2018 Annual ReportTo Our Shareholders
Since 1991, when we first purchased our
stake in the company and were given theprivilege 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, yourinvestment 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.

Cover: Activision Blizzard has themost talented, passionate anddedicated team in entertainment.

We have begun our letter with this paragraph for many
years. It is inspired by our commitment to the principles wehave learned about value creation from Warren Buffett andCharlie Munger. We do, however, recognize there are otherconsiderations for determining the value of our business
and we also attempt to include those in our reports asappropriate and permitted.
For several decades, the video game industry has been
In many ways, 2018 was a strong year for Activisiontransforming at a rapid rate. That speed and depth of

Blizzard. We achieved record net bookings of $7.3 billion

evolution seems to accelerate with each passing year,

and non-GAAP EPS of $2.72 (it is important to understandand for most of our 40 years, our company has been at

the meaning of these terms and how non-GAAP EPS

the forefront of that change.

1

reconcile to GAAP, and we explain this in the tables atthe end of this Annual Report). Our Activision and KingOver 350 million customers consume Activision Blizzard’s

segments delivered more operating income than any period

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

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

roughly 50 minutes per day in our interactive franchises,

cash flow. At the same time, we encountered issues thatinvest through online and physical purchasing, and watch

negatively impacted our results in the latter part of the year

digital advertising. Our confidence in delivering long-term

as well as our outlook for 2019.

financial success and superior shareholder returns stems
from our portfolio of some of the world’s most beloved

Some of the important metrics by which we measure ourfranchises and our track record of operational excellence.

success are reach, engagement and player investment, andAs the industry continues to evolve, we remain motivatedwhile we did have record financial results in 2018, we didn’t

by a singular purpose of finding more ways of connecting

achieve the reach, engagement and player investment

and engaging the world through epic entertainment.

goals we set for ourselves. In an industry with great growthprospects, our organic growth over the last few years has

Refocusing on Our Priorities

not been satisfactory to us.

We have always believed that prioritizing opportunities
As we reflect on 2018, we realize that we didn’t deliver thebased on our abilities to make the very best games foramount of compelling in-game content that our communities

our players with the very best financial returns for ourdemand and deserve, and our revenues from this partshareholders is the key to long-term, sustained success.

of the business failed to meet our expectations. We also

Consistent with this longstanding approach, our new,didn’t make the progress we were hoping for on major

extremely talented business unit leaders have developed

upfront content in our pipeline, and therefore we expect

a clear plan to reinforce our foundation for growth by

to have fewer big franchise launches in 2019 than in pastincreasing our focus on our biggest franchises.

years. While our business has become more recurring
over time, and our results are less driven by new releases

We are investing more in development for our leading,than they used to be, we will nevertheless see a financial

internally-owned franchises, and plan to grow ourimpact as a result of our lighter release slate in 2019.

development headcount on our biggest franchises by 20%

To address this, we realized that we needed to makeas we pursue the vast potential for our games acrossimportant structural changes to ensure we remain well
positioned to achieve our long-term goals. Those changes
are well under way.

1

Net bookings is an operating metric that is defined as the net amount of products and services
sold digitally or sold-in physically in the period, and includes license fees, merchandise, and 		
publisher incentives, among others.

1

upfront releases, in-game content and mobile delivery.

in common… a steadfast commitment to talent and a culture

This will ensure our teams can release the consistent flowof excellence.

of compelling content that our communities have cometo expect from our games while also creating new ways

Our talent evaluation process ensures that each new

for fans to interact with the franchises they love. We arehire shares that commitment. The ability to inspire is analso increasing our focus on adjacent opportunities withattribute we have always prioritized. We search for people

demonstrated potential to increase the reach, engagementwith the potential to be leaders of leaders, not managers ofand monetization of our franchises, including esports for

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

Overwatch League and Call of Duty, and our rapidly

Each member of the team has demonstrated the ability to

growing advertising business.

combine creative excellence with a commercial focus on
profitable growth. Identifying, retaining, and developing great

By increasing our investment in our biggest franchises andpeople is fundamental for our continued success.

selectively incubating a few new potential franchises, we arestaying true to the approach of doing a few things very, very

An evolution of this scale also involves reducing complexity

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

and duplication in specific functions across our businessThis approach is now more relevant than ever. Gamers

units. Eliminating costs and more effectively allocating

are playing fewer games for longer, and we are fortunate

resources to the highest return opportunities is how weto have some of the most popular franchises in the world,

become more efficient and how we improve our overall

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

financial profile. This involved making the difficult but

Overwatch and Diablo. Player expectations are rightly

necessary choice to right-size departments across theincreasing and our communities are demanding more high-business. This was a difficult process, but these steps

quality content more frequently. Staying true to our principle

were all in the service of ensuring our creative teams

of focusing on the largest and most promising opportunities

can continue to thrive and deliver our communities

will allow us to deliver on those expectations.

groundbreaking new content for many years to come.

To enable our creative teams to focus on these biggest

We are welcoming many new faces to the other parts

opportunities, we are reducing or eliminating investment inof the organization where we are making significant

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

investments. These are the talented individuals whoplayer expectations or that we now believe may not live up

possess the passion, entrepreneurial spirit and creativity

to player expectations in the future. In certain parts of thethat is required to create our games.

business we are also reducing complexity and duplication
in back office functions, consolidating certain commercial
operations, and revamping our consumer marketing

Owning Our Futurecapabilities to reflect our continued migration to a largely

Make no mistake, despite the near-term growth challenges

digital distribution network. This will enable us to better

we have encountered, our pipeline is excellent, ourleverage talent, expertise and scale across our company,

development talent is the very best in the world, and ourincreasing our potential to execute against the substantial

outlook for the long-term is as bright as ever. We believe thegrowth opportunities that our industry affords.

actions we have taken position the company to return to theoperational excellence that has defined Activision Blizzard

It Starts and Ends with Our People

throughout its history. And as our execution excellence
returns, we expect to enjoy the dual tailwinds of strong

Great entertainment experiences start with great people.

industry growth and company-specific opportunities that we

Revolutionary and lasting enterprises all share one thing

have crafted for our fully-owned intellectual properties.

2

There are more gamers than ever before. Gaming remains

we will strive to expand the reach, engagement andthe most engaging form of entertainment and has now

monetization of our franchises through initiatives inbecome the vehicle through which social activity isesports, in-game advertising, and consumer products.

increasingly occurring. We estimate that revenues in our

We are only able to pursue these opportunities because

industry exceeded $140 billion last year and grew 13%

our key franchises are based on internally-owned

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

intellectual property created by our wholly-owned studios

interactive entertainment companies, our share was only inaround the world. We are in a strong position with clear

the mid-single digits, highlighting the fragmentation of ourcompetitive advantages – we are a creator of premium

market and the opportunity ahead of us.

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 users2.

The increasing sophistication of mobile devices affords
us ever-larger creative opportunities to bring our core
intellectual properties to larger audiences and to offer2018 Successes

current players more ways to engage with their favorite
franchises. Games are becoming ever more social, further

We made strong progress in some very important areas

deepening the experience for communities and widening

this past year.

the moats around the largest franchises.
Our advertising business had a successful year as theInvestment models continue to evolve too. Free-to-playteam executed against this significant opportunity. As webusiness models have increased the total addressable

have discussed previously in our letters, King’s large andaudience for gaming, initially on PC and mobile platforms

highly engaged audience offers great potential upsideand more recently, in certain genres on consoles. In 2018,from the careful integration of advertising into our network.

we saw the highest growth in industry console game

King’s games represent a premium, safe environment forrevenues in many years. We believe that we are in a strong

advertisers, and we have invested in creating unique, highly

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

differentiated ad products that can enhance the experience

as we already operate multiple models at scale, including

for players while delivering strong results for advertisers’

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

campaigns.

with an upfront charge or with a subscription, and multiple
combinations of these models. This provides a range of

After extensive development and testing we started scaling

options for our product teams from which to pair the best

ads on the King network in 2018. As we anticipated, thegameplay experience with the best economic model.

ads team, working closely with our game teams, saw astrong response from users and advertisers. They hit someAt the center of this rapidly growing industry, our franchises

important financial milestones, reaching profitability in Q1

continue to prove their durability. Call of Duty recently

and growing net bookings strongly each quarter after that.

celebrated its 15-year anniversary and the Warcraft
universe will reach its 25th birthday in November of thisThe advertising business is starting to be a meaningful

year. As we look forward, we see a rich pipeline that cancontributor to King overall, and we expect it to cross $100

enable each of our major owned franchises to continue

million in net bookings this year. Looking ahead, we willto thrive for many years to come, with regular content

continue to work to enable the delivery of advertising tolaunches and robust ongoing live operations, enhanced

more of King’s users and educate brand advertisers on theby compelling mobile experiences.
2

In addition to the growth profile of our core business,

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.

3strong value proposition that our platform offers. And, longer

veterans transition to the civilian workforce. We maketerm, we see clear potential to leverage our ad platform

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

across our portfolio, including advertising in our other mobile

organizations that help place our veterans into high-quality

games and within our esports network.

careers and we work with our grantee organizations toraise the bar even higher, sharing best practices to further

We have also seen success in our pioneering professional

improve our grantees’ ability to serve veterans. Over the pastesports initiative. We have paved the way as the industry

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

leader in esports, solidifying the enduring appeal of ourformer service members into great jobs, and we expect tofranchises and setting the foundation for substantial

place 100,000 veterans into meaningful careers by 2024.

shareholder value creation over time.
The inaugural season of the Overwatch League saw millions

Consistent Principles

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

We thank you for your continued support and investment

Grand Finals event at the Barclays Center in New York thatin Activision Blizzard. Our core principles will continue towas watched by more than 10 million viewers around theguide us:world. Our unique approach to esports, with a focus on citybased teams, professional players, structured economics,
and premium content is already starting to pay off.

Delivering innovative and compelling entertainment
experiences with continuous investment in our franchises
and communities;

We sold an additional eight Overwatch League teams
ahead of the second season that began this February.

Focusing on the largest and most promising
opportunities;

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

Recruiting, rewarding and retaining diverse world-most experienced traditional sports and esports partners

class talent, emphasizing our shared common value andin the world. These recent sales were at substantiallycommitment to excellence;higher prices than our first team sales, reflecting thefinancial over-performance of the League versus our

Remaining disciplined in our responsibility to deliver
shareholder value.

original plans and representing further validation of ourunique approach to esports.

We could easily use an entire letter like this to recognize
and celebrate the contributions of our talented teams

As the mainstream popularity of esports continues toaround the world. They remain the engine for our success.

grow, we’re well positioned to leverage the success of our
Overwatch League model to develop esports opportunities

On behalf of all of us at Activision Blizzard, we thank you forfor other franchises, starting with Call of Duty. And justproviding the opportunity to connect and engage the world

as with the Overwatch League, we are committed tothrough our epic entertainment.

pursuing this opportunity with a world class organization.
We are attracting the very best and brightest people whoWith appreciation,

are drawn to the excitement, opportunity and rewards ourcompany provides.
Our employees and players continue to support our

Bobby Kotick

Brian Kelly

corporate social responsibility programs. One of the mostChief Executive Officer

Chairman of the Board

successful of these initiatives has been the Call of Duty

Activision Blizzard

Activision Blizzard

Endowment, which we founded in 2009 to help returning
4

UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K(Mark one)xo

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromtoCommission 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)
3100 Ocean Park Boulevard, Santa Monica, CA(Address of principal executive offices)

95-4803544(I.R.S. Employer Identification No.)
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 Actof 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 toRule 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 oNon-accelerated Filer oSmaller Reporting Company oEmerging 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 withany 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 ofEquity 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 ...............................................................................................................................................................
SIGNATURES ............................................................................................................................................................

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2
2
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E-1
E-5

PART ICAUTIONARY 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 arecitation 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 thoserelated 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 uncertainand 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 andare subject to risks, uncertainties, and other factors, some of which are beyond our control and may cause actual results todiffer materially from current expectations.
Activision Blizzard Inc.’s names, abbreviations thereof, logos, and product and service designators are all either theregistered or unregistered trademarks or trade names of Activision Blizzard. All other product or service names are theproperty 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 andservices. 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 thisacquisition 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.
22

Our Strategy and Vision
Our objective is to continue to be a worldwide leader in the development, publishing, and distribution ofhigh-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 throughcompelling 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 gameswith 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 ofcontent 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 incertain 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 throughesports, 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 retailand 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 ourinternally 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 forthe Destiny franchise to Bungie in exchange for cash and Bungie’s assumption of on-going customer obligations ofActivision. Going forward, Activision no longer has any material rights or obligations related to the Destiny franchise. As aresult 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.

3

3

(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 anddigital 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 LeagueTM, thefirst 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 actionrole-playing franchise for the PC and console platforms; Hearthstone®, an online collectible card franchise for the PC andmobile 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 acquirein-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™, whichfeatures “match three” games; Farm Heroes™, which also features “match three” games; and Bubble Witch™, whichfeatures “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 PlayStore 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 televisioncontent 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 thatprovide 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 wemarket 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 thefollowing 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 thepurchase of a full game;•microtransactions, which typically provide relatively small pieces of additional in-game content orenhancements to gameplay, generally at relatively low price points; and
4

4

•

subscriptions for players in our World of Warcraft franchise that provide for continual access to the gamecontent.

Providing additional opportunities for player investment outside of full-game purchases has allowed us to shift fromour 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 andyear-round player investment. It is our experience that enduring franchises then serve as the basis for sequels, prequels, andrelated new products and content that can be released over an extended period of time. We believe that the development anddistribution of products and content based on established franchises enhances predictability of revenues and the probability ofhigh 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 modelallows 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, andprovide 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 otherdefects 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 asignificant 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 ofpurchase displays), participation in cooperative advertising programs, direct response vehicles, and product sampling throughdemonstration software distributed through the Internet or the digital online services provided by our partners. From time totime, 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), discountwarehouses, game specialty stores (e.g., GameStop), and other stores (e.g., Amazon), or through third-party distribution andlicensing arrangements.
Most of our products and content are also available in a digital format, which allows consumers to purchase anddownload 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.

55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 ourcontent 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 threecustomers—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 othercustomer 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; andquality 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.

66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 areplaying our games.
We develop a majority of our products based on wholly-owned intellectual properties, such as Call of Duty, Worldof 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 theplatform provider and is licensed non-exclusively to us for use in the relevant product. We also license technology fromproviders other than console manufacturers in developing our content and services. While we may have renewal rights forsome licenses, our business is dependent on our ability to continue to obtain the intellectual property rights from the ownersof 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 theworld. For our PC products, we use technological protection measures to prevent piracy and the use of unauthorized copies ofour 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

Robert A. Kotick .................................
Collister Johnson .................................
Dennis Durkin .....................................
Brian Stolz ...........................................
Christopher Walther ............................

Age

Position

55 Chief Executive Officer of Activision Blizzard
42 President and Chief Operating Officer of Activision Blizzard
48 Chief Financial Officer of Activision Blizzard and President of Emerging
Brands43 Chief People Officer of Activision Blizzard
52 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 asignificant 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 andHarvard-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 forveterans.
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 ofoperations of Activision, one of our principal operating units, chief operating officer of studios for Activision, and senior vicepresident 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.

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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. Heserved as our Chief Corporate Officer from May 2017 until January 2019. Prior to joining the Company in 2012, Mr. Durkinheld a number of positions of increasing responsibility at Microsoft, a computing software and hardware manufacturer, mostrecently 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 afinancial analyst at Alex. Brown and Company. Mr. Durkin holds a B.A. degree in government from Dartmouth College andan 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 fromFebruary 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 theUnited States Sixth Circuit Court of Appeals. Since 2012, Mr. Walther has served on the board of directors of the Alliancefor 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 ofnormal 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 andAnalysis 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.

88

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 fromthose stated in forward-looking statements contained in this document and elsewhere. These risks are not presented inorder of importance or probability of occurrence. Further, the risks described below are not the only risks that weface. 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 competingproducts, 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 toremain 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 ourconsumers, 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 orservices, such as our proprietary online gaming service, do not function as consumers expect, whether because they fail tofunction 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 toconsistently satisfy. Our games with online features are also frequently updated, increasing the risk that a game may containsignificant errors, or “bugs.” If any of these issues occur, consumers may stop playing the game and may be less likely toreturn 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 fromexpectations. If we fail to release our products in a timely manner, or if we are unable to continue to extend the life ofexisting games by adding features and functionality that will encourage continued engagement with the game, our businessmay 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 suchproduct, the more critical it is that we accurately predict consumer demand for such product. If our future products do notachieve expected consumer acceptance or generate sufficient revenues upon introduction, we may not be able to recover thesubstantial 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 highpercentage 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 ouroperating 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, thefailure 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.
99

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, establishedcompetitors.
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 ourability to manage this expanded business and our aspirations for continued expansion. We have dedicated resources both tonew business models that are largely untested, as is the case with esports, and to adjacent business opportunities in whichvery 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 businesscould create significant challenges for our management, operational, and financial resources, and could increase existingstrain on, and divert focus from, our core businesses. If not managed effectively, this growth could result in theover-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 theseways 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 andentertainment content. Conversely, the success of these new businesses is, in large part, contingent on the success of theunderlying 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 webelieve 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 ourdesired and expected timeframe is subject to many estimates and assumptions, and the actual savings and timing for thosesavings 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 andproductivity, 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 theminimum 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 isplayed on a game console or PC. Also, while digitally-distributed products generally have higher profit margins than retailsales, 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 retailsales, 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 gamespecialty stores. Our “boxed” products are sold internationally on a direct-to-retail basis, through third-party distribution andlicensing arrangements, and through our wholly-owned European distribution subsidiaries. Our sales are made primarily on apurchase 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 retailcustomers or distributors could have adverse consequences.
1010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 andapplicable, 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 andprice 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 accessto 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, andthere 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 pricediscounts, 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 orprovide 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 andif competitive pressures force us to lower our prices below those levels, it could similarly have a negative impact on ourbusiness. Further, because we pay a licensing fee to the console hardware manufacturer for each physical copy of a productmanufactured 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 bycompanies 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 forthe 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 apublisher 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, orNintendo 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 fortheir 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 ofselling and distributing this content. Further, increased competition for limited premium “digital shelf space” has placed theplatform 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.

1111

We also derive significant revenues from the distribution on third-party mobile and web platforms, such as theApple App Store, the Google Play Store, and Facebook, and most of the virtual currency we sell is purchased using thepayment 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 orother 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 experienceissues with their in-app purchasing functionality. If either of these events occurs on a prolonged, or even short-term, basis orother 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, aswell 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 isdriven in large part by our ability to accurately predict which consoles will be successful in the marketplace and our ability todevelop commercially successful products for these consoles. We also rely on the availability of an adequate supply of thesevideo game consoles and the continued support for these consoles by their manufacturers. We must make productdevelopment 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 theconsoles 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 ourrevenues 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 andsubsequently 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 tofree-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 andpersonal 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.
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Claims, suits, investigations, audits, and proceedings are inherently difficult to predict and their results are subject tosignificant uncertainties, many of which are outside of our control. Regardless of the outcome, such legal proceedings canhave a negative impact on us due to legal costs, diversion of management resources and other factors. In addition, it ispossible 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 therelevant facts and circumstances on a quarterly basis assuming, as applicable, a combination of settlement and litigatedoutcomes and strategies. Further, it may take time to develop factors on which reasonable judgments and estimates can bebased. 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 isrequired 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 anegative impact on our business or require us to change the manner in which we operate our business. The tax regimes we aresubject 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 permanentestablishment theories. These proceedings may lead to adjustments or proposed adjustments to our income taxes orprovisions 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 tothe income tax effects of the U.S. Tax Reform Act we have recorded at December 31, 2018. These adjustments could have anegative impact on our business.
In December 2017, we received a Notice of Reassessment from the French Tax Authority (“FTA”) related totransfer 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 tovigorously 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 thematter. 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.
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Our industry is subject to rapid technological change, and if we do not adapt to, and appropriately allocate our resourcesamong, 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 becauseof 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 awayfrom other products or distribution channels. Further, our competitors may adapt to an emerging technology or businessmodel more quickly or effectively than we do, creating products that are technologically superior to ours, more appealing toconsumers, 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 haveadverse consequences. It may take significant time and expenditures to shift product development resources to thattechnology, 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 oursales.
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 otherresources to provide larger budgets for development and marketing and make higher offers to licensors and developers forcommercially desirable properties, as well as adopt more aggressive pricing policies to develop more commerciallysuccessful video game products than we do. In addition, competitors with large portfolios and popular games typically havegreater influence with platform providers, retailers, distributors and other customers who may, in turn, provide morefavorable support to those competitors’ games.
Additionally, we compete with other forms of entertainment and leisure activities. As our business continues toexpand 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 thecontinuing 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 pricecompression 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 ourbusiness.
Our success depends to a significant extent on our ability to identify, attract, hire, retain, motivate, and utilize theabilities 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 highlevel of employee mobility, competitive compensation programs, and aggressive recruiting among competitors for employeeswith technical, marketing, sales, engineering, product development, creative, and/or management skills. We may havedifficulties 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 ourbusiness.

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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 thesedevelopers, we are subject to the following risks:•

continuing strong demand for top-tier developers’ resources, combined with the recognition they receive inconnection 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 forus; and•reliance on external developers reduces our visibility into, and control over, development schedules andoperational 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 alliancesand 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 fromexpectations 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 topredict, (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 areinconsistent 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 thededication of a substantial portion of any cash flows from operations for the payment of principal and interest on ourindebtedness, 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 strategicacquisitions 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 ourability to adjust to changing market conditions; and placing us at a competitive disadvantage relative to competitors who havelower 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 (asamended 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 andratios. In addition, under certain circumstances, the Credit Agreement and our indentures may limit or prohibit otheractivities. 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
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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, wemight 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 toborrowing 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 notborrowed under the revolving credit facility to date, but if we wish to do so, there can be no assurance that we will be incompliance 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 theeffect 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 theperpetrators 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, ordecreased 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 othernegative 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 indevelopment, 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 withwhom 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 failureof 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 ourbusiness.
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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 ofthe source code to such software or make available any derivative works of the open source code on unfavorable terms or atno 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 ourproprietary 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 resourcesaway 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 theseproducts continue to overlap, software developers have increasingly become subject to infringement claims. Further, many ofour products are highly realistic and feature materials that are based on real-world things or people, which may also be thesubject 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 toemerging 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, andexpensive 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 andother protections could prevent us from enforcing or defending our proprietary technologies. Further, the use ofunauthorized “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 isdifficult, 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 UnitedStates, 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 otherplatforms 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 andplatform 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.

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In addition, “cheating” programs or other unauthorized software tools and modifications that enable consumers tocheat 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 respondto 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 totime 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, thisinsurance 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 befavorable. 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 frominternational trade, particularly from Europe, Asia, and Australia. Moving forward, we expect that international sales willcontinue 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, unexpectedchanges to laws, regulatory requirements, and enforcement on us and our platform partners and differing local businesspractices, all of which may impact profit margins or make it more difficult, if not impossible, for us to conduct business inforeign 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 anegative 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 inwhich 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 anegative 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 compliancewith these laws, our employees, contractors, third-party partners, representatives, or agents may take actions that violate ourpolicies. 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.
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In addition, cultural differences may affect consumer preferences and limit the international popularity of games thatare popular in the U.S. or require us to modify the content of the games or the method by which we charge our customers forthe 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 theEuropean 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 havecreated 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 andinterest rates, which could have a negative impact on our business, our suppliers and business partners, or our lenders andfinancial 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 affectour 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 andexpenses 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 ourbusiness. We have, in the past, utilized currency derivative contracts to hedge certain foreign exchange exposures andmanaged 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 ratingsfor 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 withratings information, including information on the content in such software, such as violence, nudity, or sexual content, alongwith an assessment of the suitability of the content for certain age groups. Certain other countries have also establishedcontent rating systems as prerequisites for product sales in those countries. In addition, certain stores use other ratingssystems, 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 anegative 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 begraphic 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 tosell 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.

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Further, throughout the history of the interactive entertainment industry, many interactive software products haveincluded hidden content and/or hidden gameplay features, some of which have been accessible through the use of in-gamecodes 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 sellthem, and demanding that their publishers accept them as product returns. Likewise, some consumers have reacted to therevelation of undisclosed content by refusing to purchase such games, demanding refunds for games they have alreadypurchased, 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 humanerror, circumvention, overriding, and reasonable resource constraints. If an interactive software product we publish is foundto 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 realtime, 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 postcomments. 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 toimpose 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 applicablelaws 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 aresubject 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 ofelectronic 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 HealthOrganization, 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 purchaseour products.
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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 ourcustomers 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 becostly or delay the release of our products. In addition, the laws and regulations affecting our products vary by territory andmay be inconsistent with one another, imposing conflicting or uncertain restrictions. Failure to comply with any applicablelegislation may also result in government-imposed fines or other penalties, as well as harm to our reputation. Because theKing 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 ourcontent and the functionality of our games with online features. Changes in laws or regulations that adversely affect thegrowth, 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 thoserules, coupled with the potentially significant political and economic power of local Internet service providers and therelatively 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 andregulations 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 ouremployees. 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 andmay 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 greaterobligations 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, arecontinuing 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 toincur substantial costs or impact our approach to operating and marketing our games. Due to the rapidly changing nature ofthese 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 dataprotection 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 togovernment investigations and result in substantial fines.
Player interaction with our games is subject to our privacy policies, end user license agreements (“EULAs”), andterms 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 bygovernmental 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.
21

21

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 byhackers that circumvents security measures, a failure of disaster recovery service or the failure of a company on which we arerelying 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 theloss 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 thesale 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 thesale of virtual currency for our free-to-play games. An extended interruption to any of these services could adversely affectour ability to sell and distribute our digital products and operate our games with online features, which could result in a lossof revenue and otherwise negatively impact our business.
Further, insufficient server capacity could also negatively impact our business. Conversely, if we overestimate theamount 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 ofservice, 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 accessto, 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 breachsystems 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 theoperation of such game or platform. If we are subject to cybersecurity breaches, or a security-related incident that materiallydisrupts 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 andactions, especially if there is loss, disclosure, or misappropriation of, or access to, our customers’ personal information orother sensitive information, or there is otherwise an intrusion into our customers’ privacy.

22

22Our reported financial results could be significantly impacted by changes in financial accounting standards or by theapplication 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 theservice 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 futurefinancial accounting standards, particularly those relating to the way we account for revenues and income taxes, could have asignificant 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 mattersfor 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 ourcompetitors and customers.

23

23

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 ournormal 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 ourdisaster 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 ourbusiness.
Item 1B.

UNRESOLVED STAFF COMMENTS

None.
Item 2.

PROPERTIES

Our principal corporate and administrative offices, which includes our Activision segment’s headquarters, arelocated 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 inLondon, 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 anddevelopment 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, andthe 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 suitablelocations, as needed, and we consider our facilities to be adequate for our current needs.
Item 3.

LEGAL PROCEEDINGSIn 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 ofapproximately 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 tosuccessfully 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 inadvance 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.

24

24

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 thismatter, 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 tosignificant 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 forsubsequent 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 andpersonal 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 amaterial adverse effect on our business, financial condition, results of operations, or liquidity.
Item 4.

MINE SAFETY DISCLOSURES
Not applicable.

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25

PART IIPART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
Item
5. PURCHASESMARKET FOR
COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUEROFREGISTRANT’SEQUITY SECURITIESISSUER PURCHASES OF EQUITY SECURITIESMarket Information and Holders
Market Information and Holders
Our common stock is quoted on the Nasdaq National Market under the symbol “ATVI”. At February 21, 2019, there
Ourholders
commonstock isofquoted
on the Nasdaq
were 1,616
of record
our common
stock. National Market under the symbol “ATVI”. At February 21, 2019, there
were 1,616 holders of record of our common stock.
Stock Performance Graph
Stock Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise
performancegraph
not be“filed”
for purposesof Section 18byofreference
the Exchange
Actfilingor otherwise
subject toThis
the liabilities
under
thatshall
Section,anddeemedshall notbe deemed
to be incorporated
into anyofsubjecttotheliabilities
under
that
Section,
and
shall
not
be
deemedtobeincorporated
byreference
intoanyfilingofActivision Blizzard, Inc. under the Exchange Act or the Securities Act of 1933.
Activision Blizzard, Inc. under the Exchange Act or the Securities Act of 1933.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
OFInc.,
5-YEARCUMULATIVETOTAL
amongCOMPARISON
Activision Blizzard,
the Nasdaq
Composite Index,
theRETURN
S&P 500 Index,
among Activision Blizzard,
Inc.,
the
NasdaqComposite
Index,theS&P 500 Index,
and the RDG Technology Composite Index
and the RDG Technology Composite Index
The following graph and table compare the cumulative total stockholder return on our common stock, the Nasdaq
Thefollowing
graph
tableandcomparethe Technology
cumulative total
stockholder
on ourandcommonstock, theComposite
Index,
the S&P
500andIndex,
the RDG
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The graphtable assume
thatNasdaq$100 wasComposite
Index,the
S&P
500
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RDG
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The
graph
and
table
assumethat$100 wasinvested on December 31, 2013, and that dividends were reinvested daily. The stock price performance on the following
invested
December31, 2013, andthat dividends
reinvested
daily. The stock price performance on the following
graph andontable
is not necessarily
indicativeof futurewerestock
price performance.
graph and table is not necessarily indicative of future stock price performance.

$400
$350
$300
$250
$200
$150
$100

▲

▲

12/14

12/15

▲

▲

12/17

12/18

▲

$50
$0
12/13

Activision Blizzard, Inc.

Fiscal year ending December 31:
Fiscal year ending December 31:

▲

12/16

NASDAQ Composite

Activision Blizzard, Inc. ................................................
Activision
Blizzard,.........................................................
Inc. ................................................
NasdaqComposite
NasdaqComposite.........................................................
S&P 500.........................................................................
S&P 500.........................................................................
RDG
Technology
Composite ........................................
RDG Technology Composite ........................................

12/13
12/13

$100.00$100.00
100.00100.00100.00100.00100.00100.00

26
26
26

S&P 500

12/14
12/14

$114.08$114.08
114.62114.62113.69113.69117.81117.81

12/15
12/15

$221.39$221.39122.81122.81115.26115.26122.23122.23

RDG Technology Composite

12/16
12/16

$208.19$208.19133.19133.19129.05129.05138.28138.28

12/17
12/17

$367.28$367.28
172.11
172.11
157.22
157.22
189.14
189.14

12/18
12/18

$271.51$271.51165.84165.84150.33150.33190.13190.13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:
Per Share
AmountYear

2019 ...........................................................................................................................
2018 ...........................................................................................................................
2017 ...........................................................................................................................
2016 ...........................................................................................................................

$0.37
$0.34
$0.30
$0.26

RecordDate

Dividend
Payment
Date

3/28/2019
3/30/2018
3/30/2017
3/30/2016

5/9/2019
5/9/2018
5/10/2017
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 ofmaterial 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 iscreated (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 accordancewith 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 ofFebruary 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 wereauthorized to repurchase up to $1 billion of our common stock during the two-year period from February 13, 2017 throughFebruary 12, 2019. We did not repurchase any shares under this program.

27

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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 ofFinancial Condition and Results of Operations” included under Item 7 in this Annual Report on Form 10-K. The selectedconsolidated financial data presented below at and for each of the years in the five-year period ended December 31, 2018, isderived 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.

Statement of Operations Data:
Net revenues ....................................................................................
Net income (1) .................................................................................
Basic net income per share ..............................................................
Diluted net income per share ...........................................................
Cash dividends declared per share ..................................................
Operating cash flows .......................................................................
Balance Sheet Data:
Cash and investments (2).................................................................
Total assets ......................................................................................
Long-term debt, net (3)....................................................................
Long-term debt, gross ......................................................................
Net debt (4) ......................................................................................

2018

For the Years Ended December 31,
2017
2016
2015

2014

$7,500
1,813
2.38
2.35
0.34
$1,790$7,017
273
0.36
0.36
0.30
$2,213$6,608
966
1.30
1.28
0.26
$2,155$4,664
892
1.21
1.19
0.23
$1,259$4,408
835
1.14
1.13
0.20
$1,331$4,38017,835
2,671
2,700
—

$4,775
18,668
4,390
4,440
—

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

$1,84015,246
4,074
4,119
2,279

$4,867
14,637
4,319
4,369
—

(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 thenotes 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 ofDecember 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
OPERATIONSBusiness Overview
Activision Blizzard, Inc. is a leading global developer and publisher of interactive entertainment content andservices. 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.

28

28

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 toterminate 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, whichfacilitates digital distribution of Blizzard content and selected Activision content, online social connectivity, and the creationof 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 amulti-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.

29

29

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, ascompared 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 andrecognize 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.

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30

International Sales
International sales are a fundamental part of our business. An important element of our international strategy is todevelop 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 inAustralia, 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 materiallyand 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 isthe 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 fromdeferrals.
Net bookings was as follows (amounts in millions):
For the years ended
December 31,
2018
2017
2016

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

$7,262$7,156$6,599

Increase(Decrease)2018 v 2017

Increase(Decrease)2017 v 2016

$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 WarfareTM (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 nocomparable 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.

3131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, andthe continued strength of microtransactions; and•net bookings from Crash BandicootTM 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: BlackOps 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 thenumber 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

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

53
35
268
356

September 30,
2018

June 30,
2018

46
37
262
345

45
37
270
352

March 31,
2018

51
38
285
374

December 31,
2017

55
40
290
385

September 30,
2017

49
42
293
384

Average MAUs increased by 11 million, or 3%, for the three months ended December 31, 2018, as compared to thethree months ended September 30, 2018. The increase in Activision’s average MAUs is driven by the Call of Duty franchise,3232

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 thethree months ended December 31, 2017. The year-over-year decrease in King’s average MAUs is due to decreases acrossKing’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 morecommonplace 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 ourother 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 GamesOur fans spend significant time investing in our franchises through purchases of our game content, whether throughpurchases 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 theseadjacent 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 saleof 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 arecompeting 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 fromvideo games based on a few popular franchises and these video games have been responsible for a disproportionately highpercentage 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 inestablished 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 aneffort 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.

33

33

Overall, we do expect that a limited number of popular franchises will continue to produce a disproportionately highpercentage 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 andmicrotransactions, 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 orPC 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 thecalendar 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 in2018 was 39%, as compared to 52% in 2013.
OutlookIn 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 thefirst half of 2019. In addition, we expect to deliver ongoing content for our various franchises, including continued in-gamecontent 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 andto 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 acrossthe business, which we believe will enable us to provide better opportunities for talent, and greater expertise andscale on behalf of our business units.

We expect to incur aggregate pre-tax restructuring charges of approximately $150 million in 2019, related toseverance, 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 theaggregate charge). We expect the majority of these charges to be incurred in the first quarter of 2019, with most of thebalance 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.

34

34

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 apercentage of associated revenues:

Net revenues
Product sales ............................................................................................
Subscription, licensing, and other revenues ............................................
Total net revenues .......................................................................................
Costs and expenses
Cost of revenues—product sales:
Product costs........................................................................................
Software royalties, amortization, and intellectual property licenses ...
Cost of revenues—subscription, licensing, and other:Game operations and distribution costs...............................................
Software royalties, amortization, and intellectual property licenses ...
Product development ...............................................................................
Sales and marketing.................................................................................
General and administrative ......................................................................
Total costs and expenses .............................................................................
Operating income ........................................................................................
Interest and other expense (income), net .....................................................
Loss on extinguishment of debt (1) .............................................................
Income before income tax expense .............................................................
Income tax expense .....................................................................................
Net income ..................................................................................................

(1)

2018

For the Years Ended December 31,
2017
2016

$2,255 30%
5,245
70
7,500 100

719
371

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

32
16

733
300

35
14

1,028
20
399
8
1,101
15
1,062
14
832
11
5,512
73
1,988
27
71
1
40
1
1,877
25
64
1
$1,813 24%

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

20
10
15
20
11
81
19
2
—
16
13
4%

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

741
331

34
15

851
19
471
11
958
14
1,210
18
634
10
5,196
79
1,412
21
214
3
92
1
1,106
17
140
2
$966 15%

Represents the loss on extinguishment of debt we recognized associated with our debt financing activities asfollows:•

the 2018 loss on extinguishment is comprised of a $25 million premium payment and an $8 million write-off ofunamortized discount and deferred financing costs associated with the redemption in August 2018 of ourunsecured senior notes due September 2023 that we issued on September 19, 2013 (the “2023 Notes”), alongwith a $7 million write-off of unamortized discount and deferred financing costs associated with theextinguishment of our outstanding term loans;•the 2017 loss on extinguishment is comprised of a $12 million write-off of unamortized discount and deferredfinancing 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 ofunamortized discount and financing costs of $29 million associated with the extinguishment of certain term loanand senior note facilities through our refinancing activities.

35

35

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

2018

Consolidated net revenues ....................................
Net effect from recognition (deferral) ofdeferred net revenues ........................................

2017

For the Years Ended December 31,
Increase/
Increase/(decrease)(decrease)% Change
20162018 v 2017 2017 v 2016 2018 v 2017

$7,500 $7,017 $6,608
238

(139)

9

$483

$409

377

(148)

% Change2017 v 20167%

6%

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 nocomparable release in 2016, and by revenues recognized in connection with the sale of our Destiny publishingrights 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 Callof Duty: WWII, and (4) revenues from the Spyro Reignited Trilogy, which was released in November 2018, withno 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 toin-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 priorcatalog 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, thecomparable 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

36

36

•

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 Recognized2018 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 recognizedfrom 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 ofCall 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 in2016 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 anegative 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.

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37

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 ourchief 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 inmillions):

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

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

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

Activision$2,458—$2,458$1,011

Activision$2,628—$2,628$1,005

Activision$2,220—$2,220$788

For the Year Ended
December 31, 2018
Blizzard
King

Total

$2,23853$2,291$685$6,78253$6,835$2,446$2,086—$2,086$750

For the Year Ended
December 31, 2017
Blizzard
King

Total

$2,12019$2,139$712$6,74619$6,765$2,417$1,998—$1,998$700

For the Year Ended
December 31, 2016
Blizzard
King

Total

$2,439—$2,439$995$6,245—$6,245$2,320$1,586—$1,586$537

Increase / (decrease) 2018 v 2017
Activision Blizzard
King
Total

$(170)—$(170)
$6

38

$88
—
$88
$50

$36
34
$70
$29

Increase / (decrease) 2017 v 2016
Activision Blizzard
King
Total

Intersegment revenues reflect licensing and service fees charged between segments.

38

$118
34
$152
$(27)

$408
—
$408
$217

$(319)
19$(300)$(283)$412 $501—
19$412 $520$163 $97

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

Reconciliation to consolidated net revenues:
Segment net revenues ................................................................................................................
Revenues from other segments (1) ............................................................................................
Net effect from recognition (deferral) of deferred net revenues (2) ..........................................
Elimination of intersegment revenues (3) .................................................................................
Consolidated net revenues .........................................................................................................
Reconciliation to consolidated income before income tax expense:
Segment operating income ........................................................................................................
Operating income (loss) from other segments (1) .....................................................................
Net effect from recognition (deferral) of deferred net revenues and related cost ofrevenues (2) ...........................................................................................................................
Share-based compensation expense ..........................................................................................
Amortization of intangible assets ..............................................................................................
Fees and other expenses related to the acquisition of King (4) .................................................
Restructuring costs (5) ...............................................................................................................
Other non-cash charges (6) ........................................................................................................
Discrete tax-related items (7) ....................................................................................................
Consolidated operating income .................................................................................................
Interest and other expense (income), net ...................................................................................
Loss on extinguishment of debt .................................................................................................
Consolidated income before income tax expense .....................................................................

For the Years Ended December 31,
2018
2017
2016

$6,835480238(53)$7,500$6,765
410
(139)
(19)
$7,017$6,245354
9—$6,608$2,44631$2,417(19)$2,320
14

100
(209)
(370)
—
(10)
—
—
1,988
71
40
$1,877

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

(10)
(159)
(706)
(47)
—
—
—
1,412
214
92
$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, wereflect 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 ofKing 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 tothe 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
Activision2018 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 nocomparable full-game release in 2018; and
39

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•

lower revenues from Call of Duty: Infinite Warfare, which was released in November 2016, as compared toprior 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 releasein 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, andthe 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 theperformance 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.

Blizzard2018 vs. 2017
The increase in Blizzard’s net revenues for 2018, as compared to 2017, was primarily due to higher revenues fromWorld 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.
40

40

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
Activision2018 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: BlackOps 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.
Blizzard2018 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
41

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•

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 softwaredevelopment 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 andWorld 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 fromthe 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 ofoperations 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 anegative impact of $30 million on reportable segment net revenues for 2018, 2017, and 2016, respectively, as compared tothe same periods in the previous year. The changes are primarily due to changes in the value of the U.S. dollar relative to theeuro and British pound.

4242Consolidated Results
Net Revenues by Distribution Channel
The following table details our consolidated net revenues by distribution channel (amounts in millions):

Net revenues by distribution
channel:Digital online channels (1) ..............
Retail channels.................................
Other (2) ..........................................
Total consolidated net revenues ......

2018

2017

For the Years Ended December 31,
Increase/
Increase/(decrease)(decrease)20162018 v 20172017 v 2016

$5,786
1,107
607$7,500$5,4791,033
505$7,017$4,865
1,386
357$6,608

$307
74
102
$483

% Change2018 v 2017

% Change2017 v
2016

6%
7
20
7

13%
(25)
41
6

$614
(353)
148
$409

(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 priorcatalog releases, driven by the downloadable content pack, Zombies Chronicles, which was released in May
2017, and the continued strength of microtransactions.
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The increase was partially offset by lower revenues recognized from Call of Duty: Infinite Warfare, as compared tothe 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 toCall 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 releasein 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, thecomparable 2016 title.

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

Net revenues by geographic
region:Americas ........................................
EMEA (1) ......................................
Asia Pacific ....................................
Consolidated net revenues .................
(1)

2018

2017

For the Years Ended December 31,
Increase/
Increase/(decrease)(decrease)20162018 v 2017 2017 v 2016

$3,8802,618
1,002$7,500$3,6072,464
946$7,017$3,423
2,221
964$6,608

$273
154
56
$483

$184
243
(18)
$409

% Change2018 v 2017

% Change2017 v 2016

8%
6
6
7

5%
11
(2)
6

“EMEA” consists of the Europe, Middle East, and Africa geographic regions.

Americas2018 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;

44

44

•

higher revenues recognized from Call of Duty: WWII, which was released in November 2017, as compared toCall 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 priorcatalog 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 tothe 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 ourDistribution business, primarily due to higher sales during the holiday season.
Asia Pacific2018 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 withthe 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.
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2017 vs. 2016
The slight decrease in net revenues in the Asia Pacific region for 2017, as compared to 2016, was primarily due toslightly lower revenues recognized from Overwatch and Hearthstone, mostly offset by higher revenues from King titles andCrash Bandicoot N. Sane Trilogy.
Net Revenues by Platform
The following tables detail our net revenues by platform (amounts in millions):2018

Net revenues by platform:
Console ...............................................................
PC .......................................................................
Mobile and ancillary (1) .....................................
Other (2) .............................................................
Total consolidated net revenues .............................

2017

For the Years Ended December 31,
Increase/
Increase/(decrease)(decrease)% Change
20162018 v 2017 2017 v 2016 2018 v 2017

$2,538 $2,389 $2,453
2,180 2,042 2,124
2,175 2,081 1,674
607
505
357
$7,500 $7,017 $6,608

$149
138
94
102
$483

$(64)
(82)
407
148
$409

% Change2017 v 2016

6%
7
5
20
7

(3)%
(4)
24
41
6

(1)

Net revenues from “Mobile and ancillary” include revenues from mobile devices, as well as non-platform-specificgame-related revenues, such as standalone sales of toys and accessories from our Skylanders® franchise and otherphysical 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.

Console2018 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 toCall 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, thecomparable 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 priorcatalog 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
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•

higher revenues recognized from Call of Duty: WWII, as compared to Call of Duty: Infinite Warfare, thecomparable 2016 title.

PC
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 releasedin 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 forthe partial period following the King Closing Date, as well as higher revenues from the Candy Crush franchise due toin-game events and features.
The increase was partially offset by lower revenues from sales of standalone toys and accessories from theSkylanders franchise.

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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):

Cost of revenues—product sales:
Product costs ...................................................
Software royalties, amortization,
intellectual property licenses ....................
Cost of revenues—subscription,
licensing, and other revenues:
Game operations and distribution costs ..........
Software royalties, amortization,
intellectual property licenses ....................
Total cost of revenues .....................................

Year Ended
December 31,
2018

% of
associatednet revenues

Year Ended
December 31,
2017

% of
associatednet revenues

Year Ended
December 31,
2016

% of
associatednet revenues

Increase(Decrease)2018 v 2017

Increase(Decrease)2017 v 2016

$719

32%

$733

35%

$741

34%

$(14)

$(8)

371

16

300

14

331

15

71

(31)

1,028

20

984

20

851

19

44

133

399
$2,5178484$2,50110471$2,394

11

(85)
$16

13
$107

34%

36%

36%

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 ourrelatively 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.
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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 ofinternally-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 otherrevenues for 2017 were comparable to 2016.
Product Development (amounts in millions)Year Ended
December 31,
2018
Product development .........
$1,101% ofconsolidated
net revenues
15%

Year Ended
December 31,
2017$1,069% ofconsolidated
net revenues
15%

Year Ended
December 31,
2016
$958

% of
consolidated
net revenues
14%

Increase
Increase(Decrease)(Decrease)2018 v 2017 2017 v 2016
$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 werepartially 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
Sales and marketing ...........
$1,062% ofconsolidated
net revenues
14%

Year Ended
December 31,
2017$1,378% ofconsolidated
net revenues
20%

Year Ended
December 31,
2016$1,210% ofconsolidated
net revenues
18%

Increase
Increase(Decrease)(Decrease)2018 v 2017 2017 v 2016$(316)$1682018 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 ouracquisition 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 SagaTM 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.

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49

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

$832

11%

$760

11%

$634

10%

$72

$126

General andadministrative................

2018 vs. 2017
The increase in general and administrative expenses for 2018, as compared to 2017, was primarily due to an increaseof $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 andadjacent 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
Interest and otherexpense (income),
net..................................

$71

% 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

1%

$146

2%

$214

3%

$(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

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•

a decrease of $22 million in interest expense and amortization of deferred financing costs associated with ourdebt 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 ourlower total outstanding debt and lower interest rates on our current debt instruments as a result of our refinancing activities in2016 and 2017. See further discussion below under “Liquidity and Capital Resources.”
Income Tax Expense (amounts in millions)

Income tax expense .........

Year Ended
December 31,
2018

% of
PretaxincomeYear Ended
December 31,
2017

% of
PretaxincomeYear Ended
December 31,
2016

% of
PretaxincomeIncrease(Decrease)2018 v 2017

Increase(Decrease)2017 v 2016

$64

3%

$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 year2018 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, recognitionof excess tax benefits from shared-based payments, and research and development (“R&D”) credits, partially offset bychanges 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, and22 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 andinterpretations thereof, developments in tax audits and other matters, and variations in the estimated and actual level ofannual 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 primaryadjustments related to the Closing Agreement were recognized in the second quarter of 2018 and consisted of a tax expenseof $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 thelikelihood 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
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reassess this determination quarterly and record a tax benefit if and when future evidence allows for a partial or full release ofthis 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 areasonable 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 andremeasurement 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 apositive 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.

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Liquidity and Capital Resources
We believe our ability to generate cash flows from operating activities is one of our fundamental financial strengths.
In the near term, we expect our business and financial condition to remain strong and to continue to generate significant
operating cash flows, which, we believe, in combination with our existing balance of cash and cash equivalents andshort-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 ofliquidity, which are available to us to fund cash outflows such as our anticipated dividend payments, share repurchases, andscheduled debt maturities, include our cash and cash equivalents, short-term investments, and cash flows provided byoperating activities.
As of December 31, 2018, the amount of cash and cash equivalents held outside of the U.S. by our foreignsubsidiaries 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)2018

Cash and cash equivalents .................................................................................................
Short-term investments ......................................................................................................
Percentage of total assets ...................................................................................................

Net cash provided by operating activities .............................
Net cash used in investing activities ......................................
Net cash (used in) provided by financing activities ..............
Effect of foreign exchange rate changes ...............................
Net increase (decrease) in cash and cash equivalents andrestricted cash ....................................................................

$4,225155$4,38025%

For the Years Ended
December 31,
Increase(Decrease)20172018 v 2017

$4,71362$4,77526%$(488)
93$(395)

2018

For the Years Ended December 31,
Increase(Decrease)
2017
2016
2018 v 2017

$1,790(230)(2,020)(31)$2,213
(207)
(624)
76

$2,155(4,729)500(56)$(423)(23)(1,396)
(107)

$58
4,522
(1,124)132$(491)$1,458$(2,130)$(1,949)$3,588

Increase(Decrease)2017 v 2016

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
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53

•

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 andshare-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 increasein 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 decreasein 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, andrepayments 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;

54

54

•

higher tax payments made for net share settlements on restricted stock units of $94 million for 2018, ascompared 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 apremium 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 anegative 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 infull 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 statementof operations of $33 million, comprised of premium payments of $25 million and a write-off of unamortizeddiscount 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 deferredfinancing 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 otherthings, 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):
Gross
Carrying
Amount2021 Notes ..................................................................................................
2022 Notes ..................................................................................................
2026 Notes ..................................................................................................
2027 Notes ..................................................................................................
2047 Notes ..................................................................................................
Total debt ....................................................................................................

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55

$650
400
850
400
400
$2,700December 31, 2018
Unamortized
Discount and DeferredFinancing Costs

$(3)
(3)
(8)
(5)
(10)
$(29)

Net
Carrying
Amount

$647
397
842
395
390
$2,671

A summary of our outstanding debt as of December 31, 2017, is as follows (amounts in millions):
Gross
Carrying
Amount2017 TLA ..................................................................................................
2021 Notes .................................................................................................
2022 Notes .................................................................................................
2023 Notes .................................................................................................
2026 Notes .................................................................................................
2027 Notes .................................................................................................
2047 Notes .................................................................................................
Total debt ...................................................................................................

$990
650
400
750
850
400
400
$4,440December 31, 2017
Unamortized
Discount and DeferredFinancing Costs

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

Net
Carrying
Amount

$982
646
396
741
841
394
390
$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, andsoftware 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 orfinancial 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 andassumptions 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 andassumptions. 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 consideredby management to be critical because they are both important to the portrayal of our financial condition and results ofoperations 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.
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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 torevenue recognition. The new standard replaces all current U.S. GAAP guidance on this topic, eliminating allindustry-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 forthe console, PC, and mobile platforms, as well as through the licensing of our intellectual property. Our products spanvarious 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 thepurchase of a full game;•microtransactions, which typically provide relatively small pieces of additional in-game content orenhancements to gameplay; and•subscriptions to players in our World of Warcraft franchise, which provide continual access to the gamecontent.

When control of the promised products and services is transferred to our customers, we recognize revenue in theamount 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 orservices.

Certain products are sold to customers with a “street date” (which is the earliest date these products may be sold byretailers). For these products, we recognize revenues on the later of the street date and the date the product is sold to ourcustomer. For digital full-game downloads sold to customers, we recognize revenue when it is available for download or isactivated for gameplay. Revenues are recorded net of taxes assessed by governmental authorities that are imposed at the timeof 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 thetiming 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 ourcustomer and payment for that product or service will be one year or less.

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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 priceprotection 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 theappearance of our products in a customer’s national circular ad, are recorded as “Sales and marketing” expense when thebenefit from the sales incentive is separable from sales to the same customer and we can reasonably estimate the fair value ofthe good or service.
Products with Online Functionality
For our software products that include both offline functionality (i.e., do not require an Internet connection toaccess) 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 andother observable inputs to estimate the transaction price for the license, since we do not generally sell the software license ona standalone basis. These products may be sold in a bundle with other products and services, which often results in therecognition 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 thelicense 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 therelated 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 forthe player. Similar to our software products with online functionality, these arrangements may include other products andservices, 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 throughBlizzard’s servers and is generally sold on a subscription-only basis. Revenues associated with the sales of subscriptions aredeferred 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.”

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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. Thesearrangements 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 notlimited to, prior selling prices, prices charged separately by other third-party vendors for similar service offerings, and acost-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 futurespecified 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 soldby 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 witha 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 consumablevirtual 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 thelicensing 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 orover 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 alicense of our intellectual property to play the game offline, but also depend on a significant level of integration andinterdependency with the online functionality. In these cases, significant judgment is required to determine whether thislicense 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 performanceobligation 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
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previously released games, and, to the extent publicly available, the service periods of our competitors’ games that are similarin 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 issubjective and requires management’s judgment. Future usage patterns may differ from historical usage patterns, andtherefore 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 GamesStore, 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 theApple 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 accordancewith 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 thefinancial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses andtax 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 aresult 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 berealizable in the future, an adjustment to the valuation allowance would be charged to tax expense in the period suchdetermination 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 mannerinconsistent with management’s expectations could have a material impact on our business and results of operations in aninterim 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 matterswill not be different from that which is reflected in our historical income tax provisions and accruals. We adjust thesereserves 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 theprovision for income taxes in the period in which such determination is made. The provision for income taxes includes theimpact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest andpenalties.
Our provision for income taxes is subject to volatility and could be adversely impacted by: (1) changes in the mix ofearnings 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
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accounting guidance for uncertainty in income taxes applies to all income tax positions, including the potential recovery ofpreviously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes. In addition, we aresubject 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 theadequacy 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 wasenacted. 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 repatriatedearnings of foreign subsidiaries.
On December 22, 2017, the SEC staff issued SAB 118, which provided guidance on how to account for the effectsof 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 foreignsubsidiaries 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 ofcurrent 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 toprevent excess inventory in the channel. We benchmark units to be shipped to our customers using historical and industrydata.
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 bysuch customers to us with respect to open and/or future invoices. The conditions our customers must meet to be granted theright to return products or receive price protection credits include, among other things, compliance with applicable tradingand payment terms, and consistent return of inventory and delivery of sell-through reports to us. We may also consider otherfactors, including achievement of sell-through performance targets, the facilitation of slow-moving inventory, and othermarket factors.
Significant management judgments and estimates with respect to potential future product returns and priceprotection related to current period product revenues must be made and used when establishing the allowance for returns andprice 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 ofour products by the end consumer. The following factors are used to estimate the amount of future returns and priceprotection 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 retailchannel inventory; our warehouse on-hand inventory levels; the title’s recent sell-through history (if available); marketingtrade 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 priceprotection could vary materially from our allowance estimates due to a number of reasons, including, among others: a lack ofconsumer acceptance of a title; the release in the same period of a similarly themed title by a competitor; or technologicalobsolescence due to the emergence of new hardware platforms. There may be material differences in the amount and timingof 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.

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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. Technologicalfeasibility of a product requires both technical design documentation and game design documentation, or the completed andtested product design and a working model. Significant management judgments and estimates are utilized in the assessmentof 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 projectwill 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 beabandoned 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 ofrevenues—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 productsthat have been released in prior periods, the primary evaluation criterion is the actual performance of the title to which thecosts 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 ofcomparable titles; orders for the product prior to its release; general market conditions; and, for any sequel product, estimatedperformance 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 theoriginally forecasted amounts utilized in the initial recoverability analysis, the net realizable value may be lower thanoriginally estimated in any given quarter, which could result in an impairment charge. Material differences may result in theamount 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 asingle 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 theincome 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 thedelayed 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 todetermine 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 estimatedfair value resulting from the financial models or the related accounting conclusion reached. For example, a relatively smallchange in the estimated fair value of an asset may change a conclusion as to whether an asset is impaired. While we are6262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, theexpected cost to extinguish the liability or our expectations related to the timing and the successful completion ofdevelopment of an acquired in-process technology. Such estimates are inherently difficult and subjective and can have amaterial 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 ofidentifiable 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 dispositionof 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 fairvalue of the asset group. We did not record an impairment charge to any of our definite-lived intangible assets as ofDecember 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 (ifnecessary) 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 andassumptions 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. Theseestimates 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 futureforecasts 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—weassumed 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 fairvalue 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 fairvalue. At December 31, 2018, 2017, and 2016, we concluded that no impairment had occurred and that no impairment was6363reasonably likely to occur. In determining the fair value of these trade names, we assumed a discount rate of 9.5%, androyalty saving rates of approximately 1.5%. Changes in our assumptions underlying our estimates of fair value, which will bea 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 forwhich 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 ourstock 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’scommon 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 andsenior 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 therequisite 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 thedate of grant incorporates into the valuation the possibility that the market condition may not be satisfied. Provided that therequisite service is rendered, the total fair value of the market-based restricted stock units at the date of grant must berecognized 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 theconsolidated 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 tothe 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 Reporton 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 andunsatisfied 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 andcontinues 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:
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•

The accounting for our sales of our games with significant online functionality for which we do not havevendor-specific objective evidence (“VSOE”) for unspecified future updates and ongoing online services
provided. Under the prior accounting standards, VSOE for undelivered elements was required. Thisrequirement was eliminated under the new revenue accounting standard. Accordingly, we are required torecognize as revenue a portion of the sales price upon delivery of this software, as compared to recognizing theentire 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 ofrevenue recognized upon delivery of games to our customers is analyzed on a title-by-title basis and maychange 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 ofcash 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” whenreconciling 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 recognitionand 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 thestandard 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
LeasesIn 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, and65

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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 ontransition, 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 oflease 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 offoreign 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 ourintercompany 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 arelarge 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 thenotes 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):

Foreign Currency:
Buy USD, Sell Euro ..............................................................................

As of December 31,
2018
Notional
Fair value
amountgain (loss)

$723

$12

As of December 31,
2017
Notional
Fair value
amountgain (loss)

$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 withthe 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):
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December 31, 2018, for Cash Flow Hedges that had settled but were deferred and will be amortized into earnings, along withthe 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,
2018
2017
2016

66

Cash Flow Hedges ................................................................................................... $7$(1)

Statement of
Operations
Classification$4

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
Notional
Fair value
amountgain (loss)

Foreign Currency:
Buy USD, Sell GBP ................................................................

$55

As of December 31,
2017
Notional
Fair value
amountgain (loss)

$1

$—

$—

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 ouroutstanding 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 andmust be reinvested at the then-current market rates, interest income on a portfolio consisting of cash, cash equivalents, orshort-term securities is more subject to market fluctuations than a portfolio of longer-term securities. Conversely, the fairvalue 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.

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Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm ..............................................................................................
Consolidated Balance Sheets at December 31, 2018 and 2017..........................................................................................
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017, and 2016 .................................
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017, and 2016 .............
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2018, 2017, and2016 ................................................................................................................................................................................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 2016 ................................
Notes to Consolidated Financial Statements ......................................................................................................................
Schedule II—Valuation and Qualifying Accounts at December 31, 2018, 2017, and 2016 ..............................................

F-1
F-3
F-4
F-5
F-6
F-7
F-8
F-50

Other financial statement schedules are omitted because the information called for is not applicable or is showneither in the Consolidated Financial Statements or the Notes thereto.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE
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 andforms, 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 systemof 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, hasevaluated the effectiveness of our disclosure controls and procedures at December 31, 2018, the end of the period covered bythis 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 participationof our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness, as ofDecember 31, 2018, of our internal control over financial reporting using the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on thisevaluation, our management concluded that our internal control over financial reporting was effective as of December 31,
2018.

68

68

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 byPricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in thisAnnual 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, hasevaluated 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 Statementfor our 2019 Annual Meeting of Shareholders entitled “Executive Compensation” and “Director Compensation” to be filedwith 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 Statementfor 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 Statementfor 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 Statementfor our 2019 Annual Meeting of Shareholders entitled “Audit-Related Matters” to be filed with the SEC.

69

69

PART IV
Item 15.
(a)

EXHIBITS, FINANCIAL STATEMENT SCHEDULE

12

3
Item 16.

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 showneither 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.
FORM 10-K SUMMARY

Not applicable.

70

70

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, thefinancial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows foreach 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 statementof 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 inaccordance 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 andperform 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 respondto 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 effectivenessof internal control based on the assessed risk. Our audits also included performing such other procedures as we considerednecessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

F-1

F-1

Definition and Limitations of Internal Control over Financial Reporting
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internal
control overfinanciala process designed to provide reasonable assurance
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We have served as the Company’s auditor since 2008.

F-2

F-2
F-2

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Amounts in millions, except share data)

AssetsCurrent assets:
Cash and cash equivalents ...............................................................................
Accounts receivable, net of allowances of $190 and $279, at December 31,
2018 and December 31, 2017, respectively ................................................
Inventories, net ................................................................................................
Software development .....................................................................................
Other current assets .........................................................................................
Total current assets ......................................................................................
Software development .....................................................................................
Property and equipment, net ............................................................................
Deferred income taxes, net ..............................................................................
Other assets ......................................................................................................
Intangible assets, net ........................................................................................
Goodwill ..........................................................................................................
Total assets ..................................................................................................
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable.............................................................................................
Deferred revenues ............................................................................................
Accrued expenses and other liabilities ............................................................
Total current liabilities ................................................................................
Long-term debt, net .........................................................................................
Deferred income taxes, net ..............................................................................
Other liabilities ................................................................................................
Total liabilities .............................................................................................
Commitments and contingencies (Note 22)
Shareholders’ equity:
Common stock, $0.000001 par value, 2,400,000,000 shares authorized,
1,192,093,991 and 1,186,181,666 shares issued at December 31, 2018and December 31, 2017, respectively .........................................................
Additional paid-in capital ................................................................................
Less: Treasury stock, at cost, 428,676,471 shares at December 31, 2018 andDecember 31, 2017 ......................................................................................
Retained earnings ............................................................................................
Accumulated other comprehensive loss ..........................................................
Total shareholders’ equity ...........................................................................
Total liabilities and shareholders’ equity ....................................................

At December 31,
2018$4,225$4,713

1,035
43
264
539
6,106
65
282
403
482
735
9,762
$17,835

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

$253
1,493
896
2,642
2,671
18
1,147
6,478

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

—
10,963—
10,747(5,563)6,558(601)
11,357$17,835(5,563)
4,916
(638)
9,462
$18,668

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

F-3

F-3

At December 31,
2017

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(Amounts in millions, except per share data)

Net revenues
Product sales .................................................................................................................................
Subscription, licensing, and other revenues .................................................................................
Total net revenues (Note 2) ..............................................................................................................
Costs and expenses
Cost of revenues—product sales:
Product costs .............................................................................................................................
Software royalties, amortization, and intellectual property licenses ........................................
Cost of revenues—subscription, licensing, and other revenues:
Game operations and distribution costs ....................................................................................
Software royalties, amortization, and intellectual property licenses ........................................
Product development ....................................................................................................................
Sales and marketing ......................................................................................................................
General and administrative ...........................................................................................................
Total costs and expenses ..................................................................................................................
Operating income .............................................................................................................................
Interest and other expense (income), net (Note 17) .........................................................................
Loss on extinguishment of debt ........................................................................................................
Income before income tax expense ..................................................................................................
Income tax expense ..........................................................................................................................
Net income........................................................................................................................................
Earnings per common share
Basic .............................................................................................................................................
Diluted ..........................................................................................................................................
Weighted-average number of shares outstanding
Basic .............................................................................................................................................
Diluted ..........................................................................................................................................

For the Years Ended
December 31,
2018
2017
2016

$2,2555,245
7,500$2,1104,907
7,017$2,196
4,412
6,608

719
371

733
300

741
331

1,028
399
1,101
1,062
832
5,512
1,988
71
40
1,877
64
$1,813

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

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

$2.38
$2.35

$0.36
$0.36

$1.30
$1.28

762
771

754
766

740
754

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

F-4

F-4

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Amounts in millions)
For the Years Ended
December 31,
2018
2017
2016

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

$1,813

$273

$966

(9)
38
5
$34
$1,847

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

(29)
33
—
$4
$970

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

F-5

F-5

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2018, 2017, and 2016
(Amounts and shares in millions, except per share data)

Common Stock
SharesAmountBalance at December 31, 2015 ...............
Components of comprehensive income:Net income ................................................
Other comprehensive income (loss) ..........
Issuance of common stock pursuant toemployee stock options .............................
Issuance of common stock pursuant to
restricted stock units .................................
Restricted stock surrendered for
employees’ tax liability .............................
Share-based compensation expense
related to employee stock options
and restricted stock units ...........................
Share-based compensation assumed inacquisition (see Note 23) ..........................
Dividends ($0.26 per common share) ............
Indemnity on tax attributes assumed inconnection with the PurchaseTransaction (see Note 18) .........................
Balance at December 31, 2016 ...............
Components of comprehensive income:Net income ................................................
Other comprehensive income (loss) ..........
Issuance of common stock pursuant toemployee stock options .............................
Issuance of common stock pursuant to
restricted stock units .................................
Restricted stock surrendered for
employees’ tax liability .............................
Share-based compensation expense
related to employee stock options
and restricted stock units ...........................
Dividends ($0.30 per common share) ............
Balance at December 31, 2017 ...............
Cumulative impact from adoption of
new revenue accounting standard(Note 3) .....................................................
Components of comprehensive
income:Net income ................................................
Other comprehensive income (loss) ..........
Issuance of common stock pursuant toemployee stock options .............................
Issuance of common stock pursuant to
restricted stock units .................................
Restricted stock surrendered for
employees’ tax liability .............................
Share-based compensation expense
related to employee stock options
and restricted stock units ...........................
Dividends ($0.34 per common share) ............
Balance at December 31, 2018 ...............

Treasury Stock
SharesAmountAdditional
Paid-In
CapitalRetained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders’Equity

1,163

$—

(429)

$(5,637)$10,242$4,096$(633)$8,068

—
—

—
—

—
—

—
—

—
—

966
—

—
4

966
4

7

—

—

—

105

—

—

105

7

—

—

—

—

—

—

—

(3)

—

—

—

(116)

—

—

(116)

—

—

—

—

135

—

—

135

—
—

—
—

—
—

—
—

76
—

—
(193)

—
—

76
(193)

—
1,174

—
$—

—
(429)

74
$(5,563)—$10,442—$4,869—$(629)

74$9,119

—
—

—
—

—
—

—
—

—
—

273
—

—
(9)

273
(9)

11

—

—

—

178

—

—

178

2

—

—

—

—

—

—

—

(1)

—

—

—

(54)

—

—

(54)

—
—
1,186

—
—
$—

—
—
(429)

—
—
$(5,563)181—$10,747—(226)$4,916——$(638)

181(226)$9,462

—

—

—

—

—

88

3

91

—
—

—
—

—
—

—
—

—
—

1,813
—

—
34

1,813
34

5

—

—

—

98

—

—

98

2

—

—

—

—

—

—

—

(1)

—

—

—

(93)

—

—

(93)

—
—
1,192

—
—
$—

—
—
(429)

—
—
$(5,563)

211—$10,963—(259)$6,558——$(601)

211(259)$11,357

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

F-6

F-6

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in millions)2018
Cash flows from operating activities:
Net income ......................................................................................................................................................
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes ...............................................................................................................................
Provision for inventories ............................................................................................................................
Depreciation and amortization ...................................................................................................................
Amortization of capitalized software development costs and intellectual property licenses (1) ...............
Loss on extinguishment of debt (Note 13).................................................................................................
Amortization of debt discount and financing costs ...................................................................................
Share-based compensation expense (2) .....................................................................................................
Other ..........................................................................................................................................................
Changes in operating assets and liabilities, net of effect from business acquisitions:
Accounts receivable, net ............................................................................................................................
Inventories .................................................................................................................................................
Software development and intellectual property licenses ..........................................................................
Other assets ................................................................................................................................................
Deferred revenues ......................................................................................................................................
Accounts payable .......................................................................................................................................
Accrued expenses and other liabilities.......................................................................................................
Net cash provided by operating activities .......................................................................................................
Cash flows from investing activities:
Proceeds from maturities of available-for-sale investments ...........................................................................
Purchases of available-for-sale investments ...................................................................................................
Acquisition of business, net of cash acquired (see Note 23) ..........................................................................
Capital expenditures .......................................................................................................................................
Other investing activities ................................................................................................................................
Net cash used in investing activities ...............................................................................................................
Cash flows from financing activities:
Proceeds from issuance of common stock to employees ................................................................................
Tax payment related to net share settlements on restricted stock units ..........................................................
Dividends paid ................................................................................................................................................
Proceeds from debt issuances, net of discounts ..............................................................................................
Repayment of long-term debt .........................................................................................................................
Premium payment for early redemption of note (Note 13) ............................................................................
Other financing activities ................................................................................................................................
Net cash (used in) provided by financing activities ........................................................................................
Effect of foreign exchange rate changes on cash and cash equivalents ...............................................................
Net increase (decrease) in cash and cash equivalents and restricted cash ...........................................................
Cash and cash equivalents and restricted cash at beginning of period ........................................................
Cash and cash equivalents and restricted cash at end of period ...................................................................

For the Years Ended
December 31,
2017
2016

$1,813

$273

$966

20
6
509
489
40
6
209
1

(181)
33
888
311
12
12
176
28

(9)
42
829
321
92
21
147
4

(114)
(5)
(372)
(51)
(122)
(65)
(574)
1,790

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

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

116
(209)
—
(131)
(6)
(230)

80
(135)
—
(155)
3
(207)

—
—
(4,586)(136)(7)(4,729)

99
(94)
(259)
—
(1,740)(25)(1)(2,020)
(31)
(491)
4,720
$4,229

178
(56)
(226)
3,741
(4,251)
—
(10)
(624)
76
1,458
3,262
$4,720

106
(115)
(195)
6,878
(6,104)
(63)
(7)
500
(56)
(2,130)5,392$3,262(1)

Excludes deferral and amortization of share-based compensation expense.

(2)

Includes the net effects of capitalization, deferral, and amortization of share-based compensation expense.
The accompanying notes are an integral part of these Consolidated Financial Statements.

F-7

F-7

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Description of Business
Activision Blizzard, Inc. is a leading global developer and publisher of interactive entertainment content andservices. 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”), as further
described in Note 23. Our consolidated financial statements include the operations of King commencing on the King Closing
Date.
Our 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 retailand 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 ourinternally 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.
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 forthe Destiny franchise to Bungie in exchange for cash and Bungie’s assumption of on-going customer obligations ofActivision. Going forward, Activision no longer has any material rights or obligations related to the Destiny franchise. As aresult of the agreement to terminate the relationship, the Company recognized 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 anddigital 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 LeagueTM, thefirst 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.

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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 actionrole-playing franchise for the PC and console platforms; Hearthstone®, an online collectible card franchise for the PC andmobile platforms; and Overwatch®, a team-based first-person shooter for the PC and console platforms.
(iii) King Digital Entertainment
King Digital Entertainment (“King”) is a leading global developer and publisher of interactive entertainment content
and services, 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-gameadvertising 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™, whichfeatures “match three” games; Farm Heroes™, which also features “match three” games; and Bubble Witch™, whichfeatures “bubble shooter” games.
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 televisioncontent 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 thatprovide warehousing, logistics, and sales distribution services to third-party publishers of interactive
entertainment software, our own publishing operations, and manufacturers of interactive entertainment
hardware.

2. Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts and operations of the Company. Allintercompany accounts and transactions have been eliminated. The consolidated financial statements have been prepared inconformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparationof the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates andassumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results
could differ from these estimates and assumptions.
Certain reclassifications have been made to prior-year amounts to conform to the current period presentation.
The Company considers events or transactions that occur after the balance sheet date, but before the financial
statements are issued, for additional evidence relative to certain estimates or to identify matters that require additional
disclosures.
Cash and Cash Equivalents
We consider all money market funds and highly liquid investments with original maturities of three months or lessat the time of purchase to be “Cash and cash equivalents.”
Investment Securities
Investments in debt securities designated as available-for-sale are carried at fair value, which is based on quoted
market prices for such securities, if available, or is estimated on the basis of quoted market prices of financial instrumentswith similar characteristics. Unrealized gains and losses of the Company’s available-for-sale debt securities are excluded
from earnings and are reported as a component of “Other comprehensive income (loss).”
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Investments with original maturities greater than 90 days and remaining maturities of less than one year are
normally classified within “Other current assets.” In addition, investments with maturities beyond one year may be classified
within “Other current assets” if they are highly liquid in nature and represent the investment of cash that is available forcurrent operations.
The specific identification method is used to determine the cost of securities disposed of, with realized gains andlosses reflected in “Interest and other expense (income), net” in our consolidated statements of operations.
Investments in equity securities which are not accounted for under the equity method and for which there is not areadily determinable fair value are carried at cost, less impairment, and adjusted for changes resulting from observable pricechanges in orderly transactions for identical or similar investment of the same issuer.
Financial Instruments
The carrying amounts of “Cash and cash equivalents,” “Accounts receivable, net of allowances,” “Accounts
payable,” and “Accrued expenses and other liabilities” approximate fair value due to the short-term nature of these accounts.
Our investments in U.S. treasuries, government agency securities, and corporate bonds, if any, are carried at fair value, which
is based on quoted market prices for such securities, if available, or is estimated on the basis of quoted market prices offinancial instruments with similar characteristics.
The Company transacts business in various foreign currencies and has significant international sales and expenses
denominated in foreign currencies, subjecting us to foreign currency risk. To mitigate our foreign currency risk resulting
from our foreign currency-denominated monetary assets, liabilities and earnings and our foreign currency risk related tofunctional currency-equivalent cash flows resulting from our intercompany transactions, we periodically enter into currency
derivative contracts, principally forward contracts. These forward contracts generally have a maturity of less than one year.
The counterparties for our currency derivative contracts are large and reputable commercial or investment banks.
We assess the nature of these derivatives under Financial Accounting Standards Board (“FASB”) AccountingStandards Codification (“ASC”) Topic 815 to determine whether such derivatives should be designated as hedging
instruments. The fair value of foreign currency contracts are estimated based on the prevailing exchange rates of the various
hedged currencies as of the end of the period. We report the fair value of these contracts within “Other current assets,”“Accrued expense and other liabilities,” “Other assets,” or “Other liabilities,” as applicable, in our consolidated balance
sheets.
We do not hold or purchase any foreign currency forward contracts for trading or speculative purposes.
For foreign currency forward contracts which are not designated as hedging instruments under ASC 815, changes inthe estimated fair value of these derivatives are recorded within “General and administrative expenses” and “Interest andother expense, net” in our consolidated statements of operations, consistent with the nature of the underlying transactions.
For foreign currency forward contracts which have been designated as cash flow hedges in accordance with ASC
815, we assess the effectiveness of these cash flow hedges at inception and on an ongoing basis and determine if the hedges
are effective at providing offsetting changes in cash flows of the hedged items. The Company records the changes in theestimated fair value of these derivatives in “Accumulated other comprehensive loss” and subsequently reclassifies the related
amount of accumulated other comprehensive income (loss) to earnings within “General and administrative” or “Netrevenues” when the hedged item impacts earnings, consistent with the nature and timing of the underlying transactions. Cashflows from these foreign currency forward contracts are classified in the same category as the cash flows associated with thehedged item in the consolidated statements of cash flows. We measure hedge ineffectiveness, if any, and if it is determinedthat a derivative has ceased to be a highly effective hedge, the Company will discontinue hedge accounting for the derivative.
Concentration of Credit Risk
Our concentration of credit risk relates to depositors holding the Company’s cash and cash equivalents andcustomers with significant accounts receivable balances.
Our cash and cash equivalents are invested primarily in money market funds consisting of short-term, high-quality
debt instruments issued by governments and governmental organizations, financial institutions and industrial companies.

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Our customer base includes retailers and distributors, including mass-market retailers, first party digital storefronts,
consumer electronics stores, discount warehouses, and game specialty stores in the U.S. and other countries worldwide. We
perform ongoing credit evaluations of our customers and maintain allowances for potential credit losses. We generally do not
require collateral or other security from our customers.
For the year ended December 31, 2018, we had three customers—Apple, Sony Interactive Entertainment, Inc.
(“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 eachaccounted 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 Corporation’s (“Microsoft”), andApple—who accounted for 17%, 14%, and 10%, respectively, of consolidated gross receivables at December 31, 2017. Noother customer accounted for 10% or more of our consolidated gross receivables in the respective periods discussed above.
Inventories and Allowances for Obsolescence
Inventories consist of materials (including manufacturing royalties paid to console manufacturers), labor, andfreight-in costs and are stated at the lower of cost (weighted-average method) or net realizable value. Inventories are relieved
on a weighted-average cost method.
We regularly review inventory quantities on-hand and in the retail channels and will write down inventory on-handbased on excess or obsolete inventories, determined primarily by future anticipated demand for our products. Inventory
write-downs are measured as the difference between the cost of the inventory and net realizable value, based uponassumptions about future demand, which are inherently difficult to assess and dependent on market conditions. At the pointof a loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts andcircumstances do not result in the restoration or increase in that newly established basis.
Software Development Costs and Intellectual Property Licenses
Software development costs include payments made to independent software developers under development
agreements, as well as direct costs incurred for internally developed products. Software development costs are capitalized
once technological feasibility of a product is established and such costs are determined to be recoverable. Technologicalfeasibility of a product requires both technical design documentation and game design documentation, or the completed andtested product design and a working model. Significant management judgments and estimates are utilized in the assessmentof 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 projectwill 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 beabandoned 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 ofrevenues—software royalties, amortization, and intellectual property licenses” based on the ratio of current revenues to total
projected revenues for the specific product, generally resulting in an amortization period of six months to approximately two
years.
Intellectual property license costs represent license fees paid to intellectual property rights holders for use of theirtrademarks, copyrights, software, technology, music or other intellectual property or proprietary rights in the development ofour products. Depending upon the agreement with the rights holder, we may obtain the right to use the intellectual property inmultiple products over a number of years, or alternatively, for a single product. Prior to a product’s release, if and when we
believe capitalized costs are not recoverable, we expense the amounts as part of “Cost of revenues—software royalties,
amortization, and intellectual property licenses.” Capitalized intellectual property costs for products that are canceled or are
expected to be abandoned are charged to “Product development” in the period of cancellation.
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Commencing upon a product’s release, capitalized intellectual property license costs are amortized to “Cost ofrevenues—software royalties, amortization, and intellectual property licenses” based on the ratio of current revenues for the
specific product to total projected revenues for all products in which the licensed property will be utilized. As intellectual
property license contracts may extend for multiple years and can be used in multiple products to be released over a period
beyond one year, the amortization of capitalized intellectual property license costs relating to such contracts may extend
beyond one year.
We evaluate the future recoverability of capitalized software development costs and intellectual property licenses ona quarterly basis. For products that have been released in prior periods, the primary evaluation criterion is the actual
performance of the title to which the costs relate. For products that are scheduled to be released in future periods,
recoverability is evaluated based on the expected performance of the specific products to which the costs relate or in which
the licensed trademark or copyright is to be used. Criteria used to evaluate expected product performance include: historicalperformance 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 performancebased on the performance of the product on which the sequel is based. Further, as many of our capitalized intellectual
property licenses extend for multiple products over multiple years, we also assess the recoverability of capitalized intellectual
property license costs based on certain qualitative factors, such as the success of other products and/or entertainment vehicles
utilizing the intellectual property, whether there are any future planned theatrical releases or television series based on theintellectual property, and the rights holder’s continued promotion and exploitation of the intellectual property.
Significant management judgments and estimates are utilized in assessing the recoverability of capitalized costs. In
evaluating the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales
amounts and estimates of additional costs to be incurred. If revised forecasted or actual product sales are less than theoriginally forecasted amounts utilized in the initial recoverability analysis, the net realizable value may be lower thanoriginally estimated in any given quarter, which could result in an impairment charge. Material differences may result in theamount and timing of expenses for any period if matters resolve in a manner that is inconsistent with management’s
expectations.
Assets Recognized from Costs to Obtain a Contract with a Customer
We apply the practical expedient to expense, as incurred, costs to obtain a contract with a customer when theamortization period would have been one year or less for certain similar contracts in which commissions are paid to internal
personnel or third parties. We believe application of the practical expedient has a limited effect on the amount and timing of
cost recognition. Total capitalized costs to obtain a contract were immaterial as of December 31, 2018.
Long-Lived Assets
Property and Equipment.
Property and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful life of
the asset (i.e., 25 to 33 years for buildings, and 2 to 5 years for computer equipment, office furniture and other equipment).
When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed and any resulting gains orlosses are included in the consolidated statements of operations. Leasehold improvements are amortized using thestraight-line method over the estimated life of the asset, not to exceed the length of the lease. Repair and maintenance costs
are expensed as incurred.
Goodwill and Other Indefinite-Lived Assets.
Goodwill is considered to have an indefinite life and is carried at cost. Acquired trade names are assessed as
indefinite lived assets if there is no foreseeable limits on the periods of time over which they are expected to contribute cash
flows. Goodwill and indefinite-lived assets are not amortized, but are subject to an annual impairment test, as well as between
annual tests when events or circumstances indicate that the carrying value may not be recoverable. We perform our annual
impairment testing at December 31.
Our annual goodwill impairment test is performed at the reporting unit level. As of December 31, 2018 and 2017,
our reporting units are the same as our operating segments. We test goodwill for possible impairment by first determining thefair value of the related reporting unit and comparing this value to the recorded net assets of the reporting unit, including
goodwill. The fair value of our reporting units is determined using an income approach based on discounted cash flow
models. In the event the recorded net assets of the reporting unit exceed the estimated fair value of such assets, we perform asecond step to measure the amount of the impairment, which is equal to the amount by which the recorded goodwill exceeds
the implied fair value of the goodwill after assessing the fair value of each of the assets and liabilities within the reporting
unit. We have determined that no impairment has occurred at December 31, 2018, 2017, and 2016 based upon a set ofassumptions regarding discounted future cash flows, which represent our best estimate of future performance at this time.
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We test indefinite-lived acquired trade names for possible impairment by using a discounted cash flow model toestimate fair value. We have determined that no impairment has occurred at December 31, 2018, 2017, and 2016 based upona set of assumptions regarding discounted future cash flows, which represent our best estimate of future performance at thistime.
Changes in our assumptions underlying our estimates of fair value, which will be a function of our future financial
performance and changes in economic conditions, could result in future impairment charges.
Amortizable Intangible and Other Long-lived Assets.
Intangible assets subject to amortization are carried at cost less accumulated amortization, and amortized over theestimated useful life in proportion to the economic benefits received.
We evaluate the recoverability of our definite-lived intangible assets and other long-lived assets when events orcircumstances indicate a potential impairment exists. We consider certain events and circumstances in determining whether
the carrying value of identifiable intangible assets and other long-lived assets, other than indefinite-lived intangible assets,
may not be recoverable including, but not limited to: significant changes in performance relative to expected operating
results; significant changes in the use of the assets; significant negative industry or economic trends; a significant decline in
our stock price for a sustained period of time; and changes in our business strategy. If we determine that the carrying value
may not be recoverable, we estimate the undiscounted cash flows to be generated from the use and ultimate disposition of theasset group to determine whether an impairment exists. If an impairment is indicated based on a comparison of the asset
groups’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which thecarrying amount of the asset group exceeds its fair value. We did not record an impairment charge to our definite-lived
intangible assets as of December 31, 2018, 2017, and 2016.
Revenue Recognition
In May 2014, the 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 todetermine when and how revenue is recognized. The core principle is that a company should recognize revenue upon thetransfer 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 (collectively, the “new revenue accounting standard”). This is reflected in our significant accounting
policy disclosure for revenue recognition below. Refer to Note 3 for the impact of adoption on our consolidated financial
statements.
We generate revenue primarily through the sale of our interactive entertainment content and services, principally forthe console, PC, and mobile platforms, as well as through the licensing of our intellectual property. Our products spanvarious 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 thepurchase of a full game;•microtransactions, which typically provide relatively small pieces of additional in-game content orenhancements to gameplay; and•subscriptions to players in our World of Warcraft franchise, which provide continual access to the gamecontent.

When control of the promised products and services is transferred to our customers, we recognize revenue in theamount 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;
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•

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 orservices.

Certain products are sold to customers with a “street date” (which is the earliest date these products may be sold byretailers). For these products, we recognize revenues on the later of the street date and the date the product is sold to ourcustomer. For digital full-game downloads sold to customers, we recognize revenue when it is available for download or isactivated for gameplay. Revenues are recorded net of taxes assessed by governmental authorities that are imposed at the timeof 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 thetiming 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 ourcustomer 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 priceprotection 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 theappearance of our products in a customer’s national circular ad, are recorded as “Sales and marketing” expense when thebenefit from the sales incentive is separable from sales to the same customer and we can reasonably estimate the fair value ofthe good or service.
Products with Online Functionality
For our software products that include both offline functionality (i.e., do not require an Internet connection toaccess) 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 andother observable inputs to estimate the transaction price for the license, since we do not generally sell the software license ona standalone basis. These products may be sold in a bundle with other products and services, which often results in therecognition 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 thelicense 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 therelated 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.

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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 forthe player. Similar to our software products with online functionality, these arrangements may include other products andservices, 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 throughBlizzard’s servers and is generally sold on a subscription-only basis. Revenues associated with the sales of subscriptions aredeferred 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. Thesearrangements 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 notlimited to, prior selling prices, prices charged separately by other third-party vendors for similar service offerings, and acost-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 futurespecified 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 soldby 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 witha 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 consumablevirtual 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 thelicensing 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 orover time.

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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 alicense of our intellectual property to play the game offline, but also depend on a significant level of integration andinterdependency with the online functionality. In these cases, significant judgment is required to determine whether thislicense 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 performanceobligation 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 ourpreviously released games, and, to the extent publicly available, the service periods of our competitors’ games that are similarin 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 issubjective and requires management’s judgment. Future usage patterns may differ from historical usage patterns, andtherefore 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 GamesStore, Sony’s PSN, the Apple App Store, and the Google Play Store, to determine whether revenues should be reported grossor net of fees retained by the storefront. Key indicators that we evaluate in determining whether we are the principal in thesale (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 theApple 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.
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 ofcurrent 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 toprevent excess inventory in the channel. We benchmark units to be shipped to our customers using historical and industrydata.
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
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such customers to us with respect to open and/or future invoices. The conditions our customers must meet to be granted theright to return products or receive price protection credits include, among other things, compliance with applicable tradingand payment terms and consistent return of inventory and delivery of sell-through reports to us. We may also consider otherfactors, including achievement of sell-through performance targets, the facilitation of slow-moving inventory, and othermarket factors.
Significant management judgments and estimates with respect to potential future product returns and priceprotection related to current period product revenues must be made and used when establishing the allowance for returns andprice 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 ofour products by the end consumer, and record revenue for the transferred products in the amount of consideration to which
we expect to be entitled. The following factors are used to estimate the amount of future returns and price protection for aparticular title: historical performance of titles in similar genres; historical performance of the hardware platform; historicalperformance 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; ourwarehouse on-hand inventory levels; the title’s recent sell-through history (if available); marketing trade programs; and theperformance of competing titles. The relative importance of these factors varies among titles depending upon, among otherthings, genre, platform, seasonality, and sales strategy.
Based upon historical experience, we believe that our estimates are reasonable. However, actual returns and priceprotection could vary materially from our allowance estimates due to a number of reasons, including, among others: a lack ofconsumer acceptance of a title, the release in the same period of a similarly themed title by a competitor, or technologicalobsolescence due to the emergence of new hardware platforms. There may be material differences in the amount and timingof 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.
Contract Balances
We generally record a receivable related to revenue when we have an unconditional right to invoice and receive
payment, and record deferred revenue when cash payments are received or due in advance of our performance, even if
amounts are refundable.
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in our accounts receivablebalance. In estimating the allowance for doubtful accounts, we analyze the age of current outstanding account balances,
historical bad debts, customer concentrations, customer creditworthiness, current economic trends, and changes in ourcustomers’ payment terms and their economic condition, as well as whether we can obtain sufficient credit insurance. Any
significant changes in any of these criteria would affect management’s estimates in establishing our allowance for doubtful
accounts.
Deferred revenue is comprised primarily of unearned revenue related to the sale of products with online
functionality or online hosted arrangements. We typically invoice, and collect payment for, these sales at the beginning of thecontract period and recognize revenue ratably over the estimated service period. Deferred revenue also includes payments
for: product sales pending delivery or activation; subscription revenues; licensing revenues with fixed minimum guarantees;
and other revenues for which we have been paid in advance and earn the revenue when we transfer control of the product orservice.
Refer to Note 12 for further information, including changes in deferred revenue during the period.
Shipping and Handling
Shipping and handling costs consist primarily of packaging and transportation charges incurred to move finishedgoods to customers. We recognize all shipping and handling costs as an expense in “Cost of revenues-product costs,”
including those incurred when control of the product has already transferred to the customer.

F-17

F-17

Cost of Revenues
Our cost of revenues consist of the following:
Cost of revenues—product sales:(1)“Product costs”—includes the manufacturing costs of goods produced and sold. These generally include
product costs, manufacturing royalties (net of volume discounts), personnel-related costs, warehousing, anddistribution costs. We generally recognize volume discounts when they are earned (typically in connection
with the achievement of unit-based milestones).

(2)“Software royalties, amortization, and intellectual property licenses”—includes the amortization ofcapitalized software costs and royalties attributable to product sales revenues. These are costs capitalizedon the balance sheet until the respective games are released, at which time the capitalized costs areamortized. Also included is amortization of intangible assets recognized in purchase accounting attributableto product sales revenues.

Cost of revenues—subscription, licensing, and other revenues:(1)“Game operations and distribution costs”—includes costs to operate our games, such as customer service,
Internet bandwidth and server costs, platform provider fee, and payment provider fees, along with costs to
associated with our esports activities.

(2)“Software royalties, amortization, and intellectual property licenses”—includes the amortization ofcapitalized software costs and royalties attributable to subscription, licensing and other revenues. These arecosts capitalized on the balance sheet until the respective games are released, at which time the capitalized
costs are amortized. Also included is amortization of intangible assets recognized in purchase accounting
attributable to subscription, licensing and other revenues.

Advertising Expenses
We expense advertising as incurred, except for production costs associated with media advertising, which aredeferred and charged to expense when the related advertisement is run for the first time. Advertising expenses for the years
ended December 31, 2018, 2017, and 2016 were $631 million, $708 million, and $641 million, respectively, and are included
in “Sales and marketing” in the consolidated statements of operations.
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. In accordancewith 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 thefinancial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses andtax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities due to a change in tax rates is recognized in income in the period that includes the enactment date. We
evaluate deferred tax assets each period for recoverability. For those assets that do not meet the threshold of “more likely
than not” that they will be realized in the future, a valuation allowance is recorded.
We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to betaken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in “Income tax
expense.”On December 22, 2017, tax reform legislation known as the Tax Cuts and Jobs Act (the “U.S. Tax Reform Act”)
was enacted in the United States. The U.S. Tax Reform Act, among other things, reduced the U.S. corporate income tax ratefrom 35% to 21% beginning in 2018 and implemented a modified territorial tax system that imposed a one-time tax ondeemed repatriated earnings of foreign subsidiaries (“Transition Tax”).
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides
guidance on how to account for the effects of the U.S. Tax Reform Act under ASC 740. SAB 118 enabled companies torecord 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 ouranalysis 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 global intangible low-taxed income (“GILTI”). Refer toNote 18 for further details regarding this policy election.
F-18

F-18

Excess tax benefits and tax deficiencies are recorded as an income tax expense or benefit in the consolidated
statement of operations and the tax effects of exercised or vested awards are treated as discrete items in the reporting period
in which they occur.
Foreign Currency Translation
All assets and liabilities of our foreign subsidiaries who have a functional currency other than U.S. dollars aretranslated into U.S. dollars at the exchange rate in effect at the balance sheet date, and revenue and expenses are translated ataverage exchange rates during the period. The resulting translation adjustments are reflected as a component of“Accumulated other comprehensive loss” in shareholders’ equity.
Earnings (Loss) Per Common Share“Basic (loss) earnings per common share” is computed by dividing income (loss) available to common shareholders
by the weighted-average number of common shares outstanding for the periods presented. “Diluted earnings (loss) per
common share” is computed by dividing income (loss) available to common shareholders by the weighted-average number ofcommon shares outstanding, increased by the weighted-average number of common stock equivalents. Common stock
equivalents are calculated using the treasury stock method and represent incremental shares issuable upon exercise of ouroutstanding options. However, potential common shares are not included in the denominator of the diluted earnings (loss) per
common share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss isrecorded.
When we determine whether instruments granted in share-based payment transactions are participating securities,
unvested share-based awards which include the right to receive non-forfeitable dividends or dividend equivalents are
considered to participate with common stock in undistributed earnings. With participating securities, we are required to
calculate basic and diluted earnings (loss) per common share amounts under the two-class method. The two-class method
excludes from the earnings (loss) per common share calculation any dividends paid or owed to participating securities andany undistributed earnings considered to be attributable to participating securities.
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 forwhich 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 ourstock 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’scommon 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 andsenior 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 therequisite 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 thedate of grant incorporates into the valuation the possibility that the market condition may not be satisfied. Provided that therequisite service is rendered, the total fair value of the market-based restricted stock units at the date of grant must berecognized as compensation expense even if the market condition is not achieved. However, the number of shares that
ultimately vest can vary significantly with the performance of the specified market criteria.
For share-based compensation grants that are liability classified, we update our grant date valuation at each reporting
period and recognize a cumulative catch-up adjustment for changes in the value related to the requisite service alreadyrendered.
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F-19

Loss Contingencies
ASC Topic 450 governs the disclosure of loss contingencies and accrual of loss contingencies in respect of litigationand other claims. We record an accrual for a potential loss when it is probable that a loss will occur and the amount of theloss can be reasonably estimated. When the reasonable estimate of the potential loss is within a range of amounts, theminimum of the range of potential loss is accrued, unless a higher amount within the range is a better estimate than any otheramount within the range. Moreover, even if an accrual is not required, we provide additional disclosure related to litigationand other claims when it is reasonably possible (i.e., more than remote) that the outcomes of such litigation and other claims
include potential material adverse impacts on us.
3. Recently Issued Accounting Pronouncements
Recently adopted accounting pronouncements
Revenue recognition
As noted in Note 2 above, we adopted the new revenue accounting standard effective January 1, 2018. We utilized
the modified retrospective method upon adoption and as a result, the comparative information has not been restated andcontinues to be reported under the accounting standards in effect for those periods. Additionally, we elected to apply the newrevenue 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 andunsatisfied performance obligations, (2) determining the transaction price, and (3) allocating the transaction price to thesatisfied 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 cumulative effect adjustment recorded
to our retained earnings was $88 million (see our consolidated statements of changes in shareholders’ equity) and included
the impact from the following adjustments to our consolidated balance sheet at January 1, 2018 (amounts in millions):

Consolidated Balance Sheet:

Assets
Accounts receivable, net .......................................
Software development ..........................................
Other current assets ..............................................
Deferred income taxes, net ...................................
Other assets ...........................................................
Liabilities and Shareholders’ Equity
Deferred revenues .................................................
Other liabilities .....................................................
Shareholders’ equity .............................................

Balance at
December 31, 2017

Adjustments due toadoption of newrevenue accounting
standard

Balance atJanuary 1, 2018

$918
367
476
459
440

$3
(20)
(35)
(32)
4

$921
347
441
427
444

$1,9291,132
9,462$(194)
2391$1,735
1,155
9,553

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 havevendor-specific objective evidence (“VSOE”) for unspecified future updates and ongoing online services
provided. Under the prior accounting standards, VSOE for undelivered elements was required. Thisrequirement was eliminated under the new revenue accounting standard. Accordingly, we are required torecognize as revenue a portion of the sales price upon delivery of this software, as compared to recognizing theentire sales price ratably over an estimated service period as previously required. This difference in accounting
primarily impacts revenues from many 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 ofrevenue recognized upon delivery of games to our customers is analyzed on a title-by-title basis and maychange 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

F-20

F-20

•

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.

Adoption of the new revenue accounting standard impacted our consolidated statement of operations for the year
ended December 31, 2018, and our consolidated balance sheet as of December 31, 2018, as follows (in millions, except per
share data):

Consolidated Statement of Operations:

Net revenues
Product sales ......................................................................................
Subscription, licensing, and other revenues ......................................
Total net revenues ..................................................................................
Costs and expenses
Cost of revenues—product sales:
Product costs ..................................................................................
Software royalties, amortization, and intellectual property licenses
Cost of revenues—subscription, licensing, and other revenues:
Game operations and distribution costs .........................................
Software royalties, amortization, and intellectual property licenses
Product development .........................................................................
Sales and marketing ...........................................................................
General and administrative ................................................................
Total costs and expenses ........................................................................
Operating income ...................................................................................
Interest and other expense (income), net ...............................................
Loss on extinguishment of debt .............................................................
Income before income tax expense ........................................................
Income tax expense ................................................................................
Net income .............................................................................................
Earnings per common share
Basic ..................................................................................................
Diluted ...............................................................................................

For the Year Ended December 31, 2018
Increase(decrease) due toUnder newUnder old
adoption of newrevenuerevenuerevenueaccounting
accounting
accounting
standard
standards
standard$2,2555,245
7,500$2,3985,166
7,564$(143)
79
(64)

719
371

737
389

(18)
(18)

1,028
399
1,101
1,062
832
5,512
1,988
71
40
1,877
64
$1,813

1,028
403
1,101
1,063
832
5,553
2,011
71
40
1,900
65
$1,835

—
(4)
—
(1)
—
(41)
(23)
—
—
(23)
(1)
$(22)

$2.38
$2.35

$2.41
$2.38

$(0.03)$(0.03)

At December 31, 2018

Consolidated Balance Sheet:

Assets
Accounts receivable, net ....................................................................
Software development .......................................................................
Other current assets ...........................................................................
Deferred income taxes, net ................................................................
Other assets ........................................................................................
Liabilities and Shareholders’ Equity
Deferred revenues ..............................................................................
Accrued expenses and other liabilities ..............................................
Other liabilities ..................................................................................
Shareholders’ equity ..........................................................................

F-21

F-21

Under
new
revenueaccounting
standard

Under oldrevenueaccounting
standards

Increase(decrease) due toadoption of newrevenueaccounting
standard$1,035
264
539
403
482

$1,037
266
559
453
493

$(2)
(2)
(20)
(50)
(11)

$1,493896
1,147
11,357$1,674914
1,102
11,288$(181)(18)45
69

Adoption of the new revenue accounting standard had no impact to net cash from or used in operating, investing, or
financing activities in our consolidated statement of cash flows.
Financial Instruments
In January 2016, the FASB issued new guidance related to the recognition and measurement of financial assets andfinancial liabilities. The new standard, among other things, generally requires companies to measure investments in otherentities, except those accounted for under the equity method, at fair value and to recognize any changes in fair value in net
income. For investments in entities without a readily determinable fair value, the new standard provides for a measurement
alternative that can be elected to account for the investments at cost, less impairment, and adjusted for changes resulting fromobservable price changes in orderly transactions for an identical or similar investment of the same issuer. The new standard
also simplifies the impairment assessment of equity investments without readily determinable fair values. The new standard
is effective for fiscal years beginning after December 15, 2017, and the guidance should be applied by means of acumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The guidance related toequity investments without readily determinable fair values (including disclosure requirements) is applied prospectively toequity investments that exist as of the date of adoption. We adopted the new standard during the first quarter of 2018, andelected to apply the measurement alternative for our investments without a readily determinable fair value. The adoption ofthis standard did not have a material impact on our consolidated financial statements.
Statement of Cash Flows-Restricted Cash
In November 2016, the FASB issued new guidance related to the classification of restricted cash in the statement ofcash 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” whenreconciling 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. For the year ended December 31, 2016, there is a significant impact to theconsolidated statements of cash flows, as this period included, as an investing activity, the $3.6 billion movement in restrictedcash resulting from the release of cash in escrow to complete the King Acquisition. Under this new standard, the restrictedcash balance is included in the beginning and ending cash, cash equivalents, and restricted cash balances and, hence, is notincluded as an investing activity in the statement of cash flows. See a summary of impacts on our consolidated statement ofcash flows for the year ended December 31, 2016 as follows (in millions):
For the Year Ended December 31, 2016
Under newUnder old
Increase (decrease)standard after
standard before
due to adoption
adoption
adoptionof new standard

Acquisition of business, net of cash acquired ............................
Release of cash in escrow ...........................................................
Other investing activities ............................................................
Net cash used in investing activities ...........................................
Net increase (decrease) in cash and cash equivalents andrestricted cash .........................................................................
Cash and cash equivalents and restricted cash at
beginning of period ................................................................
Cash and cash equivalents and restricted cash at end of
period ......................................................................................

$(4,586)—(7)(4,729)$(4,588)3,561(14)(1,177)$2(3,561)
7(3,552)(2,130)1,422(3,552)

5,392

1,823

3,569

3,262

3,245

17

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 recognitionand 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 thestandard during the first quarter of 2018. The adoption of the standard did not have a material impact to our consolidated
financial statements.
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F-22

Recent Accounting Pronouncements Not Yet Adopted
LeasesIn 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, andinterim 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 ontransition, 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 oflease 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.
Goodwill
In January 2017, the FASB issued new guidance that eliminates Step 2 from the goodwill impairment test. Instead, if
an entity forgoes a Step 0 test, an entity will be required to perform its annual or interim goodwill impairment test bycomparing the fair value of a reporting unit, as determined in Step 1 from the goodwill impairment test, with its carrying
amount and recognize an impairment charge, if any, for the amount by which the carrying amount exceeds the reporting
unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new standard is effective forfiscal years beginning after December 15, 2019, and should be applied prospectively. Early adoption is permitted. The effectof adoption should be reflected as of the beginning of the fiscal year of adoption. We are evaluating the impact, if any, of
adopting this new accounting guidance on our consolidated financial statements.
Cloud Computing Arrangements
In August 2018, the FASB issued new guidance related to a customer’s accounting for implementation costs
incurred in a cloud computing arrangement (i.e. hosting arrangement) that is a service contract. The new guidance requires
customers to capitalize implementation costs for these arrangements by applying the same criteria that is utilized for existing
internal-use software guidance. The capitalized costs are required to be amortized over the associated term of thearrangement, generally on a straight-line basis, with amortization of these costs presented in the same financial statement line
item as other costs associated with the arrangement. The new standard is effective for fiscal years beginning after
December 15, 2019, and can be applied retrospectively or prospectively. Early adoption is permitted. We are evaluating theimpact, if any, of adopting this new accounting guidance on our financial statements.
4. Cash and Cash Equivalents
The following table summarizes the components of our cash and cash equivalents (amounts in millions):
At December 31,
2018
2017

Cash...................................................................................................................................
$268
$269
Foreign government treasury bills ....................................................................................
32
39
Money market funds .........................................................................................................
3,925
4,405
Cash and cash equivalents ................................................................................................
$4,225 $4,713

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F-23

5. Inventories, Net
Inventories, net, consist of the following (amounts in millions):
At December 31,
2018
2017

Finished goods ..........................................................................................................................
$40$45
Purchased parts and components ..............................................................................................
3
1
Inventories, net ..........................................................................................................................
$43$46
At December 31, 2018 and 2017, inventory reserves were $22 million and $36 million, respectively.
6. Software Development and Intellectual Property Licenses
The following table summarizes the components of our capitalized software development costs (amounts
in millions):
At December 31,
2018
2017

Internally-developed software costs .........................................................................................
$291
$270
Payments made to third-party software developers ..................................................................
38
183
Total software development costs .............................................................................................
$329
$453
As of December 31, 2018 and December 31, 2017, capitalized intellectual property licenses were not material.
Amortization of capitalized software development costs and intellectual property licenses was as follows (amounts
in millions):
For the Years Ended
December 31,
2018
2017
2016

Amortization of capitalized software development costs and$501 $314
intellectual property licenses....................................................................................

$335

Write-offs and impairments of capitalized software development costs and intellectual property licenses were notmaterial for the years ended December 31, 2018, 2017, and 2016.
7. Property and Equipment, Net
Property and equipment, net was comprised of the following (amounts in millions):
At December 31,
2018
2017

Land ..................................................................................................................................
$1$1
Buildings ...........................................................................................................................
4
4
Leasehold improvements ..................................................................................................
248
224
Computer equipment .........................................................................................................
700
658
Office furniture and other equipment ...............................................................................
99
92
Total cost of property and equipment ...........................................................................
1,052
979
Less accumulated depreciation .........................................................................................
(770)
(685)
Property and equipment, net .........................................................................................
$282
$294
Depreciation expense for the years ended December 31, 2018, 2017, and 2016 was $138 million, $130 million, and$121 million, respectively.
Rental expense was $75 million, $71 million and $65 million for the years ended December 31, 2018, 2017, and2016, respectively.
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F-24

8. Intangible Assets, Net
Intangible assets, net consist of the following (amounts in millions):
Estimated
usefullives

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

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

At December 31, 2018
Gross
carrying
Accumulated
amountamortization$1,154
601
617
54
19
$2,445Net
carrying
amount$(1,032)
(456)
(617)
(23)
(15)
$(2,143)

$122
145
—
31
4
$302

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

Estimated
usefullives

Acquired definite-lived intangible assets:
Internally-developed franchises.............................................. 3 - 11 years
Developed software ................................................................ 2 - 5 years
Customer base ........................................................................ 2 years
Trade names............................................................................ 7 - 10 years
Other ....................................................................................... 1 - 15 years
Total definite-lived intangible assets .........................................

386
47
$433
$735
At December 31, 2017
Gross
carrying
Accumulated
amountamortization$1,154
601
617
54
19
$2,445Net
carrying
amount$(869)
(301)
(573)
(16)
(13)
$(1,772)

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

$285
300
44
38
6
$673
386
47
$433
$1,106

Amortization expense of intangible assets was $371 million, $759 million, and $708 million for the years ended
December 31, 2018, 2017, and 2016, respectively.
At December 31, 2018, future amortization of definite-lived intangible assets is estimated as follows (amounts
in millions):
2019.........................................................................................................................................................
$2042020.........................................................................................................................................................
74
2021.........................................................................................................................................................
12
2022.........................................................................................................................................................
7
2023.........................................................................................................................................................
2
Thereafter ................................................................................................................................................
3
Total ........................................................................................................................................................
$302

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

Total

Balance at December 31, 2016 .........................................................................
Other .............................................................................................................
Balance at December 31, 2017 .........................................................................

Activision$6,903(5)$6,898Blizzard

$190
—
$190

$2,675—$2,675$9,768(5)$9,763

Other .............................................................................................................
Balance at December 31, 2018 .........................................................................

(1)$6,897—$190—$2,675(1)$9,762At December 31, 2018, 2017, and 2016, there were no accumulated impairment losses.
10. Other Assets and Liabilities
Included in “Accrued expenses and other liabilities” in our consolidated balance sheets are accrued payroll-related
costs of $402 million and $441 million at December 31, 2018 and 2017, respectively, and the current portion of income taxes
payable of $203 million and $162 million at December 31, 2018 and 2017, respectively.
Included in “Other liabilities” in our consolidated balance sheets are the non-current portion of income taxes payable
of $272 million and $473 million at December 31, 2018 and 2017, respectively.
11. Fair Value Measurements
The FASB literature regarding fair value measurements for certain assets and liabilities establishes a three-level fairvalue hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of“observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value areas follows:•

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

Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar
assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable
market data; and•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to thefair value of the assets or liabilities, including certain pricing models, discounted cash flow methodologies, andsimilar techniques that use significant unobservable inputs.

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F-26

Fair Value Measurements on a Recurring Basis
The table below segregates all of our financial assets and liabilities that are measured at fair value on a recurring
basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at themeasurement date (amounts in millions):
Fair Value Measurements at
December 31, 2018 Using

Financial Assets:
Recurring fair value
measurements:
Money market funds .......
Foreign government
treasury bills ...............
U.S. treasuries andgovernment agency
securities .....................
Foreign currency
forward contracts
designated ashedges .........................
Foreign currency
forward contracts
not designated ashedges .........................
Total recurring fairvalue
measurements .............
Financial Liabilities:
Foreign currency
forward contracts
designated ashedges .........................

QuotedPrices in
ActiveMarkets for
Identical
Assets(Level 1)

As ofDecember 31,
2018

Significant
Other
Observable
Inputs(Level 2)

Significant
Unobservable
Inputs(Level 3)

Balance SheetClassification$3,925$3,925$—$— Cash and cash equivalents

32

32

—

— Cash and cash equivalents

150

150

—

— Other current assets

13

—

13

— Other current assets

1

—

1

— Other current assets$4,121$4,107

$14

$—

$(1)

$—

$(1)

Accrued expenses and$— other liabilities

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F-27

Fair Value Measurements at
December 31, 2017 Using

Financial Assets:
Recurring fair value
measurements:
Money market funds .......
Foreign government
treasury bills ...............
U.S. treasuries andgovernment agency
securities .....................
Total recurring fairvalue
measurements .............
Financial Liabilities:
Foreign currency
forward contracts
designated ashedges .........................

As ofDecember 31,
2017

QuotedPrices in
ActiveMarkets for
Identical
Assets(Level 1)

Significant
Other
Observable
Inputs(Level 2)

Significant
Unobservable
Inputs(Level 3)

Balance SheetClassification$4,405$4,405$—$— Cash and cash equivalents

39

39

—

— Cash and cash equivalents

55

55

—

— Other current assets$4,499$4,499

$—

$—

$(5)

$—

$(5)

Accrued expenses and$— other liabilities

Foreign Currency Forward Contracts
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):

Foreign Currency:
Buy USD, Sell Euro ..................................................................

As ofDecember 31, 2018
Notional
Fair value
amountgain (loss)

$723

As of
December 31, 2017
Notional
Fair value
amountgain (loss)

$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 withthe 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,
2018
2017
2016

Cash Flow Hedges ...........................................................................

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F-28

$7

$(1)

Statement of
Operations Classification$4

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):

Foreign Currency:
Buy USD, Sell GBP ................................................................

As ofDecember 31, 2018
Notional
Fair value
amountgain (loss)

$55

As of
December 31, 2017
Notional
Fair value
amountgain (loss)

$1

$—

$—

During 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.
Fair Value Measurements on a Non-Recurring Basis
We measure the fair value of certain assets on a non-recurring basis, generally annually or when events or changes
in circumstances indicate that the carrying amount of the assets may not be recoverable.
For the years ended December 31, 2018, 2017, and 2016, there were no impairment charges related to assets that aremeasured on a non-recurring basis.
12. Deferred Revenues
We record deferred revenues when cash payments are received or due in advance of the fulfillment of our associatedperformance obligations. The opening balance of deferred revenues as of January 1, 2018 and the ending balance as ofDecember 31, 2018, were $1.8 billion and $1.6 billion, respectively, including our current and non-current balances. For theyear ended December 31, 2018, the additions to our deferred revenues balance were primarily due to cash payments received
or due in advance of satisfying our performance obligations, while the reductions to our deferred revenues balance wereprimarily due to the recognition of revenues upon fulfillment of our performance obligations, both of which were in theordinary course of business. During the year ended December 31, 2018, $1.7 billion of revenues were recognized that were
included in the deferred revenues balance at the beginning of the period.
As of December 31, 2018, the aggregate amount of contracted revenues allocated to our unsatisfied performanceobligations is $2.9 billion, which includes our deferred revenues balances and amounts to be invoiced and recognized asrevenue in future periods. We expect to recognize approximately $1.8 billion in 2019, $0.4 billion in 2020, and the remainder
thereafter. This balance does not include an estimate for variable consideration arising from sales-based royalty license
revenue in excess of the contractual minimum guarantee.
13. Debt
Credit Facilities
At December 31, 2017, we had outstanding term loans “A” of approximately $990 million (the “2017 TLA”) and$250 million available under a revolving credit facility pursuant to a credit agreement entered into on October 11, 2013 (asamended thereafter and from time to time, the “Credit Agreement”).
On August 24, 2018, using available cash on hand, we made a voluntary prepayment of $990 million to fully repay
and extinguish the 2017 TLA. As a result, we wrote-off unamortized discount and financing costs of $7 million, which areincluded in “Loss on extinguishment of debt” in the consolidated statement of operations. On August 24, 2018, we also
entered into the seventh amendment (the “Amendment”) to our Credit Agreement. The Amendment, among other things:(1) provided for a new revolving credit facility in an aggregate principal amount of $1.5 billion (the “New Revolver”), which
replaced our prior revolving credit facility; (2) amended the Credit Agreement to remove mechanics related to the 2017 TLA,
which, as noted above, was repaid in full prior to the effectiveness of the Amendment; and (3) eliminated or amended certain
representations, warranties and covenants to reflect our current credit ratings.
The New Revolver is scheduled to mature on August 24, 2023. Borrowings under the New Revolver will bearinterest, at the Company’s option, at either (1) a base rate equal to the highest of (i) the federal funds rate, plus 0.5%, (ii) the
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prime commercial lending rate of Bank of America, N.A. and (iii) the London Interbank Offered Rate (“LIBOR”) for aninterest period of one month beginning on such day plus 1.00%, or (2) LIBOR, in each case, plus an applicable interest
margin. LIBOR will be subject to a floor of 0% and base rate will be subject to an effective floor of 1.00%. The applicableinterest margin for borrowings under the New Revolver will range from 0.875% to 1.375% for LIBOR borrowings and from
0% to 0.375% for base rate borrowings and will be determined by reference to a pricing grid based on the Company’s credit
ratings. Up to $50 million of the New Revolver may be used for letters of credit. To date, we have not drawn on the New
Revolver.
Under the Credit Agreement, we are subject to a financial covenant requiring the Company’s Consolidated Total Net
Debt Ratio (as defined in the Credit Agreement) not to exceed 3.75:1.00 (or, at the Company’s option and for a limited periodof time upon the consummation of a Qualifying Acquisition (as defined in the Credit Agreement), 4.25:1.00). The Credit
Agreement contains covenants customary for transactions of this type for issuers with similar credit ratings. These include
those restricting liens, debt of non-guarantor subsidiaries and certain fundamental changes, in each case with exceptions,
including exceptions for secured debt and debt of non-guarantor subsidiaries of the Company, in each case up to an amountnot exceeding 7.5% of Total Assets (as defined in the Credit Agreement). We were in compliance with the terms of theCredit Agreement as of December 31, 2018.
Unsecured Senior Notes
At December 31, 2017, we had the following unsecured senior notes outstanding:•$750 million of 6.125% unsecured senior notes due September 2023 that we issued on September 19, 2013 (the“2023 Notes”), in a private offering made in accordance with Rule 144A under the Securities Act of 1933, as
amended (the “Securities Act”);•$650 million of 2.3% unsecured senior notes due September 2021 (the “2021 Notes”) and $850 million of 3.4%
unsecured senior notes due September 2026 (the “2026 Notes”) that we issued on September 19, 2016, in a
private offering made in accordance with Rule 144A and Regulation S under the Securities Act, andsubsequently exchanged for publicly registered notes in June 2017; and•$400 million of 2.6% unsecured senior notes due June 2022 (the “2022 Notes”), $400 million of 3.4%
unsecured senior notes due June 2027 (the “2027 Notes”), and $400 million of 4.5% unsecured senior notes due
June 2047 (the “2047 Notes”, and together with the 2021 Notes, the 2022 Notes, the 2023 Notes, the 2026
Notes, and the 2027 Notes, the “Notes”), that we issued on May 26, 2017, in a public underwritten offering.

On July 17, 2018, we issued an irrevocable notice of redemption to the holders of all of our outstanding 2023 Notes.
Accordingly, on August 16, 2018, using available cash on hand, we redeemed the 2023 Notes in full at a redemption priceequal 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. The redemption of the 2023
Notes resulted 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. All other Notes referred to above remained outstanding as of December 31, 2018.
The Notes are general senior obligations of the Company and rank pari passu in right of payment to all of theCompany’s existing and future senior indebtedness, including the New Revolver described above. The Notes are not secured
and are effectively junior to any of the Company’s existing and future indebtedness that is secured to the extent of the valueof the collateral securing such indebtedness. The Notes contain customary covenants that place restrictions in certain
circumstances on, among other things, the incurrence of secured debt, entry into sale or leaseback transactions, and certain
merger or consolidation transactions. We were in compliance with the terms of the Notes as of December 31, 2018.
Interest is payable semi-annually in arrears on March 15 and September 15 of each year for the 2021 Notes, the2023 Notes, and the 2026 Notes, and payable semi-annually in arrears on June 15 and December 15 of each year for the 2022
Notes, the 2027 Notes, and the 2047 Notes. Accrued interest payable is recorded within “Accrued expenses and otherliabilities” in our consolidated balance sheets. As of December 31, 2018 and December 31, 2017, we had accrued interest
payable of $15 million and $28 million, respectively, related to the Notes.
We may redeem some or all of the 2021 Notes, the 2022 Notes, the 2026 Notes, the 2027 Notes, and the 2047 Notes
prior to August 15, 2021, May 15, 2022, June 15, 2026, March 15, 2027, and December 15, 2046, respectively, and in eachcase at a price equal to 100% of the aggregate principal amount thereof plus a “make-whole” premium and accrued and
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unpaid interest. Any redemption of all or a portion of the applicable class of note after the applicable date would be at 100%of aggregate principal amount plus accrued and unpaid interest.
Upon the occurrence of certain change of control events, we will be required to offer to repurchase the Notes at apurchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest. These repurchaserequirements are considered clearly and closely related to the Notes and are not accounted for separately upon issuance.
Interest expense and financing costs
Fees and discounts associated with the issuance of our debt instruments are recorded as debt discount, which reduces
their respective carrying values, and are amortized over their respective terms. Amortization expense is recorded within“Interest and other expense (income), net” in our consolidated statement of operations.
For the years ended December 31, 2018, 2017, and 2016: interest expense was $134 million, $150 million, and$197 million, respectively; amortization of the debt discount and deferred financing costs was $6 million, $12 million, and$20 million, respectively.
A summary of our outstanding debt is as follows (amounts in millions):

Gross Carrying
Amount2021 Notes ..................................................
2022 Notes ..................................................
2026 Notes ..................................................
2027 Notes ..................................................
2047 Notes ..................................................
Total long-term debt ...................................

$650
400
850
400
400
$2,700Gross Carrying
Amount2017 TLA ....................................................
2021 Notes ..................................................
2022 Notes ..................................................
2023 Notes ..................................................
2026 Notes ..................................................
2027 Notes ..................................................
2047 Notes ..................................................
Total long-term debt ...................................

$990
650
400
750
850
400
400
$4,440At December 31, 2018
Unamortized
Discount andDeferredFinancing Costs

$(3)
(3)
(8)
(5)
(10)
$(29)
At December 31, 2017
Unamortized
Discount andDeferredFinancing Costs

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

Net Carrying
Amount

$647
397
842
395
390
$2,671Net Carrying
Amount

$982
646
396
741
841
394
390
$4,390

As of December 31, 2018, the scheduled maturities and contractual principal repayments of our debt for each of thefive succeeding years are as follows (amounts in millions):
For the years ending December 31,
2019................................................................................................................................................
$—
2020................................................................................................................................................
—
2021................................................................................................................................................
650
2022................................................................................................................................................
400
2023................................................................................................................................................
—
Thereafter .......................................................................................................................................
1,650
Total ...........................................................................................................................................
$2,700On February 1, 2018, our Board of Directors authorized repayment of up to $1.8 billion of the company’s
outstanding debt during 2018. As of December 31, 2018, we had utilized this entire authorization to repay our 2017 TLA andredeem our 2023 Notes, as described above.
F-31

F-31

Using Level 2 inputs (i.e., observable market prices in less-than-active markets) at December 31, 2018, the carrying
values of the 2021 Notes and the 2022 Notes approximated their fair values, as the interest rates were similar to the current
rates at which we could borrow funds over the selected interest periods. At December 31, 2018, based on Level 2 inputs, thefair values of the 2026 Notes, the 2027 Notes, and the 2047 Notes were $800 million, $376 million, and $360 million,
respectively.
Using Level 2 inputs at December 31, 2017, with the exception of the 2023 Notes and the 2047 Notes, the carrying
values of our debt instruments approximated their fair values. At December 31, 2017, based on Level 2 inputs, the fair valuesof the 2023 Notes and the 2047 Notes were $795 million and $421 million, respectively.
14. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) were as follows (amounts in millions):

Foreign currencytranslation
adjustments

Balance at December 31, 2017 ....................................
Cumulative impact from adoption of newrevenue accounting standard ...............................
Other comprehensive income (loss) before
reclassifications ...................................................
Amounts reclassified from accumulated othercomprehensive income (loss) into earnings ........
Balance at December 31, 2018 ....................................

Total$(623)$—$(15)$(638)

3

—

—

3

(9)

10

45

46

—
$(629)

(5)
$5

(7)
$23

(12)
$(601)

Foreign currencytranslation
adjustments

Balance at December 31, 2016 ....................................
Other comprehensive income (loss) before
reclassifications ...................................................
Amounts reclassified from accumulated othercomprehensive income (loss) into earnings ........
Balance at December 31, 2017 ....................................

For the Year Ended December 31, 2018
Unrealized gain
Unrealized gain
(loss)(loss)
on available-foron forward
sale securities
contracts

For the Year Ended December 31, 2017
Unrealized gain
Unrealized gain
(loss)(loss)
on available-foron forward
sale securities
contracts

Total$(659)$1$29$(629)

20

(1)

(45)

(26)

16
$(623)

—
$—

1
$(15)

17
$(638)

Income taxes were not previously provided for foreign currency translation items, as these were considered
indefinite investments in non-U.S. subsidiaries. Due to the U.S. Tax Reform Act enacted on December 22, 2017, we
re-evaluated our indefinite reinvestment assertions and no longer consider these items to be indefinite investments. The
corresponding tax impact for this change in assertion was not material.
15. Operating Segments and Geographic Regions
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 ourchief 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.
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Information on the reportable segment net revenues and segment operating income are presented below (amounts inmillions):
Year Ended December 31, 2018
Activision
Blizzard
King

Total

Segment Revenues
Net revenues from external customers ............................$2,458
Intersegment net revenues (1) .........................................
—
Segment net revenues .....................................................$2,458$2,23853$2,291$2,086—$2,086$6,78253$6,835

Segment operating income ...........................................$1,011

$685

$750

$2,446

Year Ended December 31, 2017
Activision
Blizzard
King

Segment Revenues
Net revenues from external customers ............................$2,628
Intersegment net revenues (1) .........................................
—
Segment net revenues .....................................................$2,628
Segment operating income ...........................................$1,005$2,12019$2,139$712$1,998—$1,998$700Year Ended December 31, 2016
Activision
Blizzard
King

Segment Revenues
Net revenues from external customers ............................$2,220
Intersegment net revenues (1) .........................................
—
Segment net revenues .....................................................$2,220
Segment operating income ........................................... $788
(1)$2,439—$2,439$995$1,586—$1,586$537

Total$6,74619$6,765$2,417
Total$6,245—$6,245$2,320Intersegment revenues reflect licensing and service fees charged between segments.

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

Reconciliation to consolidated net revenues:
Segment net revenues ...................................................................................................................
Revenues from other segments (1) ...............................................................................................
Net effect from recognition (deferral) of deferred net revenues ..................................................
Elimination of intersegment revenues (2) ....................................................................................
Consolidated net revenues ............................................................................................................
Reconciliation to consolidated income before income tax expense:
Segment operating income ...........................................................................................................
Operating income (loss) from other segments (1) ........................................................................
Net effect from recognition (deferral) of deferred net revenues and related cost ofrevenues ....................................................................................................................................
Share-based compensation expense .............................................................................................
Amortization of intangible assets .................................................................................................
Fees and other expenses related to the acquisition of King (3) ....................................................
Restructuring costs (4) ..................................................................................................................
Other non-cash charges (5) ...........................................................................................................
Discrete tax-related items (6) .......................................................................................................
Consolidated operating income ....................................................................................................
Interest and other expense (income), net ......................................................................................
Loss on extinguishment of debt ....................................................................................................
Consolidated income before income tax expense ........................................................................

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F-33

Years Ended December 31,
2018
2017
2016

$6,835480238(53)$7,500$6,765
410
(139)
(19)
$7,017$6,245354
9—$6,608$2,44631$2,417(19)$2,320
14

100
(209)
(370)
—
(10)
—
—
1,988
71
40
$1,877

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

(10)
(159)
(706)
(47)
—
—
—
1,412
214
92
$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)Intersegment revenues reflect licensing and service fees charged between segments.

(3)

Reflects fees and other expenses, such as legal, banking, and professional services fees, related to the acquisition ofKing and associated integration activities, including related debt financings.

(4)

Reflects restructuring charges, primarily severance costs.

(5)

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

(6)

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

Due to requirements from our adoption of the new revenue accounting standard as discussed in Note 2, net revenues
by distribution channel for the year ended December 31, 2018, include a reconciliation to our segment revenues as disclosed
for each of our reportable segments above. Net revenues by distribution channel were as follows (amounts in millions):

Net revenues by distribution
channel:Digital online channels (1) ..................
Retail channels.....................................
Other (2) ..............................................
Total consolidated net revenues ..........
Change in deferred revenues:
Digital online channels (1) ..................
Retail channels.....................................
Other (2) ..............................................
Total change in deferred revenues .......
Segment net revenues:
Digital online channels (1) ..................
Retail channels.....................................
Other (2) ..............................................
Total segment net revenues .................

Activision

Blizzard

Year Ended December 31, 2018
NonElimination ofreportableintersegment
King
segments
revenues(3)Total$1,740998—$2,738$2,009109
148$2,266$2,090——$2,090

$—
—
459
$459

$(53)
—
—
$(53)

$5,786
1,107
607$7,500

$(96)
(184)
—
$(280)

$32
(7)
—
$25

$(4)
—
—
$(4)

$—
—
21
$21

$—
—
—
$—

$(68)
(191)
21
$(238)$1,644814—$2,458$2,041102
148$2,291$2,086——$2,086

$—
—
480
$480

$(53)
—
—
$(53)

$5,718916
628$7,262

Net revenues by distribution channel for the years ended December 31, 2017 and December 31, 2016, were as
follows (amounts in millions):
Years Ended
December 31,
2017
2016

Net revenues by distribution channel:
Digital online channels (1) ........................................................................................................................
Retail channels...........................................................................................................................................
Other (2) ....................................................................................................................................................
Total consolidated net revenues ....................................................................................................................

$5,4791,033
505$7,017$4,865
1,386
357$6,608(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.

(3)

Intersegment revenues reflect licensing and service fees charged between segments.
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Geographic information presented below is based on the location of the paying customer. Net revenues bygeographic region, including a reconciliation to each of our reportable segment’s net revenues, for the year ended
December 31, 2018, were as follows (amounts in millions):

Net revenues by geographic region:
Americas .....................................................
EMEA (1) ...................................................
Asia Pacific .................................................
Total consolidated net revenues .................
Change in deferred revenues:
Americas .....................................................
EMEA (1) ...................................................
Asia Pacific .................................................
Total change in deferred revenues ..............
Segment net revenues:
Americas .....................................................
EMEA (1) ...................................................
Asia Pacific .................................................
Total segment net revenues ........................

Activision

Blizzard

Year Ended December 31, 2018
NonElimination ofreportableintersegment
King
segments
revenues(2)Total$1,622897
219$2,738$1,004692
570$2,266$1,269599
222$2,090

$13
446
—
$459

$(28)
(16)
(9)
$(53)

$3,8802,618
1,002$7,500$(163)(127)
10$(280)

$15
16
(6)
$25

$(3)
(1)
—
$(4)

$—
21
—
$21

$—
—
—
$—

$(151)(91)
4$(238)$1,459770
229$2,458$1,019708
564$2,291$1,266598
222$2,086

$13
467
—
$480

$(28)
(16)
(9)
$(53)

$3,7292,527
1,006$7,262

Net revenues by geographic region for the years ended December 31, 2017 and December 31, 2016, were as follows(amounts in millions):
Years Ended
December 31,
2017
2016

Net revenues by geographic region:
Americas ....................................................................................................................................................
EMEA (1) ..................................................................................................................................................
Asia Pacific ................................................................................................................................................
Total consolidated net revenues ....................................................................................................................
(1)“EMEA” consists of the Europe, Middle East, and Africa geographic regions.

(2)Intersegment revenues reflect licensing and service fees charged between segments.

$3,6072,464
946$7,017$3,423
2,221
964$6,608The Company’s net revenues in the U.S. were 46%, 45%, and 45% of consolidated net revenues for the years ended
December 31, 2018, 2017, and 2016, respectively. The Company’s net revenues in the United Kingdom (“U.K.”) were 12%,12%, and 11% of consolidated net revenues for the years ended December 31, 2018, 2017, and 2016, respectively. No othercountry’s net revenues exceeded 10% of consolidated net revenues for the years ended December 31, 2018, 2017, or 2016.

F-35

F-35

Net revenues by platform, including a reconciliation to each of our reportable segment’s net revenues, for the year
ended December 31, 2018, were as follows (amounts in millions):

Net revenues by platform:
Console ................................................
PC ........................................................
Mobile and ancillary (1) ......................
Other (2) ..............................................
Total consolidated net revenues ..........

Activision

Blizzard

Year Ended December 31, 2018
NonreportableKing
segments

Elimination ofintersegment
revenues(3)Total$2,351368
19—$2,738

$187
1,711
220
148
$2,266

$—
154
1,936
—
$2,090

$—
—
—
459
$459

$—
(53)
—
—
$(53)

$2,538
2,180
2,175
607
$7,500Change in deferred revenues:
Console ................................................
PC ........................................................
Mobile and ancillary (1) ......................
Other (2) ..............................................
Total change in deferred revenues .......

$(257)(23)——$(280)

$(8)
33
—
—
$25

$—
(1)
(3)
—
$(4)

$—
—
—
21
$21

$—
—
—
—
$—

$(265)
9(3)
21$(238)

Segment net revenues:
Console ................................................
PC ........................................................
Mobile and ancillary (1) ......................
Other (2) ..............................................
Total segment net revenues .................

$2,094345
19—$2,458

$179
1,744
220
148
$2,291

$—
153
1,933
—
$2,086

$—
—
—
480
$480

$—
(53)
—
—
$(53)

$2,273
2,189
2,172
628
$7,262

Net revenues by platform for the years ended December 31, 2017 and December 31, 2016, were as follows (amounts
in millions):
Years Ended
December 31,
2017
2016

Net revenues by platform:
Console ......................................................................................................................................................
PC ..............................................................................................................................................................
Mobile and ancillary (1) ............................................................................................................................
Other (2) ....................................................................................................................................................
Total consolidated net revenues ....................................................................................................................

$2,389
2,042
2,081
505
$7,017$2,453
2,124
1,674
357
$6,608(1)

Net revenues from “Mobile and ancillary” include revenues from mobile devices, as well as non-platform specificgame-related revenues, such as standalone sales of toys and accessories from our Skylanders® franchise and otherphysical 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.

(3)

Intersegment revenues reflect licensing and service fees charged between segments.

F-36

F-36

Long-lived assets by geographic region were as follows (amounts in millions):
At December 31,
2018
2017
2016

Long-lived assets* by geographic region:
Americas ..................................................................................................................
$203 $197
EMEA ......................................................................................................................
62
75
Asia Pacific ..............................................................................................................
17
22
Total long-lived assets by geographic region ..............................................................
$282 $294
*

$154
87
17
$258

The only long-lived assets that we classify by region are our long-term tangible fixed assets, which
consist of property, plant, and equipment assets; all other long-term assets are not allocated by location.

For information regarding significant customers, see “Concentration of Credit Risk” in Note 2.
16. Share-Based Payments
Activision Blizzard Equity Incentive Plans
On June 5, 2014, the Activision Blizzard, Inc. 2014 Incentive Plan (the “2014 Plan”) became effective. Under the2014 Plan, the Compensation Committee of our Board of Directors is authorized to provide share-based compensation in theform of stock options, share appreciation rights, restricted stock, restricted stock units, performance shares, and otherperformance- or value-based awards structured by the Compensation Committee within parameters set forth in the 2014 Plan.
As of the effective date of the 2014 Plan, we had ceased making awards under our prior equity incentive plans (collectively,
the “Prior Plans”), although such plans remain in effect to the extent that they continue to govern outstanding awards.
While the Compensation Committee has broad discretion to create equity incentives, our current share-based
compensation program generally utilizes a combination of options and restricted stock units. The majority of our options
have time-based vesting schedules, generally vesting annually over a period of three to five years, and generally expire
10 years from the grant date. In addition, under the terms of the 2014 Plan, the exercise price for the options must be equal toor greater than the closing price per share of our common stock on the date the award is granted, as reported on Nasdaq.
Restricted stock units have time-based vesting schedules, generally vesting in their entirety on an anniversary of the date of
grant, or vest annually over a period of three to five years, and may also be contingent on the achievement of specified
performance measures.
As of the date it was approved by our shareholders, there were 46 million shares available for issuance under the2014 Plan. The number of shares of our common stock reserved for issuance under the 2014 Plan has been, and may befurther, increased from time to time by: (1) the number of shares relating to awards outstanding under any Prior Plan that:(i) expire, or are forfeited, terminated or canceled, without the issuance of shares; (ii) are settled in cash in lieu of shares; or(iii) are exchanged, prior to the issuance of shares of our common stock, for awards not involving our common stock; (2) if
the exercise price of any option outstanding under any Prior Plans is, or the tax withholding requirements with respect to anyaward outstanding under any Prior Plans are, satisfied by withholding shares otherwise then deliverable in respect of theaward or the actual or constructive transfer to the Company of shares already owned, the number of shares equal to thewithheld or transferred shares; and (3) if a share appreciation right is exercised and settled in shares, a number of shares equal
to the difference between the total number of shares with respect to which the award is exercised and the number of sharesactually issued or transferred. As of December 31, 2018, we had approximately 27 million shares of our common stock
reserved for future issuance under the 2014 Plan. Shares issued in connection with awards made under the 2014 Plan are
generally issued as new stock issuances.
Additionally, in connection with the King Acquisition, a majority of the outstanding options and awards with respect
to King shares that were unvested as of the King Closing Date were converted into equivalent options and awards withrespect to shares of the Company’s common stock. As part of the conversion, we assumed King’s equity incentive plan (the“King Plan”) and amended the King Plan to convert it to a plan with respect to shares of the Company’s common stock for
the King shares assumed. No future shares can be granted from the King Plan, but it continues to govern outstanding awards.

F-37

F-37

Fair Value Valuation Assumptions
Valuation of Stock Options
The fair value of stock options granted are principally estimated using a binomial-lattice model. The inputs in our
binomial-lattice model include expected stock price volatility, risk-free interest rate, dividend yield, contractual term, andvesting schedule, as well as measures of employees’ cancellations, exercise, and post-vesting termination behavior. Statisticalmethods are used to estimate employee rank-specific termination rates.
The following table presents the weighted-average assumptions, weighted average grant date fair value, and therange of expected stock price volatilities:
Employee and Director
Options
For the Years Ended
December 31,
2018
2017
2016

Expected life (in years) ......................................................................................................................
7.64
7.01
6.86
Volatility ............................................................................................................................................ 32.37% 35.00% 35.31%
Risk free interest rate ......................................................................................................................... 3.10% 2.14% 1.56%
Dividend yield ................................................................................................................................... 0.61% 0.50% 0.67%
Weighted-average grant date fair value ............................................................................................. $21.03 $21.11 $12.83
Stock price volatility range:
Low ................................................................................................................................................ 31.72% 28.19% 29.20%
High ............................................................................................................................................... 36.73% 35.00% 36.00%
Expected life
The expected life of employee stock options is a derived output of the binomial-lattice model and represents theweighted-average period the stock options are expected to remain outstanding. A binomial-lattice model assumes that
employees will exercise their options when the stock price equals or exceeds an exercise multiple. The exercise multiple isbased on historical employee exercise behaviors.
Volatility
To estimate volatility for the binomial-lattice model, we consider the implied volatility of exchange-traded options
on our stock to estimate short-term volatility, the historical volatility of our common shares during the option’s contractual
term to estimate long-term volatility, and a statistical model to estimate the transition from short-term volatility to long-term
volatility.
Risk-free interest rate
As is the case for volatility, the risk-free interest rate is assumed to change during the option’s contractual term. The
risk-free interest rate, which is based on U.S. Treasury yield curves, reflects the expected movement in the interest rate from
one time period to the next (“forward rate”).
Dividend yield
The expected dividend yield assumption is based on our historical and expected future amount of dividend payouts.
Share-based compensation expense recognized is based on awards ultimately expected to vest and therefore has
been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant based on historical experience andrevised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Valuation of Restricted Stock Units (“RSUs”)
The fair value of the Company’s RSU awards granted is principally based upon the closing price of the Company’s
stock price on the date of grant reduced by the present value of dividends expected to be paid on our common stock prior tovesting.
F-38

F-38

Accuracy of Fair Value Estimates
We developed the assumptions used in the models above, including measures of employees’ exercise andpost-vesting termination behavior. Our ability to accurately estimate the fair value of share-based payment awards at the
grant date depends upon the accuracy of the model and our ability to accurately forecast model inputs for as long as 10 years
into the future. These inputs include, but are not limited to, expected stock price volatility, risk-free rate, dividend yield, andemployee termination rates. Although the fair value of employee stock options is determined using an option-pricing model,
the estimates that are produced by this model may not be indicative of the fair value observed between a willing buyer and awilling seller. Unfortunately, it is difficult to determine if this is the case, as markets do not currently exist that permit theactive trading of employee stock option and other share-based instruments.
Stock Option Activity
Stock option activity is as follows:

Number of
Shares(in thousands)

Outstanding stock options at December 31,
2017 ................................................................
Granted ...............................................................
Exercised ............................................................
Forfeited .............................................................
Expired ...............................................................
Outstanding stock options at December 31,
2018 ................................................................
Vested and expected to vest at December 31,
2018 ................................................................
Exercisable at December 31, 2018 .....................

Weightedaverage
exercise price

Weightedaverageremaining
contractual
term (in years)

Aggregate
intrinsic value(in millions)

20,544
3,364(4,161)(2,543)(67)$34.54
55.69
23.67
45.07
43.50

17,137$39.736.81$185

14,5896,120$38.50$28.73

6.98
5.60

$172
$116

The aggregate intrinsic values in the table above represents the total pretax intrinsic value (i.e. the difference
between our closing stock price on the last trading day of the period and the exercise price, times the number of shares for
options where the closing stock price is greater than the exercise price) that would have been received by the option holders
had all option holders exercised their options on that date. This amount changes based on the market value of our stock. The
total intrinsic value of options actually exercised was $196 million, $372 million, and $161 million for the years ended
December 31, 2018, 2017, and 2016, respectively. The total grant date fair value of options vested was $45 million,$47 million, and $40 million for the years ended December 31, 2018, 2017, and 2016, respectively.
At December 31, 2018, $84 million of total unrecognized compensation cost related to stock options is expected tobe recognized over a weighted-average period of 1.20 years.
RSU Activity
We grant RSUs, which represent the right to receive shares of our common stock. Vesting for RSUs is contingent
upon the holders’ continued employment with us and may be subject to other conditions (which may include the satisfactionof a performance measure). Also, certain of our performance-based RSUs include a range of shares that may be released at
vesting which are above or below the targeted number of RSUs based on actual performance relative to the grant date
performance measure. If the vesting conditions are not met, unvested RSUs will be forfeited. Upon vesting of the RSUs, we
may withhold shares otherwise deliverable to satisfy tax withholding requirements.

F-39

F-39

The following table summarizes our RSU activity with performance-based RSUs presented at the maximum
potential shares that could be earned and issued at vesting (amounts in thousands except per share amounts):
WeightedAverage Grant
Date Fair Value

Number ofsharesUnvested RSUs at December 31, 2017 ...............................................................................
Granted ................................................................................................................................
Vested ..................................................................................................................................
Forfeited ..............................................................................................................................
Unvested RSUs at December 31, 2018 ...............................................................................

11,821
3,184(3,078)(1,304)
10,623$27.20
64.61
38.87
37.60
$40.39Certain of our performance-based RSUs did not have an accounting grant date as of December 31, 2018, as there is
not a mutual understanding between the Company and the employee of the performance terms. Generally, these performanceterms relate to operating income performance for future years where the performance goals have not yet been set. As of
December 31, 2018, there were 3.2 million performance-based RSUs outstanding for which the accounting grant date has notbeen set, of which 1.6 million were 2018 grants. Accordingly, no grant date fair value was established and the weighted
average grant date fair value calculated above for 2018 grants excludes these RSUs.
At December 31, 2018, approximately $98 million of total unrecognized compensation cost was related to RSUs andis expected to be recognized over a weighted-average period of 1.51 years. Of the total unrecognized compensation cost,$67 million was related to performance-based RSUs, which is expected to be recognized over a weighted-average period of
1.49 years. The total grant date fair value of vested RSUs was $120 million, $64 million and $123 million for the years ended
December 31, 2018, 2017, and 2016, respectively.
The income tax benefit from stock option exercises and RSU vestings was $94 million, $160 million, and$134 million for the years ended December 31, 2018, 2017, and 2016, respectively.
Share-Based Compensation Expense
The following table sets forth the total share-based compensation expense included in our consolidated statements ofoperations (amounts in millions):
For the Years Ended
December 31,
2018
2017
2016

Cost of revenues—product sales: Software royalties, amortization, and intellectual property
licenses .................................................................................................................................................. $13
Cost of revenues—subscription, licensing, and other revenues: Game Operations andDistribution Costs .................................................................................................................................. 2
Cost of revenues—subscription, licensing, and other revenues: Software royalties, amortization,and intellectual property licenses .......................................................................................................... 3
Product development ................................................................................................................................. 61
Sales and marketing ................................................................................................................................... 15
General and administrative ........................................................................................................................ 115
Share-based compensation expense before income taxes ......................................................................... 209
Income tax benefit ..................................................................................................................................... (46)
Total share-based compensation expense, net of income tax benefit ........................................................$163

$10

$20

1

2

3
57
15
92
178
(34)
$144

2
47
15
73
159
(42)
$117

17. Interest and Other Expense (Income), Net
Interest and other expense (income), net is comprised of the following (amounts in millions):
For the Years Ended
December 31,
2018
2017
2016

Interest income ..........................................................................................................................................
Interest expense from debt and amortization of debt discount and deferred financing costs....................
Other expense (income), net ......................................................................................................................
Interest and other expense (income), net ...................................................................................................
F-40

F-40

$(65)
140
(4)
$71

$(24)
162
8
$146

$(10)
217
7
$214

18. Income Taxes
Domestic and foreign income (loss) before income taxes and details of the income tax expense (benefit) are as
follows (amounts in millions):
For the Years Ended
December 31,
2018
2017
2016

Income before income tax expense:
Domestic .......................................................................................................................................
Foreign ..........................................................................................................................................
Income tax expense (benefit):
Current:
Federal ......................................................................................................................................
State ..........................................................................................................................................
Foreign ......................................................................................................................................
Total current .............................................................................................................................
Deferred:Federal ......................................................................................................................................
State ..........................................................................................................................................
Foreign ......................................................................................................................................
Total deferred ...........................................................................................................................
Income tax expense ..........................................................................................................................

$432
1,445
$1,877$185966$1,151$228
878$1,106$(228)
(15)
280
37

$696
26
335
1,057

$(15)
16
150
151

(98)
106
19
27
$64

(111)
(32)
(36)
(179)
$878

40
(13)
(38)
(11)
$140

The items accounting for the difference between income taxes computed at the U.S. federal statutory income tax rate
and the income tax expense (benefit) at the effective tax rate for each of the years are as follows (amounts in millions):
2018

Federal income tax provision at statutory rate .......................................
State taxes, net of federal benefit ...........................................................
Research and development credits .........................................................
Foreign rate differential ..........................................................................
Change in tax reserves ............................................................................
Audit settlements ....................................................................................
Net operating loss tax attribute assumed from the PurchaseTransaction .........................................................................................
Excess tax benefits related to share-based payments .............................
U.S. Tax Reform Act ..............................................................................
Change in valuation allowance ...............................................................
Other .......................................................................................................
Income tax expense ................................................................................

For the Years Ended December 31,
2017
2016

$394
36
(46)
(198)
265
(115)

21%
2
(2)
(11)
14
(6)

$403
4
(26)
(271)
291
—

35%
—
(2)
(24)
25
—

$387
9
(36)
(239)
210
—

35%
1
(3)
(22)
19
—

—
(58)
(285)
61
10
$64

—
(3)
(15)
3
—
3%

(36)
(113)
636
—
(10)
$878

(3)
(10)
55
—
—
76%

(114)
(81)
—
—
4
$140

(10)
(7)
—
—
—
13%

The Company’s tax rate is affected by the tax rates in the jurisdictions in which the Company operates, some ofwhich have a statutory tax rate less than the U.S. rate of 21% , and the relative amount of income earned in each jurisdiction.
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 primaryadjustments related to the Closing Agreement were recognized in the second quarter of 2018 and consisted of a tax expenseof $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.
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 the Transition Tax.
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F-41

On December 22, 2017, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin
No. 118 (“SAB 118”), which provides guidance on how to account for the effects of the U.S. Tax Reform Act under ASC
740. SAB 118 enabled companies to record a provisional amount for the effects of the U.S. Tax Reform Act based on areasonable 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 andremeasurement of deferred tax assets and liabilities.
In 2013, in connection with the October 11, 2013 repurchase of approximately 429 million shares of our common
stock from Vivendi (“Purchase Transaction”), we assumed certain tax attributes, generally consisting of net operating loss(“NOL”) carryforwards of approximately $760 million, which represent a potential tax benefit of approximately$266 million. The Company also obtained indemnification from Vivendi against losses attributable to the disallowance ofclaimed utilization of such NOL carryforwards of up to $200 million in unrealized tax benefits in the aggregate, limited totaxable years ending on or prior to December 31, 2016. No benefit for these tax attributes or indemnification was recorded
upon the close of the Purchase Transaction. As of December 31, 2017, we had utilized approximately $760 million of theoriginal NOL and had recorded an indemnification asset of $200 million in “Other assets.” Correspondingly, the sameamount was recorded as a reduction to the consideration paid for the shares repurchased in “Treasury stock.”
Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets andliabilities for accounting purposes and the amounts used for income tax purposes. The components of the net deferred tax
assets (liabilities) are as follows (amounts in millions):
As of
December 31,
2018
2017

Deferred tax assets:
Allowance for sales returns and price protection ..........................................................................................
Accrued expenses ..........................................................................................................................................
Deferred revenue ...........................................................................................................................................
Tax attributes carryforwards..........................................................................................................................
Share-based compensation ............................................................................................................................
Acquired intangibles ......................................................................................................................................
U.S. deferred taxes on foreign earnings ........................................................................................................
Other ..............................................................................................................................................................
Deferred tax assets .............................................................................................................................................
Valuation allowance ..........................................................................................................................................
Deferred tax assets, net of valuation allowance ................................................................................................
Deferred tax liabilities:
Acquired intangibles ......................................................................................................................................
Capitalized software development expenses .................................................................................................
Other ..............................................................................................................................................................
Deferred tax liabilities .......................................................................................................................................
Net deferred tax assets .......................................................................................................................................

$25
26
136
81
69
43
263
28
671
(61)
610

$47
31
245
71
59
149
—
61
663
—
663

(140)
(57)
(26)
(223)
$387

(146)
(55)
(24)
(225)
$438

As of December 31, 2018, we had gross tax credit carryforwards of $172 million for state purposes. The tax credit
carryforwards are presented in “Deferred tax assets” net of unrealized tax benefits that would apply upon the realization of
uncertain tax positions. In addition, we had foreign NOL carryforwards of $22 million at December 31, 2018, attributed
mainly to losses in France which can be carried forward indefinitely.

F-42

F-42

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 thelikelihood 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 willreassess this determination quarterly and record a tax benefit if and when future evidence allows for a partial or full release ofthis valuation allowance.
As of December 31, 2017, we no longer consider the available cash balances related to undistributed earnings held
outside of the U.S. by our foreign subsidiaries to be indefinitely reinvested. As of December 31, 2018, we recorded net
deferred tax liability related to undistributed foreign earnings of $16 million. In addition, we have elected to record deferred
U.S. taxes with respect to earnings of our foreign subsidiaries subject to GILTI and recorded a $263 million deferred tax
asset.
Activision Blizzard’s 2009 through 2017 tax years remain open to examination by certain major taxing jurisdictions
to which we are subject. During February 2018, we were notified by the IRS that our tax returns for our 2012 through 2016
tax years will be subject to examination. In September 2018, the IRS concluded its examination of our 2009 through 2011 tax
years. We also have several state and non-U.S. audits pending, including the French and Swedish audits discussed below. In
addition, as part of purchase price accounting for our 2016 acquisition of King, we assumed $74 million of uncertain tax
positions primarily related to pre-acquisition transfer pricing matters. We are currently in negotiations with the tax authorities
in the relevant jurisdictions, which include the UK and Sweden, with respect to King’s transfer pricing for both pre- andpost-acquisition tax years. While the outcome of these negotiations remains uncertain, they could result in an agreement thatchanges the allocation of profits and losses between these and other relevant jurisdictions or a failure to reach an agreementthat results in unilateral adjustments to the amount and timing of taxable income in the jurisdictions in which King operates.
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. The STA decision described the basis for issuing a transfer
pricing assessment of approximately 3.5kr billion (approximately $400 million), primarily concerning an allegedintercompany 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, multilateralprocedures 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 French Tax Authority (“FTA”) related totransfer 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 tosuccessfully 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, certain of our subsidiaries are under examination or investigation, or may be subject to examination or
investigation, by tax authorities in various jurisdictions. These proceedings may lead to adjustments or proposed adjustments
to our taxes or provisions for uncertain tax positions. Such proceedings may have a material adverse effect on the Company’s
consolidated financial position, liquidity, or results of operations in the earlier of the period or periods in which the matters
are resolved and in which appropriate tax provisions are taken into account in our financial statements. If we were to receive
a materially adverse assessment from a taxing jurisdiction, we would plan to vigorously contest it and consider all of ouroptions, including the pursuit of judicial remedies.

F-43

F-43

As of December 31, 2018, we had approximately $917 million of gross unrecognized tax benefits, $812 million ofwhich would affect our effective tax rate, if recognized. A reconciliation of total gross unrecognized tax benefits is as follows(amounts in millions):
For the Years Ended
December 31,
2018
2017
2016

Unrecognized tax benefits balance at January 1...............................................................................
Gross increase for tax positions taken during a prior year ...............................................................
Gross decrease for tax positions taken during a prior year ..............................................................
Gross increase for tax positions taken during the current year ........................................................
Settlement with taxing authorities ....................................................................................................
Lapse of statute of limitations ..........................................................................................................
Unrecognized tax benefits balance at December 31.........................................................................

$1,138
94
(123)
132
(312)
(12)
$917

$846
66
—
229
(1)
(2)
$1,138

$552
89
(17)
240
(18)
—
$846

As of December 31, 2018, 2017, and 2016, we had approximately $87 million, $121 million, and $71 million,
respectively, of accrued interest and penalties related to uncertain tax positions. For the years ended December 31, 2018,2017, and 2016, we recorded $11 million, $28 million, and $17 million, respectively, of interest expense related to uncertain
tax positions.
The final resolution of the Company’s global tax disputes is uncertain. There is significant judgment required in theanalysis of disputes, including the probability determination and estimation of the potential exposure. Based on current
information, in the opinion of the Company’s management, the ultimate resolution of these matters is not expected to have amaterial adverse effect on the Company’s consolidated financial position, liquidity or results of operations, except as noted
above.
19. Computation of Basic/Diluted Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share (amounts in millions,
except per share data):
For the Years Ended
December 31,
2018
2017
2016

Numerator:
Consolidated net income ...................................................................................................
Less: Distributed earnings to unvested share-based awards that participate in earnings...................................................................................................................................
Less: Undistributed earnings allocated to unvested share-based awards that participate
in earnings .................................................................................................................
Numerator for basic and diluted earnings per common share—income available tocommon shareholders ....................................................................................................
Denominator:
Denominator for basic earnings per common share—weighted-average commonshares outstanding .........................................................................................................
Effect of dilutive stock options and awards under the treasury stock method ..................
Denominator for diluted earnings per common share—weighted-average commonshares outstanding plus dilutive common shares under the treasury stock method ......
Basic earnings per common share .........................................................................................
Diluted earnings per common share ......................................................................................

$1,813

$273

$966

—

—

(2)

—

—

(2)

$1,813

$273

$962

762
9

754
12

740
14

771
$2.38

766
$0.36

754
$1.30

$2.35

$0.36

$1.28

In 2016, certain of our unvested restricted stock units met the definition of participating securities, as they
participated in earnings based on their rights to dividends or dividend equivalents. Therefore, we were required to use thetwo-class method in our computation of basic and diluted earnings per common share. For the year ended December 31,
2016, on a weighted-average basis, we had outstanding unvested restricted stock units of 3 million shares of common stockthat participated in earnings.

F-44

F-44

The vesting of certain of our employee-related restricted stock units and options is contingent upon the satisfactionof pre-defined performance measures. The shares underlying these equity awards are included in the weighted-average
dilutive common shares only if the performance measures are met as of the end of the reporting period. Approximately
4 million, 7 million, and 8 million shares are not included in the computation of diluted earnings per common share for theyears ended December 31, 2018, 2017, and 2016, respectively, as their underlying performance measures had not yet beenmet.
Potential common shares are not included in the denominator of the diluted earnings per common share calculation
when the inclusion of such shares would be anti-dilutive. Therefore, 3 million, 1 million, and 5 million options to purchaseshares of common stock were not included in the calculation of diluted earnings per common share for the years ended
December 31, 2018, 2017, and 2016, respectively, as the effect of their inclusion would be anti-dilutive.
20. Capital Transactions
Repurchase Programs
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 from February 14, 2019 until the earlier of February 13, 2021 and adetermination 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 wereauthorized to repurchase up to $1 billion of our common stock from February 13, 2017 through February 12, 2019. We did
not repurchase any shares under this program.
Dividends
On February 12, 2019, our Board of Directors declared a cash dividend of $0.37 per common share. Such dividend
is 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.
On February 9, 2017, our Board of Directors declared a cash dividend of $0.30 per common share. On May 10,
2017, we made an aggregate cash dividend payment of $226 million to shareholders of record at the close of business on
March 30, 2017. On May 26, 2017, we made related dividend equivalent payments of less than $1 million to certain holdersof restricted stock units.
On February 11, 2016, our Board of Directors declared a cash dividend of $0.26 per common share. On May 11,
2016, we made an aggregate cash dividend payment of $192 million to shareholders of record at the close of business on
March 30, 2016. On May 27, 2016, we made related dividend equivalent payments of $3 million to certain holders ofrestricted stock units.
21. Supplemental Cash Flow Information
Supplemental cash flow information is as follows (amounts in millions):
For the Years Ended
December 31,
2018
2017
2016

Supplemental cash flow information:
Cash paid for income taxes, net of refunds ..............................................................
$560 $176
Cash paid for interest ...............................................................................................
150
145

$121
209

The beginning and ending cash and cash equivalents and restricted cash reported within our consolidated statementof cash flows included restricted cash amounts as follows (amounts in millions):
At December 31,
2018
2017
2016

Beginning restricted cash ........................................................................................
$7$17
Ending restricted cash .............................................................................................
4
7

F-45

F-45

$3,56917

For the year ended December 31, 2016, we had non-cash purchase price consideration of $89 million related tovested and unvested stock options and awards that were assumed and replaced with Activision Blizzard equity or deferredcash awards in the King Acquisition. Refer to Note 23 for further discussion.
22. Commitments and Contingencies
Commitments and Obligations
In the normal course of business, we enter into contractual arrangements with third parties for non-cancelable
operating lease agreements for our offices, for the development of products and for the rights to intellectual property. Under
these agreements, we commit to provide specified payments to a lessor, developer or intellectual property holder, as the casemay be, based upon contractual arrangements. The payments to third-party developers are generally conditioned upon theachievement by the developers of contractually specified development milestones. Further, these payments to third-party
developers and intellectual property holders typically are deemed to be advances and, as such, are recoupable against futureroyalties earned by the developer or intellectual property holder based on sales of the related game. Additionally, inconnection with certain intellectual property rights, acquisitions and development agreements, we commit to spend specified
amounts for marketing support for the game(s) which is (are) to be developed or in which the intellectual property will beutilized. Assuming all contractual provisions are met, the total future minimum commitments for these and other contractual
arrangements in place at December 31, 2018, are scheduled to be paid as follows (amounts in millions):
Facility andEquipment
LeasesFor the years ending December 31,
2019 ...................................................
2020 ...................................................
2021 ...................................................
2022 ...................................................
2023 ...................................................
Thereafter ..........................................
Total ...............................................
(1)

Contractual Obligations(1)Developer andIntellectualMarketing
Properties

$80
70
53
45
38
60
$346

$24
3
1
—
—
—
$28

$35
21
—
—
—
—
$56

Long-Term
Debt
Obligations(2)

$86
86
736
466
60
2,207
$3,641

Total

$225
180
790
511
98
2,267
$4,071

We have omitted uncertain income tax liabilities from this table due to the inherent uncertainty regarding the timingof the potential issue resolution of the underlying matters. Specifically, either (a) the underlying positions have notbeen fully developed under audit to quantify at this time or, (b) the years relating to the matters for certain
jurisdictions are not currently under audit. At December 31, 2018, we had $637 million of net unrecognized tax
benefits included “Other liabilities,” in our consolidated balance sheet.
Additionally, as a result of the U.S. Tax Reform Act, we recorded a liability at December 31, 2017, of $467 million
which reflected our estimated Transition Tax net payments. In the fourth quarter of 2018, we completed our analysisof the effects of the U.S. Tax Reform Act and adjusted the net Transition Tax liability with consideration of tax
attributes utilization to be $198 million. The Transition Tax liability is payable over and up to an eight-year period
and is not reflected in our Contractual Obligations table above.

(2)

Long-term debt obligations represent our obligations related to the contractual principal repayments and interest
payments under the Notes, which are subject to fixed interest rates, as of December 31, 2018. There was nooutstanding balance under our New Revolver as of December 31, 2018. We have calculated the expected interest
obligation based on the outstanding principal balance and interest rate applicable at December 31, 2018. Refer toNote 13 for additional information on our debt obligations.

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 ofapproximately 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 tosuccessfully 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 inadvance 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.
F-46

F-46

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 thismatter, 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 tosignificant 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 forsubsequent 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 andpersonal 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 amaterial adverse effect on our business, financial condition, results of operations, or liquidity.
Letters of Credit
As described in Note 13, a portion of our New Revolver can be used to issue letters of credit of up to $50 million,
subject to the availability of the New Revolver. At December 31, 2018, we did not have any letters of credit issued oroutstanding under the New Revolver.
23. Acquisitions
King Digital Entertainment
On February 23, 2016, we completed the King Acquisition, purchasing all of King’s outstanding shares. As a result,King became a wholly-owned subsidiary of Activision Blizzard. King is a leading global developer and publisher ofinteractive entertainment content and services, primarily on mobile platforms, such as Android and iOS, and on online andsocial platforms, such as Facebook and the king.com websites. King’s results of operations since the King Closing Date areincluded in our consolidated financial statements.
We made this acquisition because we believed that the addition of King’s highly-complementary mobile businesspositioned the Company as a global leader in interactive entertainment across the console, PC, and mobile platforms, andaligned us for future growth.
The aggregate purchase price of the King Acquisition was approximately $5.8 billion, which was paid on the King
Closing Date and funded primarily with $3.6 billion of existing cash and $2.2 billion of cash from new debt issued by theCompany. We identified and recorded assets acquired and liabilities assumed at their estimated fair values at the King
Closing Date, and allocated the remaining value of approximately $2.7 billion to goodwill.
The final purchase price allocation was as follows (in millions):
February 23,
2016

Tangible assets and liabilities assumed:
Cash and cash equivalents ................................................................. $1,151
Accounts receivable ........................................................................... 162
Other current assets ............................................................................
72
Property and equipment .....................................................................
57
Deferred income tax assets, net .........................................................
27
Other assets ........................................................................................
47
Accounts payable ...............................................................................
(9)
Accrued expenses and other liabilities ............................................... (272)
Other liabilities................................................................................... (110)Deferred income tax liabilities, net .................................................... (52)Intangible assets
Internally-developed franchises ......................................................... 845
Customer base .................................................................................... 609
Developed software ........................................................................... 580
Trade name.........................................................................................
46
Goodwill ................................................................................................ 2,675
Total purchase price ............................................................................... $5,828
F-47

F-47

Estimated
useful lives

2 - 7 years

3 - 5 years
2 years3 - 4 years
7 yearsDuring the year ended December 31, 2016, the Company incurred $38 million of expenses related to the King
Acquisition, which are included within “General and administrative” in the consolidated statements of operations.
Share-Based Compensation
In connection with the King Acquisition, a majority of the outstanding King options and other equity awards thatwere unvested as of the King Closing Date were converted into equivalent options and awards with respect to shares of theCompany’s common stock, using an equity award exchange ratio calculated in accordance with the transaction agreement. As
a result, replacement options and other equity awards of 10 million and 3 million, respectively, were issued. The portion of
the fair value related to pre-combination services of $76 million was included in the purchase price.
The remaining portion of outstanding unvested awards that were assumed were replaced with deferred cash awards.
The cash proceeds were placed in an escrow-like account with the cash releases to occur based on the awards’ original
vesting schedule upon future service being rendered. The portion of the fair value related to pre-combination services of$22 million was included in the purchase price.
Identifiable Intangible Assets Acquired and Goodwill
The internally-developed franchises, customer base, developed software, and trade name intangible assets from theacquisition of King will be amortized to “Cost of revenues—subscription, licensing, and other revenues—Software royalties,
amortization, and intellectual property licenses,” “Sales and marketing,” “Cost of revenues—subscription, licensing, andother revenues—Software royalties, amortization, and intellectual property licenses,” and “General and administrative,”
respectively. The intangible assets will be amortized over their estimated useful lives in proportion to the economic benefits
received.
The $2.7 billion of goodwill recognized is primarily attributable to the benefits the Company expects to derive fromaccelerated expansion as an interactive entertainment provider in the mobile sector, future franchises, and technology, as wellas the management team’s proven ability to create future games and franchises. Approximately $464 million of the goodwill
is expected to be deductible for tax purposes in the U.S.
King Net Revenue and Earnings
The amount of net revenue and earnings attributable to King in the Company’s consolidated statement of operations
during the year ended December 31, 2016, the period of the King Acquisition, are included in the table below. The amounts
presented represent the net revenues and earnings after adjustments for purchase price accounting, inclusive of amortizationof intangible assets, share-based payments, and deferrals of revenues and related cost of revenues.
For the Year Ended
December 31, 2016

(in millions)

Net revenues............................................................................................................
Net loss....................................................................................................................

$1,523$(230)Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined results of operations of theCompany and King, on a pro forma basis, as though the acquisition had occurred on January 1, 2015. The 2016 pro forma
financial information presented includes the effects of adjustments related to amortization charges from acquired intangible
assets, employee compensation from replacement equity awards issued in the King Acquisition and the profit sharing bonus
plan established as part of the King Acquisition, and interest expense from the new debt issued in connection with the King
Acquisition, among other adjustments. We also adjusted for Activision Blizzard and King non-recurring acquisition-related
costs of approximately $74 million incurred for the year ended December 31, 2016.
The unaudited pro forma financial information as presented below is for informational purposes only and is notnecessarily indicative of the results of operations that would have been achieved if the King Acquisition, and any borrowings
undertaken to finance the King Acquisition, had taken place at the beginning of 2015, nor does it intend to be a projection of
future results.

F-48

F-48

plan established as part of the King Acquisition, and interest expense from the new debt issued in connection with the King
Acquisition, among other adjustments. We also adjusted for Activision Blizzard and King non-recurring acquisition-related
costs of approximately $74 million incurred for the year ended December 31, 2016.
The unaudited pro forma financial information as presented below is for informational purposes only and is notnecessarily indicative of the results of operations that would have been achieved if the King Acquisition, and any borrowings
undertaken to finance the King Acquisition, had taken place at the beginning of 2015, nor does it intend to be a projection of
future results.
For the Year Ended
December 31,
2016(in millions)

Net revenues............................................................................................................
Net income ..............................................................................................................
F-48
Basic earnings per common share...........................................................................
Diluted earnings per common share .......................................................................

$6,888$1,005$1.35$1.32

24. Quarterly Financial Information (Unaudited)

Net revenues .......................................................
Cost of revenues .................................................
Operating income ...............................................
Net income .........................................................
Basic earnings per common share ......................
Diluted earnings per common share...................

For the Quarters Ended
December 31,
September 30,
June 30,
March 31,
2018
2018
2018
2018
(Amounts in millions, except per share data)$2,381
832
694
650
0.85
0.84

December 31,
2017$1,512
513
265
260
0.34
0.34

$1,641
510
434
402
0.53
0.52

For the Quarters Ended
September 30,
June 30,
2017
2017(Amounts in millions, except per share data)

Net revenues .......................................................
Cost of revenues .................................................
Operating income ...............................................
Net income (loss) ...............................................
Basic earnings (loss) per common share ............
Diluted earnings (loss) per common share .........

$2,043
803
221
(584)
(0.77)(0.77)$1,618
552
257
188
0.25
0.25

$1,631
561
339
243
0.32
0.32

$1,965
662
595
500
0.66
0.65

March 31,2017

$1,726
585
493
426
0.57
0.56

25. Subsequent Events
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 theCompany plans to refocus its resources on its largest opportunities and to remove unnecessary levels of complexity andduplication 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 acrossthe business, which we believe will enable us to provide better opportunities for talent, and greater expertise andscale on behalf of our business units.

We expect to incur aggregate pre-tax restructuring charges of approximately $150 million in 2019, related toseverance, 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 theaggregate charge). We expect the majority of these charges to be incurred in the first quarter of 2019, with most of thebalance 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.

F-49

SCHEDULE II
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESVALUATION AND QUALIFYING ACCOUNTS(Amounts in millions)Col. A Description

Col. B
Balance at
Beginning of
PeriodAt December 31, 2018
Allowances for sales returns and price protection andother allowances ............................................................
Allowance for doubtful accounts.......................................
At December 31, 2017
Allowances for sales returns and price protection andother allowances ............................................................
Allowance for doubtful accounts.......................................
At December 31, 2016
Allowances for sales returns and price protection andother allowances ............................................................
Allowance for doubtful accounts.......................................

Col. C
Additions(A)Col. D
Deductions(B)Col. E
Balance at End
of Period

$274
5

$24
—

$(112)
(1)

$186
4

$257
4

$83
1

$(66)
—

$274
5

$339
4

$119
2

$(201)
(2)

$257
4

(A)

Includes increases and reversals of allowances for sales returns, price protection, and doubtful accounts due tonormal reserving terms.

(B)

Includes actual write-offs and utilization of allowances for sales returns, price protection and uncollectible accounts
receivable, net of recoveries, and foreign currency translation and other adjustments.

F-50

F-50

EXHIBIT INDEX
Pursuant to the rules and regulations of the SEC, the Company has filed certain agreements as exhibits to thisAnnual Report on Form 10-K. These agreements may contain representations and warranties by the parties. These
representations and warranties have been made solely for the benefit of the other party or parties to such agreements and(i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of suchagreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which
may not be fully reflected in the Company’s public disclosure, (iii) may reflect the allocation of risk among the parties tosuch agreements and (iv) may apply materiality standards different from what may be viewed as material to investors.
Accordingly, these representations and warranties may not describe the Company’s actual state of affairs at the date hereofand should not be relied upon.
Exhibit Number

Exhibit

3.1

Third Amended and Restated Certificate of Incorporation of Activision Blizzard, Inc., dated June 5,2014 (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed June 6, 2014).
Fourth Amended and Restated Bylaws of Activision Blizzard, Inc., adopted as of February 1, 2018
(incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K/A, filed March 21, 2018).
Indenture, dated as of September 19, 2016, among Activision Blizzard, Inc., the guarantors named
therein and Wells Fargo Bank, National Association, as trustee, with respect to the Company’s 2.300%
Unsecured Senior Notes due 2021 and the Company’s 3.400% Unsecured Senior Notes due 2026
(incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K, filed September 19, 2016).
Base Indenture, dated as of May 26, 2017, between Activision Blizzard, Inc. and Wells Fargo Bank,
National Association, as trustee (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K,
filed May 26, 2017).
First Supplemental Indenture, dated as of May 26, 2017, between Activision Blizzard, Inc. and Wells
Fargo Bank, National Association, as trustee, with respect to the Company’s 2.600% Unsecured SeniorNotes due 2022, the Company’s 3.400% Unsecured Senior Notes due September 2027 and theCompany’s 4.500% Unsecured Senior Notes due 2047 (incorporated by reference to Exhibit 4.2 of theCompany’s Form 8-K, filed May 26, 2017).
Form of certificate for the Company’s 2.600% Unsecured Senior Notes due 2022 (incorporated byreference to Exhibit 4.3 of the Company’s Form 8-K, filed May 26, 2017).
Form of certificate for the Company’s 3.400% Unsecured Senior Notes due 2027 (incorporated byreference to Exhibit 4.4 of the Company’s Form 8-K, filed May 26, 2017).
Form of certificate for the Company’s 4.500% Unsecured Senior Notes due 2047 (incorporated byreference to Exhibit 4.5 of the Company’s Form 8-K, filed May 26, 2017).
Activision Blizzard, Inc. Amended and Restated 2008 Incentive Plan, as amended and restated(incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed June 12, 2012).
Activision Blizzard, Inc. 2014 Incentive Plan, amended and restated as of March 2, 2017 (incorporated
by reference to Exhibit 10.1 of the Company’s Form 10-Q filed May 4, 2017).
Activision Blizzard, Inc. KDE Equity Incentive Plan, amended as of November 1, 2016 (incorporated byreference to Exhibit 10.14 of the Company’s Form 10-K for the year ended December 31, 2016).
Form of Notice of Stock Option Award for grants to unaffiliated directors pursuant to the Activision
Blizzard, Inc. 2008 Incentive Plan (effective as of November 12, 2008) (incorporated by reference to
Exhibit 10.44 of the Company’s Form 10-K for the year ended December 31, 2008).
Form of Notice of Stock Option Award for grants to persons other than directors pursuant to theActivision Blizzard, Inc. 2008 Incentive Plan (effective as of November 12, 2008) (incorporated byreference to Exhibit 10.45 of the Company’s Form 10-K for the year ended December 31, 2008).
Form of Notice of Stock Option Award for grants to unaffiliated directors pursuant to the Activision
Blizzard, Inc. 2008 Incentive Plan (effective as of March 6, 2013) (incorporated by reference to
Exhibit 10.5 of the Company’s Form 10-Q for the quarter ended March 31, 2013).
Form of Notice of Stock Option Award for grants to persons other than directors pursuant to theActivision Blizzard, Inc. 2008 Incentive Plan (effective as of March 6, 2013) (incorporated by reference
to Exhibit 10.6 of the Company’s Form10-Q for the quarter ended March 31, 2013).
Form of Notice of Stock Option Award for grants pursuant to the Activision Blizzard, Inc. 2014
Incentive Plan (effective as of June 5, 2014) (incorporated by reference to Exhibit 10.1 of theCompany’s Form 10-Q for the quarter ended June 30, 2014).
Form of Notice of Restricted Share Unit Award for grants to persons other than non-affiliated directors
pursuant to the Activision Blizzard, Inc. 2014 Incentive Plan (effective as of June 5, 2014) (incorporated
by reference to Exhibit 10.2 of the Company’s Form 10-Q for the quarter ended June 30, 2014).

3.2
4.1

4.2
4.3

4.4
4.5
4.6
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*

E-1

E-1

Exhibit Number

Exhibit10.10*

Form of Notice of Performance-Vesting Restricted Share Unit Award for grants pursuant to theActivision Blizzard, Inc. 2014 Incentive Plan (effective as of June 5, 2014) (incorporated by reference to
Exhibit 10.4 of the Company’s Form 10-Q for the quarter ended June 30, 2014).
Form of Notice of Restricted Share Award for grants pursuant to the Activision Blizzard, Inc. 2014
Incentive Plan (effective as of June 5, 2014) (incorporated by reference to Exhibit 10.5 of theCompany’s Form 10-Q for the quarter ended June 30, 2014).
Form of Notice of Restricted Share Unit Award for grants to persons other than non-affiliated directors
pursuant to the Activision Blizzard, Inc. 2014 Incentive Plan (effective as of July 29, 2014)(incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q for the quarter ended
September 30, 2014).
Form of Notice of Restricted Share Unit Award for grants to non-affiliated directors pursuant to theActivision Blizzard, Inc. 2014 Incentive Plan (effective as of July 29, 2014) (incorporated by reference
to Exhibit 10.2 of the Company’s Form 10-Q for the quarter ended September 30, 2014).
Form of Notice of Performance-Vesting Restricted Share Unit Award for grants pursuant to theActivision Blizzard, Inc. 2014 Incentive Plan (effective as of July 29, 2014) (incorporated by reference
to Exhibit 10.3 of the Company’s Form 10-Q for the quarter ended September 30, 2014).
Form of Notice of Stock Option Award for grants to U.S. employees pursuant to the Activision
Blizzard, Inc. 2014 Incentive Plan (effective as of November 1, 2016) (incorporated by reference to
Exhibit 10.44 of the Company’s Form 10-K for the year ended December 31, 2016).
Form of Notice of Stock Option Award for grants to non-U.S. employees pursuant to the Activision
Blizzard, Inc. 2014 Incentive Plan (effective as of November 1, 2016) (incorporated by reference to
Exhibit 10.45 of the Company’s Form 10-K for the year ended December 31, 2016).
Form of Notice of Restricted Share Unit Award for grants to non-U.S. employees pursuant to theActivision Blizzard, Inc. 2014 Incentive Plan (effective as of November 1, 2016) (incorporated byreference to Exhibit 10.46 of the Company’s Form 10-K for the year ended December 31, 2016).
Form of Notice of Stock Option Award for grants pursuant to the Activision Blizzard, Inc. 2014
Incentive Plan (effective as of March 2, 2017) (incorporated by reference to Exhibit 10.2 of theCompany’s Form 10-Q for the quarter ended March 31, 2017).
Form of Notice of Performance-Vesting Restricted Share Unit Award for grants pursuant to theActivision Blizzard, Inc. 2014 Incentive Plan (effective as of March 2, 2017) (incorporated by reference
to Exhibit 10.3 of the Company’s Form 10-Q for the quarter ended March 31, 2017).
Form of Notice of Performance-Vesting Restricted Share Unit Award for grants pursuant to theActivision Blizzard, Inc. 2014 Incentive Plan (effective as of November 26, 2018).
Form of Notice of Stock Option Award for grants pursuant to the Activision Blizzard, Inc. 2014
Incentive Plan (effective as of October 26, 2018).
Amended and Restated CEO Recognition Program (incorporated by reference to Exhibit 10.6 of theCompany’s Form 10-Q for the quarter ended June 30, 2014).
Activision Blizzard, Inc. Corporate Annual Incentive Plan (incorporated by reference to Exhibit 10.1 of
the Company’s Form 10-Q for the quarter ended September 30, 2015).
Employment Agreement, dated February 25, 2019, between Dennis Durkin and the Company.
Employment Agreement, dated as of November 22, 2016, between Robert A. Kotick and the Company(incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K, filed November 25, 2016).
Form of Notice of Performance Share Unit Award to Robert A. Kotick.
Form of Notice of Stock Option Award to Robert A. Kotick.
Employment Letter, dated October 3, 2018, to Michael Morhaime from the Company.
Service Agreement, dated November 2, 2015, between Riccardo Zacconi and the Company(incorporated by reference to Exhibit 10.4 of the Company’s Form 10-Q for the quarter ended March 31,2017).
Individual Option and Subscription Agreement, dated as of January 31, 2014 (incorporated by reference
to Exhibit 10.5 of the Company’s Form 10-Q for the quarter ended March 31, 2017).
Option Exchange/Supplemental Subscription Agreement, dated as of March 21, 2014 (incorporated byreference to Exhibit 10.6 of the Company’s Form 10-Q for the quarter ended March 31, 2017).
Notice of Share Option Grant, dated as of February 16, 2015, to Riccardo Zacconi (incorporated byreference to Exhibit 10.7 of the Company’s Form 10-Q for the quarter ended March 31, 2017).
Notice of Restricted Stock Unit Award, dated as of February 16, 2015, to Riccardo Zacconi(incorporated by reference to Exhibit 10.8 of the Company’s Form 10-Q for the quarter ended March 31,2017).

10.11*
10.12*

10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
10.30*
10.31*
10.32*
10.33*

E-2

E-2

Exhibit Number

Exhibit10.34*

Notice of Restricted Stock Unit Award, dated as of November 10, 2015, to Riccardo Zacconi(incorporated by reference to Exhibit 10.9 of the Company’s Form 10-Q for the quarter ended March 31,2017).
Employment Agreement, dated May 10, 2017, between Activision Blizzard, Inc. and Collister Johnson(incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K, filed May 11, 2017).
Employment Agreement, dated May 5, 2017, between Activision Blizzard, Inc. and Spencer Neumann(incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K, filed May 11, 2017).
King Profit Sharing Plan, effective as of February 23, 2016 (incorporated by reference to Exhibit 10.10of the Company’s Form 10-Q for the quarter ended March 31, 2017).
Credit Agreement, dated as of October 11, 2013, among the Company, as borrower, certain subsidiariesof the Company, as guarantors, a group of lenders, Bank of America, N.A., as administrative agent andcollateral agent for the lenders, J.P. Morgan Securities LLC, as syndication agent, Bank of America
Merrill Lynch and J.P. Morgan Securities LLC, as joint lead arrangers and joint bookrunners, andGoldman Sachs & Co., HSBC Securities (USA) Inc., Mistubishi UFJ Securities (USA), Inc., Mizuho
Securities USA Inc., RBC Capital Markets, SunTrust Bank and U.S. Bank National Association, as
co-documentation agents (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K, filed
October 18, 2013).
First Amendment to the Credit Agreement, dated as of October 11, 2013, by and among Activision
Blizzard, Inc., the guarantors from time to time party thereto, the lenders from time to time party thereto,
Bank of America, N.A., as administrative agent and collateral agent, and the several other agents party
thereto (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K, filed November 3,2015).
Second Amendment to the Credit Agreement, dated as of October 11, 2013, by and among Activision
Blizzard, Inc., the guarantors from time to time party thereto, the lenders from time to time party thereto,
Bank of America, N.A., as administrative agent and collateral agent, and the several other agents party
thereto (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K, filed November 17,2015).
Third Amendment to the Credit Agreement, dated as of October 11, 2013, by and among Activision
Blizzard, Inc., the guarantors from time to time party thereto, the lenders from time to time party thereto,
Bank of America, N.A., as administrative agent and collateral agent, and the several other agents party
thereto (incorporated by reference to Exhibit 10.1 of the Company’s form 8-K, filed December 14,2015).
Fourth Amendment to the Credit Agreement, dated as of October 11, 2013, by and among Activision
Blizzard, Inc., the guarantors from time to time party thereto, the lenders from time to time party thereto,
Bank of America, N.A., as administrative agent and collateral agent, and the several other agents party
thereto (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K, filed April 1, 2016).
Fifth Amendment to the Credit Agreement, dated as of October 11, 2013, by and among Activision
Blizzard, Inc., the guarantors from time to time party thereto, the lenders from time to time party thereto,
Bank of America, N.A., as administrative agent and collateral agent, and the several other agents party
thereto (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K, filed August 24, 2016).
Sixth Amendment to the Credit Agreement, dated as of October 11, 2013, by and among Activision
Blizzard, Inc., the guarantors from time to time party thereto, the lenders from time to time party thereto,
Bank of America, N.A., as administrative agent and collateral agent, and the several other agents party
thereto (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K, filed February 6, 2017).
Seventh Amendment to the Credit Agreement, dated as of October 11, 2013, by and among Activision
Blizzard, Inc., the guarantors from time to time party thereto, the lenders from time to time party thereto,
Bank of America, N.A., as administrative agent and collateral agent, and the several other agents party
thereto (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K, filed August 29, 2018).
Non-Affiliated Director Compensation Program and Stock Ownership Guidelines, as amended andrestated as of May 1, 2018 (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q for
the quarter ended June 30, 2018).
Subsidiaries of the Company.
Consent of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP).
Power of Attorney of each Executive Officer and Director signing this report (included in the signature
page hereto).
Certification of Robert A. Kotick pursuant to Rule 13a-14(a) under the Securities and Exchange Act of1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

10.35*
10.36*
10.37*†
10.38

10.39

10.40

10.41

10.42

10.43

10.44

10.45

10.46*
21.1
23.1
24.1
31.1

E-3

E-3

Exhibit Number

31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF

Exhibit

Certification of Dennis Durkin pursuant to Rule 13a-14(a) under the Securities and Exchange Act of1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Robert A. Kotick pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Dennis Durkin pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Calculation Linkbase Document.
XBRL Taxonomy Label Linkbase Document.
XBRL Taxonomy Presentation Linkbase Document.
XBRL Taxonomy Extension Definition Document.

*

Indicates a management contract or compensatory plan, contract or arrangement in which a director or executive
officer of the Company participates.

†

Confidential treatment requested as to portions of the exhibit. Confidential materials omitted and filed separately
with the Securities and Exchange Commission.

E-4

E-4

SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Activision
Blizzard, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 28, 2019
ACTIVISION BLIZZARD, INC.
By:/s/ ROBERT A. KOTICK
Robert A. Kotick
Director and Chief Executive Officer of Activision
Blizzard, Inc.
(Principal Executive Officer)
POWER OF ATTORNEY

Each individual whose signature appears below constitutes and appoints Robert A. Kotick, and Dennis Durkin andeach of them, his or her true and lawful attorneys-in-fact and agents with full power of substitution, for him or her and in his
or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposesas he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any ofthem, or his, her or their substitute or substitutes, may lawfully do or cause to be done or by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on the dates indicated.
By:/s/ ROBERT A. KOTICK(Robert A. Kotick)

Director,
Chief Executive Officer, andPrincipal Executive Officer

February 28, 2019

By:/s/ DENNIS DURKIN(Dennis Durkin)

Chief Financial Officer andPrincipal Financial Officer

February 28, 2019

By:/s/ STEPHEN WEREB(Stephen Wereb)

Deputy Chief Financial Officer,
Chief Accounting Officer, andPrincipal Accounting Officer

February 28, 2019

By:

/s/ REVETA BOWERS(Reveta Bowers)

Director

February 28, 2019

By:

/s/ ROBERT J. CORTI(Robert J. Corti)

Director

February 28, 2019

By:/s/ BRIAN G. KELLY(Brian G. Kelly)

Chairman and Director

February 28, 2019

By:/s/ HENDRIK J. HARTONG III(Hendrik J. Hartong III)

Director

February 28, 2019

By:/s/ BARRY MEYER(Barry Meyer)

Director

February 28, 2019

By:

/s/ ROBERT J. MORGADO(Robert J. Morgado)

Director

February 28, 2019

By:/s/ PETER NOLAN(Peter Nolan)

Director

February 28, 2019

By:

/s/ CASEY WASSERMAN(Casey Wasserman)

Director

February 28, 2019

By:/s/ ELAINE P. WYNN
(Elaine P. Wynn)

Director

February 28, 2019

E-5

E-5

E-6
(176)
2,099

—
2,577

(96)

(167)

—

$

40

—

(100)

10

10

$

370

370

1,813

Net Income

(48)

209

$

$

209

1,988

Operating
Income

(238)

—
719

$

—

719
—

—
7,500

$

—

7,500
—

$

$

$

(0.13) $(0.23)
2.76 $(0.22)

0.05

0.01

0.48

0.27

2.38 $(0.12)(0.23)
2.72(0.22)

0.05

0.01

0.48

0.27

2.35

(2) $

—
1,026

—
$

1,028 $
(2)

Diluted Earnings
per Share(76) $

—
358 $

—

371 $
(13)

Basic Earnings
per Share

$

$

$

(12)

—
78

(318)

399
(3)

Cost of
Revenues—
Subs/Lic/Other:
Software
Royalties andAmortization

$

$

$

—

—
1,040

—

1,101
(61)

Product
Development

$

$

$

—

—
1,003

(44)

1,062
(15)

Sales andMarketing

$

$

$

—

(10)
699

(8)

832
(115)

General and
Administrative

$

$

$

(138)

(10)
4,923

(370)

5,512
(209)

Total Costs andExpenses

Includes expenses related to share-based compensation.
Reflects amortization of intangible assets from purchase price accounting.
Reflects restructuring charges, primarily severance costs.
Reflects the net effect from deferral of revenues and (recognition) of deferred revenues, along with related cost of revenues, on certain of our online enabled products, including the effects of taxes.
Reflects the loss on extinguishment of debt from redemption activities.
Reflects the income tax impact associated with the above items. Tax impact on non-GAAP pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income under ASC 740, which employs an annual
effective tax rate method to the results.
Reflects the impact of significant discrete tax-related items, including amounts related to changes in tax laws, amounts related to the potential or final resolution of tax positions, and/or other unusual or unique tax-related items andactivities. Activision Blizzard provided additional information in our Form 10-K for the year ended December 31, 2018.

$

$

$

$

$

$

Net Revenues

Cost of
Revenues—
Subs/Lic/Other:Game Operations
and Distribution
Costs

The GAAP and non-GAAP earnings per share information is presented as calculated. The sum of these measures, as presented, may differ due to the impact of rounding.

7

6

5

4

3

2

1

Net effect of deferred revenues and related costof revenues4

Discrete tax-related items7
Non-GAAP Measurement

Income tax impacts from items above6

Loss on extinguishment of debt5

Restructuring costs3

Amortization of intangible assets2

GAAP Measurement
Share-based compensation1

Net effect of deferred revenues and related costof revenues4

Restructuring costs3
Non-GAAP Measurement

GAAP Measurement
Share-based compensation1
Amortization of intangible assets2

Year Ended December 31, 2018

Cost of
Revenues—
Product Sales:
Product Costs

Cost of
Revenues—
Product Sales:
Software
Royalties andAmortization

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESRECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES(Amounts in millions, except per share data)

E-7

—

—

12
(368)
794

—
—
39

71

$

14

14

52 $

1,697 $

15

15

$

22

15

2,327

757

757

35

287

—

—

—

—

(3)

0.07

2.25

1.05

(0.49)

0.02

0.02

0.02

0.03

1.00

0.24

0.36

Basic Earnings
per Share

273 $
178

$

Net Income

25 $

178

1,309

Operating
Income

139

$

—

—
733 $

—

—

$

—

—

7,017

—

—

(10)

300

1

973

(10)

—

—

—

—

(1)

984

$

$

$

0.07

2.21

1.04

(0.48)

0.02

0.02

0.02

0.03

0.99

0.23

0.36

Diluted Earnings
per Share

$

$

$

$

$

$

7 $

43 $

—

—

—

—

(438)

(3)

484 $

Cost of
Revenues—
Subs/Lic/Other:
Software
Royalties andAmortization

—

1,006

(6)

—

—

—

—

(57)

1,069

Product
Development

$

$

$

—

1,039

(16)

—

—

—

(308)

(15)

1,378

Sales andMarketing

$

$

$

—

609

(7)

(14)

(15)

(15)

(8)

(92)

760

General and
Administrative

$

$

$

68

4,690

(39)

(14)

(15)

(15)

(757)

(178)

5,708

Total Costs andExpenses

Includes expenses related to share-based compensation.
Reflects amortization of intangible assets from purchase price accounting.
Reflects fees and other expenses related to the King Acquisition, including related debt financings and integration costs.
Reflects restructuring charges, primarily severance costs.
Reflects a non-cash accounting charge to reclassify certain cumulative translation (gains) losses into earnings due to the substantial liquidation of certain of our foreign entities.
Reflects the impact of significant discrete tax-related items, including amounts related to changes in tax laws (including a reasonable estimate for the impact of the Tax Cuts and Jobs Act enacted in December 2017, as provided for inaccordance with Securities and Exchange Commission guidance) and the resolution of tax positions, and/or other unusual or unique tax-related items and activities. Activision Blizzard provided additional information in our Form 10-K
for the year ended December 31, 2017.
Reflects the net effect from deferral of revenues and (recognition) of deferred revenues, along with related cost of revenues, on certain of our online enabled products, including the effects of taxes.
Reflects the loss on extinguishment of debt from refinancing activities.
Reflects the income tax impact associated with the above items. Tax impact on non-GAAP pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income under ASC 740, which employs an annual
effective tax rate method to the results.

$

$

$

$

$

—

—

733 $

$

$

7,017

Net Revenues

Cost of
Revenues—
Subs/Lic/Other:Game Operations
and Distribution
Costs

The GAAP and non-GAAP earnings per share information is presented as calculated. The sum of these measures, as presented, may differ due to the impact of rounding.

9

8

7

6

5

4

3

2

1

Net effect of deferred revenues and related costof revenues7

Discrete tax-related items6
Non-GAAP Measurement

Income tax impacts from items above9

Loss on extinguishment of debt8

Other non-cash charges5

Amortization of intangible assets2
Fees and other expenses related to the King
Acquisition3
Restructuring costs4

Share-based compensation1

GAAP Measurement

Net effect of deferred revenues and related costof revenues7

Discrete tax-related items6
Non-GAAP Measurement

Other non-cash charges5

Amortization of intangible assets2
Fees and other expenses related to the King
Acquisition3
Restructuring costs4

Share-based compensation1

GAAP Measurement

Year Ended December 31, 2017

Cost of
Revenues—
Product Sales:
Product Costs

Cost of
Revenues—
Product Sales:
Software
Royalties andAmortization

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESRECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES(Amounts in millions, except per share data)

E-8
10

$

(327)

—

20 $

1,650 $

92

—
$

54

47

2,324

706

706

3

303

—

(8)

0.03

2.22

(0.44)

0.12

0.07

0.95

0.21

1.30

Basic Earnings
per Share

966 $Net Income(39) $

159

$

$

159

1,412

Operating
Income

(9)

741 $

—
$

—
6,608

—

—

(20)

331

12

849

—

—

(2)

851

$

$

$

0.02

2.18

(0.43)

0.12

0.07

0.93

0.21

1.28

Diluted Earnings
per Share

$

$

$

$

$

$

5 $

45 $

—

(424)

(2)

471 $

Cost of
Revenues—
Subs/Lic/Other:
Software
Royalties andAmortization

—

911

—

—

(47)

958

Product
Development

$

$

$

—

929

—

(266)

(15)

1,210

Sales andMarketing

$

$

$

—

506

(47)

(8)

(73)

634

General and
Administrative

$

$

$

(19)

4,284

(47)

(706)

(159)

5,196

Total Costs andExpenses

Includes expenses related to share-based compensation.
Reflects amortization of intangible assets from purchase price accounting.
Reflects fees and other expenses related to the King Acquisition, including related debt financings and integration costs.
Reflects the net effect from deferral of revenues and (recognition) of deferred revenues, along with related cost of revenues, on certain of our online enabled products, including the effects of taxes.
Reflects the loss on extinguishment of debt from refinancing activities.
Reflects the income tax impact associated with the above items. Tax impact on non-GAAP pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income under ASC 740, which employs an annual
effective tax rate method to the results.

$

$

$

$

$

—

—

741 $

$

$

6,608

Net Revenues

Cost of
Revenues—
Subs/Lic/Other:Game Operations
and Distribution
Costs

The GAAP and non-GAAP earnings per share information is presented as calculated. The sum of these measures, as presented, may differ due to the impact of rounding.

6

5

4

3

2

1

Net effect of deferred revenues and related costof revenues4

Income tax impacts from items above 6
Non-GAAP Measurement

Amortization of intangible assets2
Fees and other expenses related to the King
Acquisition3
Loss on extinguishment of debt5

Share-based compensation1

GAAP Measurement

Net effect of deferred revenues and related costof revenues4

Amortization of intangible assets2
Fees and other expenses related to the King
Acquisition3
Non-GAAP Measurement

Share-based compensation1

GAAP Measurement

Year Ended December 31, 2016

Cost of
Revenues—
Product Sales:
Product Costs

Cost of
Revenues—
Product Sales:
Software
Royalties andAmortization

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESRECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES(Amounts in millions, except per share data)

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESACTIVISION
AND SUBSIDIARIESOPERATINGBLIZZARD,SEGMENTSINC.
INFORMATIONOPERATING
SEGMENTSINFORMATION
For the Years Ended December 31, 2018 and 2017
For the Years Ended December 31, 2018 and 2017
(Amounts in millions)(Amounts in millions)Years Ended:

Years Ended:

December 31, 2018
December 31, 2018
Activision
Blizzard
King
Activision Blizzard
King$ Increase / (Decrease)$ Increase / (Decrease)
Total
Activision
Blizzard
Total
Activision Blizzard
King King Total Total

SegmentRevenues
Revenues
Segment
Net revenues
revenuesfrom
fromexternal
externalcustomers
customers $ $ 2,458
2,458 $ $2,238
2,238 $ 2,086$ 2,086$ 6,782$ 6,782$
Net
1 1Intersegmentnet
revenues—
53—
Intersegment net revenues
—
53
—
53 53
Segmentnet
netrevenues
revenues
2,458 $ $2,291
2,291 $ 2,086$ 2,086$ 6,835$ 6,835$
Segment$ $ 2,458$(170)(170)
$
118
$
118
$
—
—
34 34
$(170)(170)
$
152
$
152
$

$88
—
$88

$88

—
$88

$36
34
$70

36
34
70

Segmentoperating
operatingincome
incomeSegment

$ 6

$50

$50

$29

29

1,011 $ $ 685685 $ $ 750 750$ 2,446$ 2,446$$ $ 1,011

OperatingOperatingMargin
MarginSegment
SegmentRevenues
RevenuesNet
Net revenues
revenuesfrom
fromexternal
externalcustomers
customers $ $ 2,628
2,628 $
1
Intersegmentnet
revenues——
1
Intersegment net revenues
Segment$ $ 2,628
Segmentnet
netrevenues
revenues
2,628 $

Segment operating income

$

$

1,005

1,005

$

$2,1202,120 $
19 19
$2,1392,139 $
$

712

712

$

$

700

$ 2,417700$ 2,417
35.7%

Operating Margin1

TotalTotal

1,998$ 1,998$ 6,746$ 6,746
— —
19 19
1,998
$ 1,998$ 6,765$ 6,765

Operating Margin
1$(27) (27)
$

35.8%
35.8%
December31, 31,
20172017
December
Activision
Activision Blizzard
Blizzard KingKing

Segment operating income

$6

35.7%

Intersegment revenues reflect licensing and service fees charged between segments.

Intersegment revenues reflect licensing and service fees charged between segments.

Our operating segments are consistent with the manner in which our operations are reviewed and managed by our Chief Executive Officer, who is
Ourchief
operatingsegments
aremaker
consistent
with themannerinreviews
which ouroperations
are reviewed
andof:managed
by ofourtheChief
Executive
Officer, who is
ouroperatingdecision(“CODM”).
The
CODM
segment
performance
exclusivethe impact
changein deferred
our chiefand
operatingmaker (“CODM”).
CODM
reviews
segment performance
exclusiveof: the impactof theamortization
change in deferred
revenues
related decision
cost of revenues
with respect The
to certainof ouronline-enabled
games; share-based
compensation
expense;ofrevenues andrelatedcost ofwith respect
to certainof otherour online-enabled
games;
share-based
amortizationof
intangible
assetsas a resultof revenues
purchase priceaccounting;fees andexpenses (including
legal
fees, costs,compensation
expenses and expense;
accruals) related
tointangible assets
as a resultof purchasepriceaccounting;andrestructuringother expenses(including
fees,charges.
costs, expenses
and accruals)
acquisitions,associatedintegration
activities,
andfinancings;fees
certaincosts;and otherlegal
non-cash
See the following
pagerelated
for theto
reconciliationtables of segment
revenues
and andoperatingincometo consolidated
netcosts;
revenues
and consolidated
operatingincome.
acquisitions, associatedintegration
activities,
financings;
certain
restructuring
and other
non-cash charges.
See thefollowing page for thereconciliation tables of segment revenues and operating income to consolidated net revenues and consolidated operating income.

Our operating segments are also consistent with our internal organization structure, the way we assess operating performance and allocate resources,andavailabilityof separate
financialinformation.
do notorganization
aggregate operating
segments.
Ourtheoperatingsegments
are also
consistent
with ourWeinternalstructure,
the way we assess operating performance and allocate resources,

and the availability of separate financial information. We do not aggregate operating segments.

E-9

BLIZZARD, INC.
INC. ANDAND SUBSIDIARIESSUBSIDIARIESACTIVISION BLIZZARD,OPERATING SEGMENTS
SEGMENTS INFORMATIONINFORMATION
For the Years Ended December
December 31,
31, 2018
2018 andand 2017
2017(Amounts in millions)millions)

consolidated net
net revenues:
revenues:
Reconciliation to consolidated
Segment net revenues
non-reportable segments
segments11
Revenues from non-reportable
recognition (deferral)(deferral) ofof deferreddeferred net
netrevenues
revenues22
Net effect from recognition
Elimination of intersegmentintersegment revenues
revenues33
Consolidated net revenues
revenues
consolidated income
income before
before income
incometax
taxexpense:
expense:Reconciliation to consolidated
incomeSegment operating income
Operating income (loss)(loss) fromfrom non-reportablenon-reportable segments
segments11
Net effect from recognition
recognition (deferral)(deferral) ofof deferreddeferred net
netrevenues
revenuesand
andrelated
relatedcost
costofofrevenues2
Share-based compensationcompensation expense
expenseAmortization of intangible
intangible assets
assetsFees and other expenses
expenses related
related toto thethe King
King Acquisition
Acquisition44
55Restructuring costs
Other non-cash charges
charges66
Discrete tax-related items
items77
Consolidated operating
operating income
incomeInterest and other expense
expense (income),(income), net
net
Loss on extinguishment
extinguishment ofof debt
debt
Consolidated income before
before income
income tax
tax expense
expense
11
22
33
44
55
66
7
7

YearsEnded
EndedDecember
December31,
31,
Years
2018
2017
2018
2017
$$

$$
$$

$$

6,835 $$
6,835
480
480
238
238
(53)
(53)
7,500
7,500
$$

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

2,446
2,446
31
31

$$

2,417
2,417
(19)
(19)

100
100
(209)
(209)
(370)
(370)
—
—
(10)
(10)
—
—
—
—
1,988
1,988
71
71
40
40
1,877
1,877 $$

(71)
(71)
(178)
(178)
(757)
(757)
(15)
(15)
(15)
(15)
(14)
(14)
(39)
(39)
1,309
1,309
146
146
1212
1,151
1,151

IncludesIncludes other
other income
income andand expenses
expenses fromfrom operating
operatingsegments
segmentsmanaged
managedoutside
outsidethe
thereportable
reportablesegments,
segments,including
includingour
ourstudios
studiosand
anddistribution
distributionbusinesses.
businesses.Also
Also
includesincludes unallocatedunallocated corporate
corporate income
income andand expenses.
expenses.
Reflects
Reflects thethe netnet effecteffect fromfrom (deferral)(deferral) ofof revenues
revenuesand
andrecognition
recognitionof
ofdeferreddeferredrevenues,
revenues,along
alongwithwithrelated
relatedcost
costofofrevenues,
revenues,ononcertain
certainofofour
ouronline
onlineenabled
enabledproducts.
products.
Intersegment
Intersegment revenues
revenues reflectreflect licensing
licensing andand service
servicefees
feescharged
chargedbetween
betweensegments.
segments.
Reflects
Reflects fees
fees andand otherother expenses
expenses related
related toto thetheKing
KingAcquisition,
Acquisition,including
includingrelated
relateddebt
debtfinancings
financingsand
andintegration
integrationcosts.
costs.
Reflects
Reflects restructuring
restructuring charges,
charges, primarily
primarily severance
severancecosts.
costs.
Reflects
Reflects aa non-cash
non-cash accounting
accounting charge
charge toto reclassify
reclassifycertain
certaincumulative
cumulativetranslationtranslationgains
gains(losses)(losses)into
intoearnings
earningsdue
duetotothe
thesubstantial
substantialliquidation
liquidationofofcertain
certainofofour
ourforeign
foreign entities.
entities.
Reflects
Reflects thethe impact
impact ofof otherother unusual
unusual oror uniqueuniquetax-related
tax-relateditems
itemsandandactivities.
activities.

E-10

ACTIVISIONBLIZZARD,
BLIZZARD,INC.
INC.AND
ANDSUBSIDIARIESSUBSIDIARIESACTIVISIONNETREVENUESBY
DISTRIBUTIONCHANNELNET REVENUES BY DISTRIBUTION CHANNEL
For thethe Years
YearsEnded
EndedDecember
December31,
31,20182018and
and
2017
2017
(Amounts ininmillions)millions)(Amounts
Years
Ended
Years
Ended
December
31,31,
2018
December31, 2017
December
2018
December31, 2017 $ Increase$ Increase% Increase% Increase
1 1 % of Total2 2 Amount2
2(Decrease)
AmountAmount% of Total
Amount % of%Totalof Total(Decrease)(Decrease)(Decrease)Net
Net Revenues
Revenuesby
byDistribution
DistributionChannel
ChannelDigitalonlinechannels$$
Digital online channels3 3
Retailchannels
Retail channels
4
Other
Other4
Total$$
Total consolidated
consolidatednet
netrevenues
revenues

5,786
5,786
1,107
1,107
607
607
7,500
7,500

5
ChangeChange inin deferreddeferredrevenues
revenues5
Digital online channels3 3$
Digital online channels$
Retail channels
Retail4 channels
Other 4
Other
Total changes in deferred revenues $Total changes in deferred revenues $

(68)
(68)
(191)
(191)
21
21
(238)
(238)

1
1

2

2
3

3
4

4
5

5

77%
77%$ $ 5,479
5,479
15 15
1,033
1,033
8 8
505505
100%
100%$ $ 7,017
7,017
$

$

$

$

78%78%
$
15 15
7 7
100%
$
100%

$ 307 307
74 74
102 102$ 483 483

6% 6%
7
7
20 20
7
7

(53)
(53)
210
210
(18)
(18)
139
139

We adopted a new revenue accounting standard in the first quarter of 2018. The impacts of the new revenue accounting standard are reflected in
We financial
adopted informationa new revenue
accounting
in thefirst quarterof 2018.
impacts
ofhavethe new
revenueaccounting
are reflected
in
our
as of
and for thestandard
year ended
December31, 2018.
PriorThe
periodresults
not been
restated
to reflectstandard
this changeinour financial
information
andfor theyear
December31, 2018.
results havenot been restated to reflect this change inaccounting
standards.
Referastoofour
Form
10-K
forended
the year
ended December
31,Prior
2018period
for additional
information.
accounting
standards.
to our Form
10-K for Therefore,
the year ended
December
2018 for additional
information.
The
percentagesof totalRefer
are presented
as calculated.
the sumof these31,
percentages,
as presented,
may differ due to the impact of
The percentages of total are presented as calculated. Therefore, the sum of these percentages, as presented, may differ due to the impact ofrounding.
rounding.
Net
revenues from Digital online channels represent revenues from digitally-distributed subscriptions, downloadable content, microtransactions,
Net products,
revenues asfromonlineroyalties.
channels represent revenues from digitally-distributed subscriptions, downloadable content, microtransactions,
andwellDigitalas licensing
and revenues
products,fromas wellas include
licensingroyalties.
Net
Other
revenues
from our studios and distribution businesses, as well as revenues from Major League Gaming and theOverwatch
League.
Net revenues
from Other include revenues from our studios and distribution businesses, as well as revenues from Major League Gaming and theReflects
the League.
net effect from deferral of revenues and (recognition) of deferred revenues on certain of our online enabled products.
Overwatch
Reflects the net effect from deferral of revenues and (recognition) of deferred revenues on certain of our online enabled products.

E-11

ACTIVISIONACTIVISIONBLIZZARD,
BLIZZARD,INC.
INC.AND
ANDSUBSIDIARIESSUBSIDIARIESNETNET REVENUESREVENUESBYBYPLATFORM
PLATFORM
For2017
For thethe Years
YearsEnded
EndedDecember
December31,
31,20182018andand2017(Amounts(Amounts ininmillions)millions)Net
Net Revenues
Revenuesby
byPlatform
Platform
ConsoleConsolePC
PC
Mobile and ancillary3 3
Mobile and ancillary
Other44
Other
Total consolidated net revenues
Total consolidated net revenues

Years
Ended
Years
Ended
December
31,
2018
December31, 2017
December 31, 2018
December31, 2017 $ Increase$ Increase% Increase% Increase
1
2
2
Amount%of
Total
Amount%of
Total(Decrease)
Amount1% of Total2
Amount% of Total2 (Decrease)(Decrease)(Decrease)

$

2,538
2,538
2,180
2,180
2,175
2,175
607
607
7,500
7,500

Change in deferred revenues5
Changein deferred revenues5
Console$Console$PC
PC
3
Mobile and ancillary
3
Mobile4 and ancillary
Other
4
Other
Total changes in deferred revenues $Total changes in deferred revenues $

(265)
(265)
9
(3) 9
21 (3)(238)21
(238)

1

1
2

2
3
3
4
4
5
5

$$

$

34%
34%$ $ 2,389
2,389
29
2,042
29
2,042
29
2,081
29
2,081
8
505
8
505
100% $
7,017
100% $
7,017
$

$

$

$

34%34%
$
29
29
30
30
7
7
100% $
100%$ 149 149
138
138
94
94
102
102
483
$
483

6% 6%
7
7
5
5
20
20
7
7

210
(67)21014 (67)(18) 14139 (18)139

We adopted a new revenue accounting standard in the first quarter of 2018. The impacts of the new revenue accounting standard are reflected in
our
as of
and for thestandard
year ended
December31, 2018.
PriorThe
periodresults
not been
restated
to reflectstandard
this changein
We financial
adopted informationa new revenue
accounting
in thefirst quarterof 2018.
impacts
ofhavethe new
revenueaccounting
are reflectedinaccounting
standards.
Referastoofour
Form
10-K
for ended
the year
ended December
31,Prior
2018period
for additional
information.
our financial
information
andfor theyear
December31, 2018.
results havenot been restated to reflect this change inThepercentagesof totalRefer
are presented
as calculated.
the sumof these31,
percentages,
as presented,
may differ due to the impact ofaccounting
standards.
to our Form
10-K for Therefore,
the year ended
December
2018 for additional
information.
rounding.
The percentages of total are presented as calculated. Therefore, the sum of these percentages, as presented, may differ due to the impact ofNetrevenues from Mobile and ancillary include revenues from mobile devices, as well as non-platform specific game related revenues, such as
rounding.
standalone
salesof physicalaccessories.
Net revenues
from
Mobile merchandise
and ancillaryand
includerevenues from mobile devices, as well as non-platform specific game related revenues, such as
Netrevenues
from
Other
includerevenuesfrom
our studios and distribution businesses, as well as revenues from Major League Gaming and thestandalone sales of physical merchandise and accessories.
Overwatch League.
Net revenues from Other include revenues from our studios and distribution businesses, as well as revenues from Major League Gaming and theReflects the net effect from deferral of revenues and (recognition) of deferred revenues on certain of our online enabled products.
Overwatch League.
Reflects the net effect from deferral of revenues and (recognition) of deferred revenues on certain of our online enabled products.

E-12

ACTIVISION BLIZZARD,ACTIVISIONBLIZZARD,INC.
INC.AND
ANDSUBSIDIARIESSUBSIDIARIESNET REVENUESREVENUESBYBYGEOGRAPHICGEOGRAPHICREGIONREGIONFor theFor
the Years
Years Ended
EndedDecember
December31,
31,20182018andand20172017(Amounts
inmillions)(Amounts in millions)

Net Revenues by Geographic Region
Net
Revenues by Geographic Region
Americas
Americas
EMEA3
EMEA3
Asia PacificAsia PacificTotal consolidated net revenues
Total consolidated net revenues

Years
Ended
Years
Ended
December
31,
2018
December31, 31,
2017$ Increase% Increase
December
31,
2018
December
20172$ Increase% Increase
1
2
Amount%of
Total
Amount%of
Total(Decrease)12
2
Amount% of Total
Amount% of Total(Decrease)(Decrease)(Decrease)

$

3,880
3,880
2,618
2,618
1,002
1,002
7,500
7,500

Change in deferred revenues4 4Changein deferred revenues
Americas$
Americas
$
EMEA3
3
EMEA
Asia Pacific
Asia
Pacific
Totalchanges in deferred revenues $Total changes in deferred revenues $

(151)
(151)
(91)
(91)
4
(238)4
(238)

1

1
2

2
3
34
4

$
$

$

52% $
3,607
52% $
3,607
35
2,464
35
2,464
13
946
13
946
100% $
7,017
100% $
7,017
$
$

$
$

51% $
51%
35
35
13
13
100% $
100%

273
273
154
154
56
56
483
$
483

$

8%
8%
6
6
6
6
7
7

75
88 75
(24)88139(24)139

We adopted a new revenue accounting standard in the first quarter of 2018. The impacts of the new revenue accounting standard are reflected in
our
as of
and for thestandard
year ended
December31, 2018.
PriorThe
periodresults
not been
restated
to reflect
this changein
We financial
adopted ainformation
new revenue
accounting
in thefirst quarterof 2018.
impactsof havethe new
revenueaccounting
standard
are reflectedinaccounting
standards.
Referastoofour
10-K
forended
the year
ended December
2018period
for additional
information.
our financial
information
andForm
for theyear
December31, 2018.31,
Priorresults havenot been restated to reflect this change inThepercentagesof totalRefer
are presented
as calculated.
Therefore,
the sumof these31,
percentages,
as presented,
may differ due to the impact ofaccounting
standards.
to our Form
10-K for theyear ended
December
2018 for additional
information.
rounding.
The percentages of total are presented as calculated. Therefore, the sum of these percentages, as presented, may differ due to the impact ofNetrevenues from EMEA consist of the Europe, Middle East, and Africa geographic regions.
rounding.
Reflects
the netfrom
effectfrom deferralof therevenues
andMiddle(recognition)of deferred
revenues onregions.
certain of our online enabled products.
Net revenues
EMEA
consist ofEurope,East, andAfrica geographic
Reflects the net effect from deferral of revenues and (recognition) of deferred revenues on certain of our online enabled products.

E-13

E-14

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

$

$

$ $

2,019

2,155
2,155
1361362,019$$

859859 $ $37 37822822

2,099

2,229
2,229
130 130
2,099$

411 411 $21 21
390 390$

1,874

1,9911,991
117 1171,874$$ 265 265 $
31 31
234 234

$

$

1,791

1,914 1,914
123 123
1,791$

379 379$34 34
345 345

$

$

2,058

2,213 2,213
155 155
2,058

1,158 1,158
69
69
1,089 1,089

2% $3
3 2,33114
14 165
2% $
2,166

$
35% $ 35% 529
868631
32 498
32

$9
30
(21)

2,331 2,075
165 164
$
1,911
2,166
$

31
498

$529

9
30
(21)

2,075
164
$1,91
1

$

$

1,949
166
1,783

$ 253
36
217
1,949
166
$
1,783

36
217

$ 253

$

1,790
131
1,659

$ 999
34
965

1,659

1,790
131

999
34
965

respectively. Capital Expenditures for the three months ended March 31, 2016, three months ended June 30, 2016, and three months ended September 30, 2016, was $27 million, $44 million, and $28 million, respectively.

(19)
(15)
(19)%

(14)%
(51)
(11)

(19)%

(19)
(15)

(14)%
(51)
(11)

Three
MonthsEndedYearover Year
ThreeEnded
Months EndedYear over Year
Three
MonthsEnded
Year overYear
Three Months
Year over Year
March
September
December
31, % Increase% IncreaseMarch 31,
March 31,30,
December%31,
March
31, 31, JuneJune30, 30, September
30, 30, December
31,
June 30, June 30,
SeptemberSeptember
30,
December
31,
Increase % Increase2017(Decrease) 2018 2018 2018
2018
2018
2018 (Decrease) (Decrease)2017
20172017
2017 20172017 2017(Decrease)
2018
2018

Non-GAAP free cash flow represents operating cash flow minus capital expenditures.
21
TTM
represents
twelvemonths. operating
Operatingcash
Cashflow
Flowminus
for thecapital
three months
ended March 31, 2016, three months ended June 30, 2016, and three months ended September 30, 2016 was $337 million, $503 million, and $456 million,
Non-GAAP
freetrailing
cash flow
represents
expenditures.
2
respectively.
CapitalExpenditures
for the threemonths CashendedFlowMarchmonthsended
June31,30,2016,
2016,three
and threemonthsended$27 million,$44 million,and$28wasmillion,TTM represents
trailing
twelve months.
Operatingfor31,
the2016,threethreemonthsended
Marchmonths
ended
JuneSeptember
30, 2016,30,
and2016,threewasmonthsended September
30,
2016$337respectively.
million, $503 million, and $456 million,1

2 2
OperatingOperatingCash
CashFlow
Flow- -TTM
TTM
2 2
CapitalCapital Expenditures
Expenditures- -TTM
TTM
2
Non-GAAP
Non-GAAPFree
FreeCash
CashFlow
Flow- TTM
- TTM2

Cash FlowFlowData
Data
Cash
OperatingCash
CashFlow
Flow
Operating
Capital Expenditures
Expenditures
Capital
1 1
Non-GAAPFree
FreeCash
CashFlow
Flow
Non-GAAP

December
December
31,31,
2016
2016

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
SUPPLEMENTAL CASH FLOW INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION(Amountsin
inmillions)millions)(Amounts

ACTIVISIONBLIZZARD,
BLIZZARD,INC.
INC.ANDAND
SUBSIDIARIESACTIVISIONSUBSIDIARIESEBITDAAND
ADJUSTEDEBITDAEBITDA AND ADJUSTED EBITDA
For thethe Trailing
TrailingTwelve
TwelveMonths
MonthsEnded
Ended
December
2018
For
December
31,31,
2018(Amounts(Amountsin
inmillions)millions)

March
31, 31,
March
2018
2018
GAAP Net Income1 1
GAAP Net Income
Interest and other expense (income), net
Interest and other expense (income), net
Loss on extinguishment of debt
Loss on extinguishment of debt
Provision for income taxes2 2Provision for income taxes
Depreciation and amortization
Depreciation and amortization
EBITDA$$EBITDA

Share-based compensation expense
Share-based compensation
expense3
Restructuringcosts4
4
Restructuring
costs
Adjusted
EBITDA
3

Adjusted EBITDA

$

$

500
500
28
28
—
—
67
67
155
155
750

JuneJune30, 30,20182018

750$ 402 402 $
26
26
—
—
6
6
112
112
546
546

53
— 53
803 —

57
— 57
603 — $

803$

Trailing
Trailing
TwelveTwelve
MonthsMonths
Ended Ended
September
30, 30,December
31, 31,
December31,
September
December
December31,2018 20182018 20182018 2018

$

$

603

$

260
260 $
13
13
40
40
(48)
(48)
118
118
383

383

$

55
—
438

55
— $
438

$ 650
4
—
40
124
818

$

43
10
871

650 $
4
—
40
124
818
43
10 $
871

$1,813 1,813
71
71
40
40
64
64
509
509
2,497
2,497
209
10
2,716

$

209
10
2,716

Change in deferred net revenues and related cost of5
revenues
Changein deferred
net revenues and related cost of

$
(373)
$
(182)
$
89
$
368
$
(100)
revenues5
$
(373)
$
(182)
$
89
$
368
$
(100)
1
We adopted a new revenue accounting standard in the first quarter of 2018. The impacts of the new revenue accounting standard are reflected in1
our
as forthe fiscal quarters
2018. Prior
periodresults
haveofnot
toaccounting
reflect this change
in are reflected in
Wefinancial
adopted informationa new revenue
accounting
standardbeginningin the firstinquarterof 2018.
The
impacts
thebeennewrestatedrevenuestandard
accounting
standards.
Refer
to
our
Form
10-K
for
the
year
ended
December
31,
2018
for
additional
information.
our financial information as for the fiscal quarters beginning in 2018. Prior period results have not been restated to reflect this change in2
Provision
forstandards.
income taxes
forto
theourthree
monthsJune
30,ended
2018,December
September31,
30, 2018
2018,forandadditional
Decemberinformation.
31, 2018, also include impacts fromaccounting
Refer
Form
10-Kended
for theyear
significant
discretetax-related
items,
includingamounts
relatedtochanges
in
tax
laws,
amounts
relatedtothe potential
or finalof tax from2
Provision for income taxes for the three months ended June 30, 2018, September 30, 2018, and December
31, 2018,
also resolution
include impacts
positions, and/or other unusual or unique tax-related items and activities.
significant
discretetax-related
items,
includingamounts
relatedtochanges
in
tax
laws,
amounts
relatedtothepotential
orfinal
resolutionof tax3
Includes expenses related to share-based compensation.
positions,
and/orother
unusualoruniquetax-related
items
and
activities.
4
Reflects restructuring charges, primarily severance costs.
3
Includes expenses related to share-based compensation.
5
Reflects the net effect from deferral of revenues and (recognition) of deferred revenues, along with related cost of revenues, on certain of our
4
Reflects
restructuring
onlineenabledproducts.charges, primarily severance costs.
5
Reflects the net effect from deferral of revenues and (recognition) of deferred revenues, along with related cost of revenues, on certain of ouronlineenabledproducts.
Trailing
twelvemonthsamounts are presented as calculated. Therefore, the sum of the four quarters, as presented, may differ due to the impact ofrounding.

Trailing twelve months amounts are presented as calculated. Therefore, the sum of the four quarters, as presented, may differ due to the impact ofrounding.

E-15

This page intentionally left blankThis page intentionally left blankThis page intentionally left blankCorporate Information

Board of Directors

Officers

Special Advisors

Annual Meeting

Reveta Bowers
Independent Governance andOrganizational Consultant

Robert A. Kotick
Chief Executive Officer,
Activision Blizzard

Thomas Tippl
Vice Chairman,
Activision Blizzard

June 20, 2019, 9:00 am PDT
Boston Properties Offices
3200 Ocean Park BoulevardSanta Monica, California 90405

Robert J. Corti
Retired Chief Financial Officer,
Avon Products

Collister Johnson
President and Chief
Operating Officer,
Activision Blizzard

Hendrik J. Hartong III
Chairman and Chief
Executive Officer,
Brynwood Partners
Brian G. Kelly
Chairman of the Board,
Activision Blizzard
Robert A. Kotick
Chief Executive Officer,
Activision Blizzard
Barry Meyer
Retired Chairman andChief Executive Officer,
Warner Bros. Entertainment

Dennis Durkin
Chief Financial Officer
and President ofEmerging Businesses
Activision Blizzard
Brian Stolz
Chief People Officer,
Activision Blizzard
Chris Walther
Chief Legal Officer,
Activision Blizzard

Transfer AgentBroadridge Corporate
Issuer Solutions(800) 685-4509

AuditorPricewaterhouseCoopers LLP
Los Angeles, California

Corporate Headquarters
Activision Blizzard, Inc.
3100 Ocean Park BoulevardSanta Monica, CA 90405(310) 255-2000

Worldwide Website
www.activisionblizzard.com

Robert J. Morgado
Former Chairman andChief Executive Officer,
Warner Music GroupE-mailAnnual Reporton Form 10-K
Activision Blizzard’s Annual
Report on Form 10-K for the year
ended December 31, 2018, isavailable to shareholders withoutcharge, upon request, by calling
our Investor Relations department
at (310) 255-2000 or by mailinga request to our Corporate
Secretary at our corporate
headquarters.

Non-incorporation
Portions of the Company’s 2018
Form 10-K, as filed with the SEC,
are included within this Annual
Report. Other than these portionsof the Form 10-K, all otherportions of this Annual Report are
not “filed” with the SEC and shallnot be deemed so.

IR@activisionblizzard.com

Peter Nolan
Senior Advisor,
Leonard Green & Partners
Casey Wasserman
Chairman and Chief
Executive Officer,
Wasserman
Elaine Wynn
Co-founder,
Wynn Resorts

Domestic Offices
Albany, New York
Austin, Texas
Beverly Hills, California
Bloomington, Minnesota
Boulder, Colorado
Burbank, California
Carlsbad, California
Columbus, Ohio
Dallas, Texas
Eden Prairie, Minnesota
El Segundo, California
Foster City, California
Fresno, California
Hilliard, Ohio

International Offices
Irvine, California
Los Angeles, California
Middleton, Wisconsin
New York, New York
Novato, California
Portland, Maine
Redmond, Washington
Rogers, Arkansas
San Francisco, California
Santa Monica, California
Seattle, Washington
Sherman Oaks, California
Woodland Hills, California

Annual Report Design: Andra Design / andradesignstudio.com
Printers: DFIN Donnelley Financial Solutions / Hatteras / Trico Web© Copyright 2019 Activision Blizzard, Inc.

Amsterdam, The Netherlands
Barcelona, Spain
Berlin, Germany
Birmingham, United Kingdom
Bucharest, Romania
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Milan, Italy
Cork, Ireland
Datchet, United Kingdom
Dublin, Ireland
Hong Kong SAR, China
London, United Kingdom
Madrid, Spain
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St. Julians, Malta
Melbourne, Australia
Mexico City, Mexico

Mississauga, Canada
Munich, Germany
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Quebec City, Canada
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Taipei, Region of Taiwan
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