Overview

U.S.-based Activision Blizzard Inc.'s leverage fell to 0.2x at the end of 
2017 due to continued successful title releases and strong cash flow 
generation.
We expect the company will continue to increase its cash flow in 2018 and 
maintain a conservative financial policy, balancing debt repayment with 
shareholders returns.
We are raising our ratings on Activision, including the corporate credit 
rating to 'BBB+' from 'BBB'.
The stable rating outlook reflects our expectation that Activision will 
maintain leverage under 1.5x despite fluctuations related to the success 
and timing of its game releases.

Rating Action

On March 20, 2018, S&P Global Ratings raised its corporate credit rating on 
Activision Blizzard Inc. to 'BBB+' from 'BBB'. The rating outlook is stable.

At the same time, we raised our issue-level rating on Activision's senior 
unsecured debt to 'BBB+' from 'BBB'.

Rationale

The upgrade is based on our expectation that Activision's leverage will remain 
low in 2018 and 2019, supported by steady growth in revenue and cash flow and 
a conservative financial policy. The company's financial position continues to 
improve and its cash and cash equivalents now exceed its debt level. Recent 
U.S. tax reform also reduces the company's tax rate and enables Activision to 
more efficiently repatriate cash to the U.S. We expect that leverage, which 
was 0.2x at the end of 2017, will remain low due to the company's strong cash 
flow generation and portfolio of leading franchise titles, and the growth in 
its ancillary revenue streams from eSports.

Activision is one of the largest video game publishers globally. It has a 
sizable presence in mobile gaming and a history of successful new intellectual 
property rollouts, such as "Overwatch," which was launched in 2016. We expect 
that Activision's operating performance will remain largely stable, after 
adjusting for fluctuations in release slate, due to its portfolio of strong 
franchise titles and very good profitability. These strengths are partially 
offset by some revenue concentration around key titles ("Call of Duty," "World 
of Warcraft," "Overwatch," and "Candy Crush"), heightened competition for 
leisure time activities from other electronic media, intense rivalry between 
video game publishers, and high development and marketing costs for new video 
games. 

Established franchise games enable Activision to introduce sequels and brand 
extensions, which are less risky than introducing a new franchise game without 
any existing brand equity or user base. For example, there are now several 
off-shoots under "Call of Duty." With its acquisition of King Digital 
Entertainment PLC in 2016, Activision became one of the largest mobile video 
game publishers and the owner of "Candy Crush," one of the breakout hits on 
the mobile platform. However, although Activision has been successful in 
growing the revenue from "Candy Crush," the underlying user base continues to 
decline. King's monthly active users declined 18% from the last quarter in 
2016 to the same period in 2017; however, declines moderated toward the end of 
last year. And we expect that mobile revenue could come under pressure if 
Activision is unable to introduce successful new mobile titles and in-game 
advertising that more than offset potential future declines in players of 
"Candy Crush."

Although Activision has been successful in diversifying its revenue base to be 
less reliant on retail game sales, the company still generates the vast 
majority of its revenue from the sale of games and related content and 
services to consumers. The company could further diversify its revenue sources 
by successfully executing its eSports strategy, including selling additional 
teams, advertising, sponsorships, and media rights, which could take years to 
reach full potential. 

Another area of potential growth is the company monetizing its intellectual 
property (IP) through licensing rights for its brands, titles, and characters 
for use in movies and other consumer products. These growth areas present 
upside to revenue growth but carry risk of damage to the company's IP or a 
distraction away from its core competency of video game publishing. While 
these are meaningful revenue diversification opportunities, they rely on the 
success of Activision's top video game franchises such as "Overwatch" and 
"Call of Duty," highlighting the reliance on the success of a handful of 
games.

We expect Activision's leverage, which was 0.2x at the end of 2017, will 
remain low in 2018. Over the long term, we expect that Activision will 
maintain adjusted debt leverage of less than 1.5x, despite the volatility 
associated with fluctuations in game releases and the business' hit-driven 
nature. 

Our base-case scenario incorporates the following expectations:

U.S. GDP growth of 2.8% in 2018 and 2.2% in 2019, and eurozone GDP growth 
of 2.0% in 2018 and 1.7% in 2019. Although game sales aren't highly 
correlated with economic indicators, console sales, which drive game 
sales, relies on stable to growing GDP.
Revenue and EBITDA will increase at a mid-single-digit and 
high-single-digit percentage rate in 2018, respectively, due to healthy 
growth at the company's Blizzard operating segment and modest growth at 
Activision and King Digital.
A new "World of Warcraft" game launch and in-game content releases 
related to multiple top franchises will drive much of Blizzard's growth 
in 2018. 
Although we have less visibility into the slate for 2019, we expect the 
company's revenue will continue to grow, given the expected launches 
later in 2018, which will carry into next year, and the staggered release 
schedule for downloadable content and new releases.
A 100 basis point EBITDA margin expansion in 2018 as the revenue mix 
continues to shift to higher-margin digital downloads.
Cash flow from operations of roughly $2 billion per year in 2018 and 2019.
Capital spending of roughly $150 million to $175 million per year.
Dividends of about $260 million in 2018 and about $275 million in 2019.
A resumption of share repurchases that could consume about $500 million 
in 2018.
Debt repayment of $1 billion or more in 2018.
Net leverage will remain very low (near 0x) in 2018 and 2019.

Liquidity

Activision has strong liquidity supported by substantial cash balances and 
healthy discretionary cash flow, in our view. Liquidity sources will exceed 
uses by more than 5x over the next 12 months. Given the company's sizable cash 
and liquid investments and ample margin of compliance with its net debt 
covenant, we expect that it could withstand a high-impact, low-probability 
event without refinancing. Activision has been able to successfully access the 
credit markets while reducing its cost of borrowing, which demonstrates a 
generally high standing in the credit markets. The company also demonstrates 
prudent risk management, including balancing debt repayment with shareholder 
returns and growing its sources of liquidity.

Principal liquidity sources:

Cash and equivalents of $4.7 billion as of Dec. 31, 2017; 
Cash flow from operations, before working capital, totaling roughly $2 
billion in 2018; and
An undrawn $250 million revolving credit facility.

Principal liquidity uses:

Working capital swings of up to $300 million, depending on the release 
slate;
Annual shareholder dividends of $250 million to $275 million;
Annual capital spending of roughly $150 million to $175 million; and
Share repurchases of roughly $450 million to $550 million annually.

Outlook

The stable rating outlook reflects our expectation that Activision will 
maintain leverage below 1.5x despite fluctuations related to the success and 
timing of its game releases. We also expect that Activision will be able to 
maintain the vitality of its key franchise titles, including "Call of Duty," 
"World of Warcraft," and "Candy Crush."

Downside scenario

We could lower the corporate credit rating if the company experiences 
meaningful performance deterioration relative to our expectation (likely due 
to weakness in key franchise titles). Additionally, a downgrade could occur if 
Activision is unable to maintain its adjusted debt leverage below 1.5x given 
the potential for fluctuations in leverage from acquisitions and the success 
and timing of releases.

Upside scenario

We could raise the rating if Activision significantly reduces its revenue 
concentration, becoming less reliant on a small number of key titles and 
revenue from consumer purchase of games and related services. An upgrade would 
also likely entail the company maintaining its conservative financial policies 
and low leverage level.

Ratings Score Snapshot

Corporate credit rating: BBB+/Stable/--

Business risk: Satisfactory

Country risk: Low
Industry risk: Intermediate
Competitive position: Satisfactory

Financial risk: Modest

Cash flow/leverage: Modest

Anchor: bbb+

Modifiers

Diversification/portfolio effect: Neutral (no impact)
Capital structure: Neutral (no impact)
Financial policy: Neutral (no impact)
Liquidity: Strong (no impact)
Management and governance: Fair (no impact)
Comparable rating analysis: Neutral (no impact)

Issue Ratings--Subordination Risk Analysis

In 2017, all of the company's subsidiary guarantors were released from their 
respective guarantees provided under the credit agreement. As a result, all of 
the company's $4.44 billion debt is now unsecured. 

Capital structure

Activision's weighted-average remaining debt term extends to roughly eight 
years. We expect that Activision will refinance or repay its upcoming debt 
maturities proactively, given the group's strong credit standing in 
combination of its available cash and cash equivalents, which totaled $4.7 
billion on Dec. 31, 2017. The company's board of directors authorized debt 
repayments of up to $1.8 billion in 2018.

Analytical conclusions

We rate Activision's senior unsecured debt 'BBB+', in line with the issuer 
credit rating, since no significant elements of subordination risk are present 
in the capital structure.

Related Criteria

Criteria - Corporates - General: Reflecting Subordination Risk In 
Corporate Issue Ratings, Sept. 21, 2017
General Criteria: Methodology For Linking Long-Term And Short-Term Ratings
, April 7, 2017
Criteria - Corporates - General: Methodology And Assumptions: Liquidity 
Descriptors For Global Corporate Issuers, Dec. 16, 2014
Criteria - Corporates - Industrials: Key Credit Factors For The Media And 
Entertainment Industry, Dec. 24, 2013
General Criteria: Group Rating Methodology, Nov. 19, 2013
Criteria - Corporates - General: Corporate Methodology: Ratios And 
Adjustments, Nov. 19, 2013
Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013
General Criteria: Country Risk Assessment Methodology And Assumptions, 
Nov. 19, 2013
General Criteria: Methodology: Industry Risk, Nov. 19, 2013
General Criteria: Methodology: Management And Governance Credit Factors 
For Corporate Entities And Insurers, Nov. 13, 2012
General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

Ratings List

Upgraded
                                        To                 From
Activision Blizzard Inc.
 Corporate Credit Rating                BBB+/Stable/--     BBB/Stable/--
  Senior Unsecured                      BBB+               BBB

Certain terms used in this report, particularly certain adjectives used to 
express our view on rating relevant factors, have specific meanings ascribed 
to them in our criteria, and should therefore be read in conjunction with such 
criteria. Please see Ratings Criteria at www.standardandpoors.com for further 
information. Complete ratings information is available to subscribers of 
RatingsDirect at www.capitaliq.com. All ratings affected by this rating action 
can be found on the S&P Global Ratings' public website at 
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