfolio as of December 31, 2018,

there was no material interest rate risk exposure to the Company’s consolidated financial condition, results of operations, or

liquidity as of that date.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm ..............................................................................................

F-1

Consolidated Balance Sheets at December 31, 2018 and 2017 ..........................................................................................

F-3

Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017, and 2016 .................................

F-4

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017, and 2016 .............

F-5

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2018, 2017, and

2016 ................................................................................................................................................................................

F-6

Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 2016 ................................

F-7

Notes to Consolidated Financial Statements ......................................................................................................................

F-8

Schedule II—Valuation and Qualifying Accounts at December 31, 2018, 2017, and 2016 ..............................................

F-50

Other financial statement schedules are omitted because the information called for is not applicable or is shown

either in the Consolidated Financial Statements or the Notes thereto.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL

DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

Definition and Limitations of Disclosure Controls and Procedures.

Our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the

“Exchange Act are designed to reasonably ensure that information required to be disclosed in our reports filed under the

Exchange Act is: (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and

forms, and (2) accumulated and communicated to our management, including our principal executive officer and principal

financial officer, as appropriate, to allow timely decisions regarding required disclosures. A control system, no matter how

well designed and operated, can provide only reasonable assurance that it will detect or uncover failures within the Company

to disclose material information otherwise required to be set forth in our periodic reports. Inherent limitations to any system

of disclosure controls and procedures include, but are not limited to, the possibility of human error and the circumvention or

overriding of such controls by one or more persons. In addition, we have designed our system of controls based on certain

assumptions, which we believe are reasonable, about the likelihood of future events, and our system of controls may

therefore not achieve its desired objectives under all possible future events.

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our principal executive officer and principal financial officer, has

evaluated the effectiveness of our disclosure controls and procedures at December 31, 2018, the end of the period covered by

this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at

December 31, 2018, our disclosure controls and procedures were effective to provide reasonable assurance that information

required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (1) recorded,

processed, summarized, and reported on a timely basis, and (2) accumulated and communicated to our management,

including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding

required disclosures.

Management’s Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting

(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our management, with the participation

of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness, as of

December 31, 2018, of our internal control over financial reporting using the criteria set forth by the Committee of

Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on this

evaluation, our management concluded that our internal control over financial reporting was effective as of December 31,

2018.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become

inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may

deteriorate.

The effectiveness of our internal control over financial reporting as of December 31, 2018, has been audited by

PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in this

Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting.

Our management, with the participation of our principal executive officer and principal financial officer, has

evaluated any changes in our internal control over financial reporting that occurred during the quarter ended December 31,

2018. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at December 31,

2018, there have not been any changes in our internal control over financial reporting during the most recent fiscal quarter

that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. OTHER INFORMATION

None.

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information required by this Item, other than the information regarding executive officers, which is included in

Item 1 of this report, is incorporated by reference to the sections of our definitive Proxy Statement for our 2019 Annual

Meeting of Shareholders entitled “Proposal 1—Election of Directors,” “Corporate Governance Matters—Board of Directors

and Committees—Board Committees” “Corporate Governance Matters—Code of Conduct,” and “Beneficial Ownership

Matters—Section 16(a) Beneficial Ownership Reporting Compliance,” to be filed with the SEC.

Item 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement

for our 2019 Annual Meeting of Shareholders entitled “Executive Compensation” and “Director Compensation” to be filed

with the SEC.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND

RELATED SHAREHOLDER MATTERS

The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement

for our 2019 Annual Meeting of Shareholders entitled “Beneficial Ownership Matters” and “Equity Compensation Plan

Information” to be filed with the SEC.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement

for our 2019 Annual Meeting of Shareholders entitled “Corporate Governance Matters—Board of Directors and Committees”

and “Certain Relationships and Related Transactions” to be filed with the SEC.

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement

for our 2019 Annual Meeting of Shareholders entitled “Audit-Related Matters” to be filed with the SEC.

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE

(a)

Financial Statements See Item 8.—Consolidated Financial Statements and Supplementary Data for index to

Financial Statements and Financial Statement Schedule on page 68 herein.

Financial Statement Schedule The following financial statement schedule of Activision Blizzard for the years

ended December 31, 2018, 2017, and 2016 is filed as part of this report on page F-50 and should be read in

conjunction with the consolidated financial statements of Activision Blizzard:

Schedule II—Valuation and Qualifying Accounts

Other financial statement schedules are omitted because the information called for is not applicable or is shown

either in the Consolidated Financial Statements or the Notes thereto.

The exhibits listed on the accompanying index to exhibits immediately following the financial statements are

filed as part of, or hereby incorporated by reference into, this Annual Report on Form 10-K.

Item 16. FORM 10-K SUMMARY

Not applicable.

F-1

Report of Independent Registered Public Accounting Firm

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

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Activision Blizzard, Inc. and its subsidiaries (the

“Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, of comprehensive

income, of changes in shareholders’ equity and of cash flows for each of the three years in the period ended December 31,

2018, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2),

(collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control

over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the

financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for

each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in

the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control

over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework

(2013) issued by the COSO.

Change in Accounting Principles

As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it

accounts for revenues from contracts with customers and the manner in which it accounts for restricted cash in the statement

of cash flows in 2018.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective

internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial

reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our

responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal

control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company

Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in

accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange

Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and

perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material

misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in

all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material

misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond

to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the

consolidated financial statements. Our audits also included evaluating the accounting principles used and significant

estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our

audit of internal control over financial reporting included obtaining an understanding of internal control over financial

reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness

of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered

necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

F-2

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance

regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance

with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies

and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the

transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as

necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that

receipts and expenditures of the company are being made only in accordance with authorizations of management and

directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized

acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become

inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may

deteriorate.

/s/ PricewaterhouseCoopers LLP

Los Angeles, California

February 28, 2019

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