Technology, Media, & Telecommunications

Fall 2016

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2

Agenda

Risks

Valuation

Recommendation

Company Analysis

Sector Analysis

Company Overview

Company Drivers

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

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Sector Overview

Increase in broadband

Digital Distribution

Change in Consumer Habits

Technology, Media, & Telecommunications

Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Telecommunication Services

Utilities

-10% -5% 0% 5% 10% 15% 20% 25%

0.75%

0.14%

21.92%

13.71%

-5.83%

15.46%

8.26%

15.94%

8.93%

7.29%Return YTD

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

4

Gaming Overview

11/27/15 1/27/16 3/27/16 5/27/16 7/27/16 9/27/161700

1900

2100

2300

272931333537

SPX Index

Comparison & Growth

LTM

P

erfo

rman

ce

Industry is maturing

Shifting to Digital Business Model

Operating results are volatile during console system transition periods

Rev

enu

e G

row

th

2011 2012 2013 2014 2015 2016 2017 2018 2019 202011000

16000

21000

26000

31000$MM

12.19%

8.89%

8.25%

7.76%

8.65%

6.56%

5.89%

7.02%

6.62%

Industry Revenues expected to grow at an annualized rate of 6.5%

Growth in broadband connections

Increase in Consumers’ Disposable Incomes

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

Mobile Gaming

5

Used Phone Sales and Trade-Ins

Global Mobile Gaming Revenues

Volatility – Fickle Gamers Consumers are fickle Business model makes it easy for a user

to switch games Pure play mobile gaming is too volatile

Catalyst – Used Phone Market

No large capital investment needed

Used smartphones will represent 7% of all sales in 2016

Up from 5% in 2015

Revenue Distribution

Emerging

Markets

Used Phone Market

Smart Phone

Ownership

Mobile Gaming Revenu

es

90% 50%

10% 50%

Rest of In-App Purchasers"Whales"

2015 2016 2017 2018 2019 202025

30

35

40

45

50

55

60

29.71

36.74

42.72

47.7252.24

58.03

2015A 2016F70

80

90

100

110

120

130

80

120

2015-2020 CAGR: 14.33%

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

eSports

6

Business Games as a Service Cross-screen entertainment

Technology Creator & live streaming tools Video platforms & communities

Consumer Creation & Involvement Consumer entertain consumers

Underlying Trends

37%

18%12%

11%

8%8% 2% 4%

NAM WE-EU E-EU CHINAS. KOREA REST APAC LATAM MEA

Major Events per RegionTicket Revenues per Region

35%

36%

11%

10%5% 2% 1%

NAM WE-EU E-EU CHINAS. KOREA REST APAC LATAM MEA

2012 2013 2014 2015 2016 2017 2018 2019 2020$0.0

$5.0

$10.0

$15.0

$2.2 $3.5 $6.0

$2.2

$7.6 $11.0

Average Revenue per Enthusiast (Pessimistic)

AlternativeOptimistic ScenarioBase Scenario

90M 131M 180M

Average Revenue per eSports Enthusiast

Global Number of Esports Enthusiasts:

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

Activision Blizzard

7

Market Data

Ticker: ATVI

Activision Blizzard publishes, develops, and distributes interactive entertainment software and peripheral products.

11/5/2015 2/5/2016 5/5/2016 8/5/2016 11/5/201625

30

35

40

45

50ATVI Stock LTM

Talent, Technology & Processes Deliver High

Quality Content

High Quality Content Drives Engagement

Engagement Drives Premium Recurring Player

Investment

Player Investment Drives Predictable Cash Flow and Re-

Investment

52 – Week High 45.4752 – Week Low 28.12Previous Close 37.22

Market Cap 27.7BBeta 1.03

EPS (TTM) 1.13Dividend 0.70%

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

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Activision

Blizzard

King Digital

34%

13%13%

36%

8%ConsoleOnline Gam-ingPCMobile Gam-ing

Revenue Breakdown

52%37%

11% North Amer-icaEuropeAsia Pacific

By Geography

Revenue BreakdownS

peci

alty

Pro

duc

ts

Console Gaming

Computer Gaming Mobile Gaming

Call of Duty Skylanders Destiny Guitar Hero

World of Warcraft

Overwatch Hearthstone Diablo

Candy Crush Farm Heroes Pet Rescue Bubble Witch

By Segment

21.36%

47.49%

31.15% ActivisionBlizzardKing Digital

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

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Gaming FranchisesOverwatch World of Warcraft

12 years strong Blizzard’s ‘money mint’ 60-80% market share, 80-

85% gross margin Latest expansion sold 3.3

million copies before launch

Call of Duty Established brand One of the most successful console

shooters Downloadable content maps are a strong

source of revenue Total sales of 231 million units across the

franchise

Candy Crush Saga Established brand with staying power in a

fickle market Currently the 5th top grossing app on the

iOS appstore Estimated daily revenue of $500,000 Candy Crush themed game show coming

to CBS

Universal critical acclaim

6% of 2015 revenues in one week

Doubled Blizzard’s YoY revenues in the release quarter First

WeekJune August October0

510152025

710

1520

Active Players (mm)

Q215 Q216250350450550650750

385

738

Blizzard Segment Revenues

$mm

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

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Mergers & AcquisitionsKing Digital Entertainment PLC MLG Legacy Holdings Inc.

Price: $5.9 Billion

Cash Transaction Makes The Largest Game Network in

the World King Digital will continue to be led by its

CEO Acquired King Digital Below IPO PriceTop Games:

Price: $46 Million

Marketing Tool Marginal Source of Revenue Attract More Consumers Increase Player Engagement

Tournaments:

TV / EBITDA Marketing Budget

King Digital Median Average0

10

20

30

40

6.64

16.94

36.52 5.90%

94.10%

MLG Acquisition Marketing Budget

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

King Digital

11

Top Grossing iOS Publishers

Catalyst

Facebook’s new in messenger games infrastructure could highly boost King’s player base

The Segment Social mobile game developer

with games on web, mobile, and Facebook

394 million monthly active users (MAU)

3 of top 20 grossing games on U.S. app stores for 11 consecutive quarters

Freemium Business Model

Acquisition and retention of players is key

Variable pricing

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

Major League Gaming

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Ad Metric Performance90%

4%

99%72%

2%

44%

MLG.tv Industry

MLG.tv, the #1 online broadcast network for professional level competitive gaming

MLG Pro Circuit, the longest-running eSports league in North America

GameBattles, the largest cross platform online gaming tournament system with 9 million registered users across the globe

Consumer Distribution

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

13

2016 2015 2014 2013

4,940

4,079 4,3244,693

LiquidityCurrent Ratio: 2.24*

Quick Ratio: 1.88*

Cash Ratio: 0.70

Total Debt / EV: 0.13Total Debt /EBITDA:

2.25EBITDA / Interest: 10.4Credit Ratings

Moody’s: Baa2S&P: BBB-Fitch: BBB

Net Debt Debt to Equity Debt Distribution

Capital Structure

*Adjusted for Deferred Revenue

2026

20232016

2021∞

$2.9 billion tranche A term loans (“New TLA”) and $250 million

revolver&

$650 million “new notes”

$750 million unsecured senior notes

$850 million unsecured senior notes

Maturity Schedule

54%42%

5%

Term LoanNotesRevolver

19%

82%

DebtEquity

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

14

Risk & Mitigation

Competition

Regulations

Foreign Exchange

Fluctuations

Intellectual Property

Competition

Regulations

Acquisitions Higher Margins Investments

Possible Mobile Gaming Regulation

Foreign Exchange Fluctuations

Foreign currency forward contracts

Copyrights Licensing Patents Marginalizing Revenues

Intellectual Property

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

15

Financial AnalysisDividend Growth

2013 2014 2015 20160.150.170.190.210.230.250.270.29

0.19 0.2

0.23

0.26

EBITDA Per Share

.

2013 2014 2015 20161

1.5

2

2.5

3

1.65

2.142.49

2.98

R&D % of Revenue

2012 2013 2014 2015 201612.0%12.5%13.0%13.5%14.0%14.5%15.0%

12.44%12.74% 12.95%

13.85%

14.56%

Capital Expenditures ($MM)

2013 2014 2015 2016$60 $70 $80 $90

$100 $110 $120

$74

$107 $111 $115

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

16

Comparable AnalysisEV / EBITDA

ATVI EA TTWO UBI 9684*0

5

10

15

20

13.12x16.72x

13.39x

5.25x7.99x

Median: 10.69x

Price / Earnings

EBITDA Margin Operating Margin

ATVI UBI EA TTWO 9684*0%

10%

20%

30%

40%

50%

33.16%

45.15%

27.75%17.29%

6.83%

Median: 22.52%

ATVI EA UBI TTWO 9684*0%5%

10%15%20%25% 21.68%

23.52%

12.49%

5.03%

10.51%

ATVI TTWO UBI EA 9684*0

20406080

100

33.70x

106.22x

32.92x 30.65x 20.11x

Median: 31.79x

Median: 12.49%

*Square Enix Holdings

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

17

ValuationFootball Field Analysis

Comps P/E

Comps EV/EBITDA Valuation

DCF EBITDA Exit Multiple

DCF Perpetuity Method

Average

$30.0 $35.0 $40.0 $45.0 $50.0 $55.0 $60.0

Target Price: $45.89 Upside: 25.66%

Series1$36$38$40$42$44$46$48$50

$43.20$45.89

$36.52

$48.59

Low TargetHigh

Assumptions

WACC 8.2%

Growth Rate 3.0%

Exit Multiple 14.1x

Tax Rate 16.0%

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Source: Bloomberg, Company Filings, IBISWorld as of 12/07/2016

18

SummaryRecommendation: Buy

Current Price 36.52

Target Price 45.89

Upside 25.66%

52 – week high 45.4752 – week low 28.12Previous Close 37.22Market Cap 27.7BBeta 1.03EPS (ttm) 1.13Dividend 0.70%

Market Data

Acquisition Strategy Franchises

eSportsMobile Gaming

Acquisition Strategy