[August 03, 2017]

Activision Blizzard Announces Better-Than-Expected Second-Quarter 2017 Financial Results

Activision Blizzard, Inc. (Nasdaq: ATVI) today announced better-than-expected second-quarter 2017 results.

* Prior outlook was provided by the company on May 4, 2017 in its earnings release.
** "Non-GAAP (redefined)" includes the net effect of revenue deferrals accounting treatment on certain of our online enabled products. Please refer to our July 29, 2016 call and materials for additional information.

For the quarter ended June 30, 2017, Activision Blizzard's net revenues presented in accordance with GAAP were $1.63 billion, as compared with $1.57 billion for the second quarter of 2016, an increase of 4%. GAAP net revenues from digital channels were $1.31 billion, growing 15% year-over-year. GAAP operating margin was 21%. GAAP earnings per diluted share were a Q2 record of $0.32, as compared with $0.20 for the second quarter of 2016, an increase of 60%.

For the quarter ended June 30, 2017, on a non-GAAP (redefined) basis, Activision Blizzard's operating margin was 35% and earnings per diluted share were a Q2 record of $0.55, as compared with $0.45 for the second quarter of 2016, an increase of 22%.

For the quarter, operating cash flows were $265 million.

Please refer to the tables at the back of this press release for a reconciliation of the company's GAAP and non-GAAP (redefined) results.

Bobby Kotick, Chief Executive Officer of Activision Blizzard, said, "This was another strong quarter for Activision Blizzard. We exceeded our outlook and delivered record revenues for the first half of 2017."

Kotick added, "Celebrating players and audiences is the foundation for our success. This quarter we announced the first team owners in the Overwatch League™, the first major global, city-based professional esports league. With hundreds of hours of broadcast content ahead of us, as well as significant sponsorship and media opportunities, the Overwatch League will provide new ways for us to highlight and support the passion of esports fans and the skill of some of the world's top Overwatch^® players."

Selected Business Highlights:

• Regular content and feature updates across the portfolio enabled deeper player engagement and therefore player investment.

Audience Reach

• Activision Blizzard had 407 million Monthly Active Users (MAUs)^B in the quarter.
• Blizzard had the biggest quarterly online player community in its history with a record 46 million MAUs^B, up 38% year-over-year. The Overwatch community continued to grow more than a year after launch, setting another all-time MAU^B record with the release of two seasonal events in the quarter. Hearthstone^® MAUs^B grew year-over-year and quarter-over-quarter to an all-time record, driven by its expansion, Journey to Un'Goro™.
• Activision had 47 million MAUs^B in the second quarter, down slightly year-over-year. The launch of Zombies Chronicles led to a MAU^B increase quarter-over-quarter in Call of Duty^®: Black Ops III. Activision also released Crash Bandicoot™ N. Sane Trilogy for PS4, a collection of remastered Crash Bandicoot™ classic titles. Despite only two days of sales on a single platform, it was the number one console title globally in June based on units.¹
• Activision and its partners at Bungie expect to release Destiny 2 on September 6, 2017 for consoles and on October 24, 2017 for PC. The Destiny 2 console Beta had more total players than the 2014 Destiny Beta, and Destiny 2 pre-orders are now above the first Destiny. Activision expects to release Call of Duty: WWII on November 3, 2017. Momentum on pre-orders and hands-on feedback have been strong.
• King had 314 million MAUs^B for the quarter, down year-over-year, but with better gross bookings^C per paying user. King had two of the top-10 highest-grossing titles in the U.S. mobile app stores for the fifteenth quarter in a row.²

Deep Engagement

• Blizzard had Q2-record time spent. In April, Blizzard launched Uprising, an Overwatch seasonal event that included a player-versus-environment mode that drew record play time. Overwatch's Anniversary event in May and June also drove strong engagement with record participation in customization items. Time spent in World of Warcraft^® grew year-over-year in the second quarter, and the Legion™ expansion continued to perform ahead of the prior expansion.
• King's live operations and new content continue to drive strong engagement with steady time spent at 35 minutes per day and players engaging more frequently.
• Blizzard announced the first seven team sales for the Overwatch League, the first major global professional esports league with city-based teams, and the league is set to begin its inaugural competitive season later this year.
• Blizzard announced a live-streaming media rights partnership for esports and in-game content across a number of franchises, but excluding Overwatch League content.
• Activision's Call of Duty World League will culminate in its Championships held in Orlando in August.

Player Investment

• Activision Blizzard delivered nearly $1 billion of in-game revenues in the quarter with record performance in the first half of 2017.
• King's gross bookings^C per paying user grew for the 8^th quarter in a row to a new record. Strong engagement and player investment led to an increase in mobile gross bookings^C year-over-year and quarter-over-quarter.
• Call of Duty: Black Ops III's Zombies Chronicles, Activision's first large content drop in year two after a game launch, not only drove purchases of that specific piece of content, but also led to higher engagement and to add-on revenues for that game.
• Blizzard's Overwatch, Hearthstone, World of Warcraft, and Diablo^® III, which debuted new content during the quarter, drove strong in-game participation.

Company Outlook:

* Fully diluted weighted average shares include participating securities and dilutive options on a weighted average basis.

As referenced on our July 29, 2016 call, if you would like to calculate Non-GAAP metrics as previously defined, you would add the impact of GAAP deferrals to the Non-GAAP (redefined) metrics.

Currency Assumptions for 2017 Outlook:

• $1.12 USD/Euro for current outlook (vs. average of $1.11 for 2016 and $1.11 for 2015); and
• $1.30 USD/British Pound Sterling for current outlook (vs. average of $1.36 for 2016 and $1.53 for 2015).
• Note: Our financial guidance includes the forecasted impact of the FX cash flow hedging program.

Cash Dividend:

The company paid a cash dividend of $0.30 per common share, up 15% year-over-year, in May 2017 to shareholders of record at the close of business on March 30, 2017, totaling $226 million.

Conference Call:

Today at 4:30 p.m. EDT, Activision Blizzard's management will host a conference call and Webcast to discuss the company's results for the quarter ended June 30, 2017 and management's outlook for the remainder of the calendar year. The company welcomes all members of the financial and media communities and other interested parties to visit the "Investor Relations" area of www.activisionblizzard.com to listen to the conference call via live Webcast or to listen to the call live by dialing into 888-364-3108 in the U.S. with passcode 1183538.

About Activision Blizzard:

Activision Blizzard, Inc., a member of the S&P 500, is the world's most successful standalone interactive entertainment company. We delight hundreds of millions of monthly active users around the world through franchises including Activision's Call of Duty®, Destiny and Skylanders®, Blizzard's World of Warcraft®, Overwatch®, Hearthstone®, Diablo®, StarCraft®, and Heroes of the Storm®, and King's Candy Crush™, Pet Rescue™, Bubble Witch™ and Farm Heroes™. The company is one of the Fortune "100 Best Companies To Work For®". Headquartered in Santa Monica, California, Activision Blizzard has operations throughout the world, and its games are played in 196 countries. More information about Activision Blizzard and its products and services can be found on the company's website, www.activisionblizzard.com.

¹ Per NPD, GfK, GSD, and internal estimates
² U.S. ranking for Apple App Store and Google Play Store combined, per App Annie Intelligence for second quarter 2017.

^A Net effect of accounting treatment from revenue deferrals on certain of our online enabled products. Some of our games' online functionality represents an essential component of gameplay and, as a result, a more-than-inconsequential separate deliverable. As a result, we recognize revenues attributed to these game titles over their estimated service periods, which is generally less than a year. The related cost of revenues is deferred and recognized as an expense as the related revenues are recognized. Impact from changes in deferrals refers to the net effect from revenue deferrals accounting treatment for the purposes of revenues, along with, for the purposes of EPS, the related cost of revenues deferrals treatment and the related tax impacts. Internally, management excludes the impact of this change in deferred revenues and related cost of revenues when evaluating the company's operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team. Management believes this is appropriate because doing so enables an analysis of performance based on the timing of actual transactions with our customers. In addition, management believes excluding the change in deferred revenues and the related cost of revenues provides a much more timely indication of trends in our operating results.

^B Monthly Active User ("MAU") Definition: We monitor MAUs as a key measure of the overall size of our user base. MAUs are the number of individuals who played 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 plays two of our games would be counted as two users. In addition, due to technical limitations, for Activision and King, an individual who plays the same game on two platforms or devices in the relevant period would be counted as two users. For Blizzard, an individual who plays the same game on two platforms or devices in the relevant period would generally be counted as a single user.

^C Gross bookings is an operating metric that represents the total cash spent by players in the period for the purchase of virtual items. King uses gross bookings to evaluate its results of operations, generate future operating plans and assess performance. Gross bookings is the total price paid by players, which includes indirect taxes (sales tax or value added tax etc.), platform providers fees, and King's share of revenues.

Non-GAAP (as previously defined) and Non-GAAP (redefined) Financial Measures: In accordance with the updated Compliance and Disclosure Interpretations issued by the SEC staff on May 17, 2016, beginning with the reporting of our second-quarter 2016 results, we have reported our financial results and provided our outlook using GAAP and non-GAAP (redefined). We have historically provided Non-GAAP (as previously defined) financial measures. The only difference between the two measures is the inclusion (Non-GAAP (redefined)) or exclusion (Non-GAAP (as previously defined)) of the impact from revenue deferrals accounting treatment on certain of our online enabled products. Please see materials from July 29, 2016 call for further details.

Non-GAAP Financial Measures: As a supplement to our financial measures presented in accordance with Generally Accepted Accounting Principles ("GAAP"), Activision Blizzard presents certain non-GAAP measures of financial performance. These non-GAAP financial measures are not intended to be considered in isolation from, as a substitute for, or as more important than, the financial information prepared and presented in accordance with GAAP. In addition, these non-GAAP measures have limitations in that they do not reflect all of the items associated with the company's results of operations as determined in accordance with GAAP.

Activision Blizzard provides net income (loss), earnings (loss) per share and operating margin data and guidance both including (in accordance with GAAP) and excluding (non-GAAP) certain items. When relevant, the company also provides constant FX information to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations. In addition, Activision Blizzard provides EBITDA (defined as GAAP net income (loss) before interest (income) expense, income taxes, depreciation and amortization) and adjusted EBITDA (defined as non-GAAP operating margin (see non-GAAP financial measure below) before depreciation). The non-GAAP financial measures exclude the following items, as applicable in any given reporting period and our outlook:

• expenses related to stock-based compensation;
• the amortization of intangibles from purchase price accounting;
• fees and other expenses related to the King acquisition, inclusive of related debt financings, and refinancing of long-term debt, including penalties and the write off of unamortized discount and deferred financing costs;
• restructuring charges;
• other non-cash charges from reclassification of certain cumulative translation adjustments into earnings as required by GAAP; and
• the income tax adjustments associated with any of 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).

In the future, Activision Blizzard may also consider whether other items should also be excluded in calculating the non-GAAP financial measures used by the company. Management believes that the presentation of these non-GAAP financial measures provides investors with additional useful information to measure Activision Blizzard's financial and operating performance. In particular, the measures facilitate comparison of operating performance between periods and help investors to better understand the operating results of Activision Blizzard by excluding certain items that may not be indicative of the company's core business, operating results, or future outlook. Internally, management uses these non-GAAP financial measures, along with others, in assessing the company's operating results, and measuring compliance with the requirements of the company's debt financing agreements, as well as in planning and forecasting.

Activision Blizzard's non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles, and the terms non-GAAP net income, non-GAAP earnings per share, non-GAAP operating margin, and non-GAAP or adjusted EBITDA do not have a standardized meaning. Therefore, other companies may use the same or similarly named measures, but exclude different items, which may not provide investors a comparable view of Activision Blizzard's performance in relation to other companies.

Management compensates for the limitations resulting from the exclusion of these items by considering the impact of the items separately and by considering Activision Blizzard's GAAP, as well as non-GAAP, results and outlook, and by presenting the most comparable GAAP measures directly ahead of non-GAAP measures, and by providing a reconciliation that indicates and describes the adjustments made.

Cautionary Note Regarding Forward-looking Statements: The statements contained herein that are not historical facts are forward-looking statements, including, but not limited to, statements about: (1) projections of revenues, expenses, income or loss, earnings or loss per share, cash flow or other financial items; (2) statements of our plans and objectives, including those related to releases of products and services; (3) statements of future financial or operating performance; and (4) statements of assumptions underlying such statements. The company 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 risk, reflect management's current expectations, estimates and projections about our business, and are inherently uncertain and difficult to predict.

The company cautions that a number of important factors could cause Activision Blizzard's actual future results and other future circumstances to differ materially from those expressed in any forward-looking statements. Such factors include, but are not limited to: sales levels of Activision Blizzard's titles, products and services; concentration of revenue among a small number of titles; Activision Blizzard's ability to predict consumer preferences, including interest in specific genres, and preferences among platforms; the diversion of management time and attention to issues relating to the operations of our acquired or newly started businesses; the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt; the adoption rate and availability of new hardware (including peripherals) and related software; counterparty risks relating to customers, licensees, licensors and manufacturers; maintenance of relationships with key personnel, customers, financing providers, licensees, licensors, manufacturers, vendors, and third-party developers, including the ability to attract, retain and develop key personnel and developers that can create high-quality titles, products and services; risks relating to the expansion into new businesses, including the potential impact on our existing businesses; changing business models within the video game industry, including digital delivery of content and the increased prevalence of free-to-play games; product delays or defects; competition, including from other forms of entertainment; rapid changes in technology and industry standards; possible declines in software pricing; product returns and price protection; the identification of suitable future acquisition opportunities and potential challenges associated with geographic expansion; the seasonal and cyclical nature of the interactive entertainment market; the outcome of current or future tax disputes; the impact of litigation risks and associated costs; protection of proprietary rights; shifts in consumer spending trends; capital market risks; applicable regulations; domestic and international economic, financial and political conditions and policies; tax rates and foreign exchange rates; the impact of the current macroeconomic environment; and the other factors identified in "Risk Factors" included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.

The forward-looking statements in this press release are based on information available to the company at this time and we assume no obligation to update any such forward-looking statements. Although these forward-looking statements are believed to be true when made, they may ultimately prove to be incorrect. These statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and may cause actual results to differ materially from current expectations.