Online Videogames. How Console-Based Gross Profit Dollars Can Still Double From Here

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1 Americas/United States Equity Research Consumer Internet Research Analysts Stephen Ju Christopher Ford Online Videogames PRE RESULTS COMMENT How Console-Based Gross Profit Dollars Can Still Double From Here Event: With all three of ATVI, EA, and TTWO shares having returned on a four-year CAGR 25%, 47%, and 36% respectively since the beginning of this current console cycle (measuring beginning 2013-end 2016), we revisit our investment thesis and ask ourselves once again "what's next". We maintain our Outperform ratings on ATVI and EA, and Neutral rating on TTWO and our price targets for ATVI, EA, and TTWO are now $48, $100 and $53 respectively as we have made significant changes to our estimates for each. Investment Case: When we last asked ourselves this question in mid we thought that the long-term secular offline-to-online investment thesis had bifurcated into 1) console full game downloads and 2) online free to play, but today we believe our thesis has really trifurcated into the following in order of near-term to long-term importance: 1) Consumer adoption of console full game downloads driving gross margin expansion. With downloads currently at ~25%-30% of the total mix, this will likely approach 50% over the next few years, with the mix shifting ~5% every year 2) Consumer adoption of console microtransactions driving gross profit dollar expansion due to the increase of monetization. Examples include Call of Duty supply drops, FIFA Ultimate Team, Grand Theft Auto Online, and Overwatch 3) Expansion of the addressable market with online free to play and mobile examples include FIFA Online 3, Need for Speed Edge, Hearthstone, and Heroes of the Storm We have to concede that the concept of console microtransactions is not new, as publishers have already started to realize organic revenue/free cash flow benefits and Activision management has, in previous conversations and investor days, mentioned the prospect of closing the ARPU gap between World of Warcraft and Call of Duty. That said we do not believe the Street has properly accounted for what this opportunity can be as each of the publishers take more meaningful steps to offer live services and gameplay-enhancing in-game items to the console user base it has amassed. Hence from a thematic point of view, this is a blend of our long-term free-to-play investment thesis playing out in the console market. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 As an illustrative point, we lay out the basic construct of how to think about what the gross profit opportunity can be for an online-connected game that sells ~10 million physical units: Figure 1: Illustrative Example of the Incremental Gross Profit Opportunity from Microtransactions USD in millions, unless otherwise stated Incremental Gross Profit: Console Packaged Disk Sales Microtransactions Contribution Units Sold (mm) 10 Active Users (mm) 10 Conversion Rate 10% Paying Users (mm) 1.0 Wholesale Price $50 MABPPU $10 Revenue (mm) 500 Revenue 120 Hardware Royalty 120 Hardware Royalty 24 Gross Profit 380 Gross Profit 96 And as with any piece of analysis like this, the underlying assumptions of what the business can be is more important, as in the above we believe we are using ultimately a very conservative conversion rate and monthly average booking per paying user (MABPPU) assumption. The following table illustrates the sensitivity based on a range of conversion rates between 5% to 30% as well as monthly bookings per paying user from $5 to $25. Figure 2: Gross Profit Sensitivity to Conversion Rate and Monthly Average Bookings Per Paying User USD in millions, unless otherwise stated MABPPU Conversion Rate $96 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% $ $ $ $ $ We submit that for the core game offerings like Call of Duty, Overwatch, FIFA, and others, there is no reason to believe that conversion rates and MABPPU cannot reach free-to-play levels shown by the online game operators in the APAC over the longer-term. Online Videogames 2

3 As a case in point we believe the conversion rates for the online operators in APAC across the various genres are as shown below: Figure 3: Conversion Rates Across Different Genres Sports 30%-50% MMORPG 30%-40% FPS Casual Web Board 5%-10% 15%-25% 10% 20% 30% 40% 50% As for monthly average bookings per paying user, we note that even for a more casually oriented game like King's Candy Crush Saga, this was trending at ~$24 by the time of its acquisition by Activision-Blizzard in 4Q15. Hence from a Blue Sky standpoint, a 20% conversion rate with $25 monthly bookings number in our opinion should not be off the table and in this scenario, publishers can theoretically double their gross profit dollars for any given franchise. To this end, we have significantly changed our models for all three publishers as we take into account the trifurcation of the investment theme. The Activision model had the most significant changes as we layer in microtransactions expectations for nearly all of its franchises over the longer term Overwatch serves as the proof point by which all other console-based (as well as the legacy Blizzard games like StarCraft) must follow in terms of an updated revenue model. Online Videogames 3

4 Americas/United States Consumer Internet Rating OUTPERFORM Price (30-Jan-17, US$) Target price (US$) (from 50.00) week price range (US$) Market cap (US$ m) 29, Target price is for 12 months. Share price performance Research Analysts Stephen Ju stephen.ju@credit-suisse.com Christopher Ford christopher.ford@credit-suisse.com A p r Ju l O c t Ja n A T V I.O Q S& P IN D EX On 30-Jan-2017 the S&P 500 INDEX closed at Daily Jan29, Jan30, 2017, 01/29/16 = US$34.82 Quarterly EPS Q1 Q2 Q3 Q4 2015A E E Activision Blizzard, Inc (ATVI) Blizzard Getting a Cosmetic Lift Event: We preview Activision Blizzard's 4Q16 results which will be reported on 9 February 2017 after the close. As we contemplate the near, medium, and long-term thematic drivers for Activision we have made significant structural changes to our model to better account for the ongoing changes in the business as a result we lower our price target to $48 versus prior $50 and our 2017 adj. EPS is now $1.83 vs. prior $2.29. Investment Case: Given the ongoing changes to the business with the shift of console CPG software to full download, console microtransactions, mobile/king, as well as online/free-to-play, we have elected to completely rebuild our model to better account for our aforementioned trifurcation of the long-term investment thesis. Although the online piece of the business offers inherently less visibility, Activision's new revised disclosure especially for COGS does allow us to better monitor the progress it is making. We have also revisited our franchise-by-franchise projections and where appropriate added microtransaction add-on sales assumptions, as we feel this will be a key driver for ATVI shares on a go forward basis. Looking more near-term, we have decreased our assumptions for Call of Duty: Infinite Warfare to 15.1 million units in the year, split 13.1 million/2.0 million between the $59.99 standard SKU/$79.99 SKU that is accompanied by Modern Warfare Remastered, and moderated the trajectory of Call of Duty units. Changes to Our Estimates: Our updated revenue and adjusted EPS estimates for FY17 are now $6.49b and $1.83 respectively vs prior $7.11b and $2.29 as we have made significant changes to our model. Valuation: Our $48 price target (vs. prior $50) is based on DCF, which uses an 11% weighted average cost of capital and 3% terminal growth. Financial and valuation metrics Year 12/15A 12/16E 12/17E 12/18E EPS (Excl. ESO) (US$) EPS (CS adj., ) Prev. EPS (CS adj., US$) P/E (CS adj.) (x) P/E rel. (CS adj., %) Revenue (US$ m) 4, , , ,057.8 EBITDA (US$ m) 1, , , ,246.1 Net Debt (US$ m) -1,305 1, ,360 OCFPS (US$) P/OCF (x) Number of shares (m) Price/Sales (x) 4.65 BV/share (Next Qtr., US$) 12.0 P/BVPS (x) 3.2 Net debt (Next Qtr., US$ m) 1,386.4 Dividend (current, US$) - Dividend yield (%) - Source: Company data, Thomson Reuters, Credit Suisse estimates Online Videogames 4

5 Activision Blizzard, Inc (ATVI) Price (30 Jan 2017): US$39.61; Rating: OUTPERFORM; Target Price: (from US$50.00) US$48.00; Analyst: Stephen Ju Income Statement 12/15A 12/16E 12/17E 12/18E Revenue (US$ m) 4, , , ,057.8 Sales 4, , , ,057.8 EBITDA 1, , , ,246.1 Operating profit 1, , , ,672.1 Recurring profit 1, , , ,484.8 Cash Flow 12/15A 12/16E 12/17E 12/18E Cash flow from operations 1,192 2,444 1,545 1,881 CAPEX (111) (129) (135) (136) Free cashflow to the firm 1,081 2,316 1,409 1,745 Cash flow from investments (155) (1,180) (135) (136) Net share issue(/repurchase) Dividends paid (170) (195) (203) (205) Issuance (retirement) of debt (250) (195) 0 0 Other 424 (3,629) 0 0 Cashflow from financing activities 110 (3,933) (203) (205) Effect of exchange rates (366) (23) 0 0 Changes in Net Cash/Debt 781 (2,691) 1,207 1,540 Net debt at end (1,305) 1, (1,360) Balance Sheet ($US) 12/15A 12/16E 12/17E 12/18E Assets Other current assets Total current assets 6,948 6,674 7,952 9,684 Total assets 15,251 19,547 20,024 21,265 Liabilities Short-term debt Total current liabilities 2,611 4,011 4,048 4,112 Long-term debt 4,079 5,053 5,053 5,053 Total liabilities 7,183 10,044 10,081 10,145 Shareholder equity 8,068 9,503 9,943 11,120 Total liabilities and equity 15,251 19,547 20,024 21,265 Net debt (1,305) 1, (1,360) Per share 12/15A 12/16E 12/17E 12/18E No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Free cash flow per share Earnings 12/15A 12/16E 12/17E 12/18E Sales growth (%) (4.0) 41.0 (0.4) 8.8 EBIT growth (%) (4.0) 57.8 (8.0) 25.6 Net profit growth (%) (6.4) 63.9 (10.4) 28.2 EPS growth (%) (7.6) 61.6 (14.3) 27.0 EBIT margin (%) Valuation 12/15A 12/16E 12/17E 12/18E EV/Sales (x) EV/EBIT (x) P/E (x) Quarterly EPS 2015A Q Q Q Q E E Company Background Activision develops, publishes and distributes interactive entertainment software. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) (from 74.00) We have also elected to run a Blue Sky and Grey Sky scenario for ATVI shares leveraging historic P/E multiples on next twelve month earnings estimates. Activision historically traded in a range of ~10x- 27x with an average of ~15.7x and a standard deviation of ~3.1x during the past decade. In terms of upside potential, we apply a 26.6x peak multiple to our 2018 EPS estimate of $2.32 and derive a blue sky scenario of $62. Our Grey Sky Scenario (US$) (from 35.00) In terms of downside potential, we apply a lower bound P/E multiple of 12.6x (average less one standard deviation) to our 2018 EPS estimate of $2.32, to derive a grey sky scenario of $ Share price performance A p r Ju l O c t Jan A T V I.O Q S& P IN D EX On 30-Jan-2017 the S&P 500 INDEX closed at Daily Jan29, Jan30, 2017, 01/29/16 = US$34.82 Source: Company data, Thomson Reuters, Credit Suisse estimates Online Videogames 5

6 Activision Blizzard, Inc. (ATVI): Blizzard Getting a Cosmetic Lift Activision will report its 4Q16 results on 9 February 2017 after market close. As we contemplate the near, medium, and long-term thematic drivers for the company, we have made significant structural changes in our model to better account for the ongoing changes to the business. Specifically, we have added more details given the shift of console CPG software to full download, the rise of console microtransactions, mobile/king, as well as online/free-to-play. We will freely concede that where our models were two or three years ago, given the greater online component versus point of sale/retail, there is inherently less visibility. That said, Activision's new revised disclosure especially for COGS does allow us to better monitor the progress it is making against our long-term investment thesis. We have also revisited our franchise by franchise projections and where appropriate added microtransaction add-on sale assumptions, as we feel this will be a key driver for ATVI shares on a go forward basis. In the table below we summarize our longer-term free-to-play and microtransaction revenue estimates which we believe more accurately reflect the contributions of each franchise. Figure 4: Activision Blizzard, Inc. Annual Free-To-Play and Microtransactions Revenue Estimates USD in millions, unless otherwise stated 2016E 2017E 2018E 2019E 2020E 2021E 2022E Call of Duty Destiny Hearthstone Heroes of the Storm Overwatch Starcraft II Diablo New Blizzard Title With the launch of Overwatch in May, Blizzard created a franchise that likely sold 25+ million units but also introduced cosmetic monetization opportunities which is a completely different way of thinking about microtransactions in Blizzard properties as these purchases do not skew the competitive dynamics of the game to potentially ruin the balanced gameplay the studio is known to offer in other words, no way to pay to win. And we believe the monetization trail that Overwatch has blazed will be followed by Blizzard's other franchises, such as Diablo and even StarCraft. Looking more near-term, Call of Duty: Infinite Warfare will have the largest impact though we believe investor expectations for units sold have come down materially since the game launched in November. As per our usual practice we have updated our SKU-by-SKU bottoms up forecast with the latest release date shifts and product clarity (in order of importance): We have decreased our assumptions for Call of Duty: Infinite Warfare to 15.1 million units in the year, split 13.1 million/2.0 million between the $59.99 standard SKU/$79.99 SKU that is accompanied by Modern Warfare Remastered, and moderated the trajectory of Call of Duty units going forward We have recalibrated our King Digital estimates and explicitly have modeled advertising revenue of ~$250 million for 2017 and ~$260 for 2018 Online Videogames 6

7 We have extended our SKU-by-SKU forecast out thru 2022 We have taken steps to isolate the FX-driven versus the fundamental changes to our near to medium term estimates are summarized in the table below and: Figure 5: Activision Blizzard, Inc. CS Estimate Revisions USD in millions, unless otherwise stated 4Q16 4Q16 % 4Q16 % % 2017 % % 2018 % Prior FX-Only Δ Current Δ Prior FX-Only Δ Current Δ Prior FX-Only Δ Current Δ Non-GAAP Net Revenue % % % % % % Adjusted EBITDA % % % % % % Adjusted EPS $0.85 $ % $ % $2.29 $ % $ % $2.76 $ % $ % We maintain our Outperform rating and our target price decreases to $48 vs. prior $50 as we recalibrate our estimates. As a reminder our investment thesis for ATVI shares, is predicated on the following factors: Ability to produce and maintain high quality franchise content Management execution consistency in on-time content delivery Strong positioning in the long-term videogame industry transition from a consumer packaged goods to online Sensitivity to Call of Duty: Infinite Warfare Unit Volume We are lowering our expectations for Call of Duty: Infinite Warfare to sell-thru 15.1 million units in the quarter (13.1 million at $59.99 and 2.0 million at $79.99) and 18.5 million units over the life of the title versus prior 19.5 million (with no contribution from the $79.99 SKU) and 22.5 million, respectively. This year is definitely more competitive in the FPS genre with Battlefield 1 and Titanfall 2 also released for the holidays and we feel our 15.1 million unit estimate for the year is appropriately conservative as it is our understanding that most prior Call of Duty's went on to sell million units. With this in mind we have put together a sensitivity study of what the upside potential and downside risk based on Call of Duty: Infinite Warfare units may be from a range of 12 million units to 19 million. We have taken steps to proportionately adjust the mix of $59.99 and $79.99 SKUs relative to the overall volume in the analysis, which is as shown below: Figure 6: Activision Blizzard, Inc. Call of Duty: Infinite Warfare Sensitivity Analysis Call of Duty Infinite Warfare (in millions) Units (mm) Revenue ($mm) EPS $2.02 $2.06 $2.09 $2.13 $2.17 $2.20 $2.24 $2.28 Each incremental million units yield about $0.04 in EPS assuming the $79.99 SKU represents ~13% of the overall mix which we believe is appropriately conservative. Sensitivity to Destiny 2 Unit Volume We believe investors have already rationalized tougher comparisons in 2017 given 2016 featured Overwatch, World of Warcraft: Legion and Destiny: Rise of Iron. With that said we still expect meaningful contribution from Destiny 2 and, even though it will not likely comp the impact of 2016's major releases, we submit that a strong sell-thru of the game, bringing in new users/re-attracting those who may have purchased the prior iteration, will augur a steeper revenue ramp from the ongoing contribution from microtransactions. To gauge the more near-term impact of Destiny 2's contribution we have put together a sensitivity study of what the upside potential and downside risk based on Destiny 2 units may be from a range of 8 million units to 15 million, which is as shown below: Online Videogames 7

8 Figure 7: Activision Blizzard, Inc. Destiny 2 Sensitivity Analysis Destiny 2 (in millions) Units (mm) Revenue ($mm) EPS $1.75 $1.77 $1.80 $1.83 $1.85 $1.88 $1.91 $1.93 Each incremental million units yield about $0.03 in EPS. Our updated release slate for the packaged goods titles is as shown below: Figure 8: Activision Blizzard Inc. FY17 and FY18 Release Slate FY17E FY18E Title CPG PC HH FGD DLC Total Title CPG PC HH FGD DLC Total Call of Duty Expansion 1Q17 1 Call of Duty Expansion 1Q18 1 1Q17E Total Q18E Total CPG PC HH FGD DLC Total CPG PC HH FGD DLC Total Call of Duty Expansion 2Q17 1 Call of Duty Expansion 2Q18 1 World of Warcraft Expansion Q17E Total Q18E Total CPG PC HH FGD DLC Total CPG PC HH FGD DLC Total Destiny 2 3 Diablo 4 1 Crash Bandicoot N. Sane Trilogy 2 Destiny 2 Expansion 3Q18 2 Licensed Title 3Q Call of Duty Expansion 3Q18 1 Call of Duty Expansion 3Q17 1 Licensed Title 3Q Licensed Title 3Q Q17E Total Q18E Total CPG PC HH FGD DLC Total CPG PC HH FGD DLC Total Call of Duty Sledgehammer 3 Call of Duty Treyarch 3 Skylanders Sequel Skylanders Sequel Call of Duty Expansion 4Q17 1 Call of Duty Expansion 4Q18 1 Licensed Title 4Q Licensed Title 4Q Licensed Title 4Q Licensed Title 4Q Licensed Title 4Q Licensed Title 4Q Licensed Title 4Q Licensed Title 4Q Q17E Total Q18E Total CPG PC HH FGD DLC Total CPG PC HH FGD DLC Total 2017E Total E Total We also include below our updated unit sales projections on a title-by-title basis for FY17 and FY18: Online Videogames 8

9 Figure 9: Activision Blizzard, Inc. FY17 and FY18 Unit Sales Projections in millions, unless otherwise stated FY17 Units (mm) FY18 Units (mm) 1Q17 Releases 1Q18 Releases Call of Duty Expansion 1Q Call of Duty Expansion 1Q Total 2.0 Total 2.0 2Q17 Releases 2Q18 Releases Call of Duty Expansion 2Q Call of Duty Expansion 2Q World of Warcraft Expansion Total 1.8 Total 5.9 3Q17 Releases 3Q18 Releases Destiny Diablo Crash Bandicoot N. Sane Trilogy 0.8 Destiny 2 Expansion 3Q Licensed Title 3Q Call of Duty Expansion 3Q Call of Duty Expansion 3Q Licensed Title 3Q Licensed Title 3Q Total 14.1 Total Q17 Releases 4Q18 Releases Call of Duty Sledgehammer 15.3 Call of Duty Treyarch 15.8 Skylanders Sequel Skylanders Sequel Call of Duty Expansion 4Q Call of Duty Expansion 4Q Licensed Title 4Q Licensed Title 4Q Licensed Title 4Q Licensed Title 4Q Licensed Title 4Q Licensed Title 4Q Licensed Title 4Q Licensed Title 4Q Total 21.0 Total 21.6 FY17 Total 38.9 FY18 Total 45.4 Valuation We maintain our Outperform rating and our end-of-2017 target price for ATVI shares decreases to $48 vs. prior $50 we use a weighted cost of capital of 11% and terminal growth rate of 3%. Online Videogames 9

10 Figure 10: Activision Blizzard, Inc. Discounted Cash Flow Analysis in millions, unless otherwise stated CAGR 2017E 2018E 2019E 2020E 2021E 2022E '17-'22 EBITDA % Net Income % Depreciation & Amortization % Other Non-Cash Charges (Benefits) Interest Expense (Income) Changes in Operating Assets & Liabilities (372.1) (423.5) (399.1) (378.3) (446.6) (426.9) Unlevered Cash Flows % Capital Expenditures % Unlevered Free Cash Flows % Y/Y % Change (40.0)% 20.8% 35.2% 5.6% 2.5% 25.3% Weighted Average Cost of Capital 11.0% Perpetual UFCF Growth Rate ("G") 3.0% 2017E NPV of Unlevered Free Cash Flows Present Value of Terminal Value Enterprise Value Off-Balance Sheet Assets 0.0 Adjusted Enterprise Value Year End Net Debt (Cash) Equity Value Diluted Shares Outstanding Equity Value Per Share $48 We have also elected to run a Blue Sky and Grey Sky scenario for ATVI shares leveraging historic P/E multiples on the next twelve month earnings estimates. Activision historically traded in a range of ~10x-27x with an average of ~15.7x and a standard deviation of ~3.1x during the past decade. As we think about where we will be at the end of 2017, we apply a lower bound P/E multiple of 12.6x (average less one standard deviation) to our 2018 EPS estimate of $2.32, to derive a grey sky scenario of $29. In terms of upside potential, we apply a 26.6x peak multiple to our 2018 EPS estimate and derive a blue sky scenario of $62. Figure 11: Activision Blizzard, Inc. Historical Forward P/E Range Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Risks to our Outperform rating and $48 target price for ATVI shares are: Lack of commercial traction for any of Activision's game releases Potential for business or R&D disruption as the company integrates KING Failure to transition existing console and PC properties to online free to play Online Videogames 10

11 Americas/United States Consumer Internet Rating OUTPERFORM Price (30-Jan-17, US$) Target price (US$) week price range (US$) Market cap (US$ m) 25, Target price is for 12 months. Share price performance Research Analysts Stephen Ju stephen.ju@credit-suisse.com Christopher Ford christopher.ford@credit-suisse.com A p r Ju l O c t Ja n EA.O Q S& P IN D EX On 30-Jan-2017 the S&P 500 INDEX closed at Daily Feb01, Jan30, 2017, 02/01/16 = US$64.2 Quarterly EPS Q1 Q2 Q3 Q4 2016A E E Electronic Arts, Inc (EA) Ongoing Value Creation from Ongoing Longer- Term Initiatives Event: We preview Electronic Arts' 3QFY17 results which will be reported on 31 January 2017 after the close. In conjunction with this preview, we are rolling out a new model for EA, which now individually accounts for the contribution of each mobile title. Looking near-term our consolidated estimates remain largely unchanged, we maintain our Outperform rating and $100 target price. Our FY17 EPS is now $3.73 versus prior $3.72. Investment Case: While the headline console products released during 3QFY17 will likely dominate the discussion, we will be most interested in whether or not there is an upward step-function or acceleration in the growth rate of FIFA Ultimate Team following the inclusion of 'The Journey' which catalyzed sellthru of the main FIFA 17 SKU to accelerate to +13% YOY. Coming out of EA's Investor Day last May, we called out that the presentation laid out a more concrete roadmap for near/medium term (mobile) as well as long-term (Player Network) product development to this end, early FIFA Mobile is of particular importance given the intersection of soccer's large global fan base with the smart phone installed base. As we look towards FY18 we do not expect any major changes to the release slate and from a risk/reward perspective we continue to favor EA as our Blue Sky Gray Sky analysis suggests favorable risk/reward of upside potential to $124 and downside risk to $72. Changes to Our Estimates: Our FY17 estimates for revenue and adj. EPS are now $4.93b and $3.73 vs. guidance $4.93b and $3.65 and prior $4.98b and $3.72. Valuation: Our DCF target price remains at $100 and uses a 11% WACC and 3% terminal growth assumption. Financial and valuation metrics Year 3/16A 3/17E 3/18E 3/19E EPS (Excl. ESO) (US$) EPS (CS adj., ) Prev. EPS (CS adj., US$) P/E (CS adj.) (x) P/E rel. (CS adj., %) Revenue (US$ m) 4, , , ,567.0 EBITDA (US$ m) 1, , , ,227.5 Net Debt (US$ m) -1,343-2,100-3,386-5,049 OCFPS (US$) P/OCF (x) Number of shares (m) Price/Sales (x) 5.44 BV/share (Next Qtr., US$) 15.8 P/BVPS (x) 5.6 Net debt (Next Qtr., US$ m) -1,615.0 Dividend (current, US$) - Dividend yield (%) - Source: Company data, Thomson Reuters, Credit Suisse estimates Online Videogames 11

12 Electronic Arts, Inc (EA) Price (30 Jan 2017): US$83.84; Rating: OUTPERFORM; Target Price: US$100.00; Analyst: Stephen Ju Income Statement 3/16A 3/17E 3/18E 3/19E Revenue (US$ m) 4, , , ,567.0 Sales 4, , , ,567.0 EBITDA 1, , , ,227.5 Operating profit 1, , , ,070.5 Recurring profit 1, , , ,084.3 Cash Flow 3/16A 3/17E 3/18E 3/19E Cash flow from operations 1,151 1,293 1,659 2,008 CAPEX (93) (135) (129) (134) Free cashflow to the firm 1,058 1,158 1,530 1,873 Cash flow from investments (686) (124) (132) (137) Net share issue(/repurchase) Dividends paid Issuance (retirement) of debt Other (632) (411) (241) (208) Cashflow from financing activities (603) (411) (241) (208) Effect of exchange rates Changes in Net Cash/Debt (123) 757 1,286 1,663 Net debt at end (1,343) (2,100) (3,386) (5,049) Balance Sheet ($US) 3/16A 3/17E 3/18E 3/19E Assets Other current assets 1,595 1,741 1,741 1,741 Total current assets 4,354 5,145 6,475 8,175 Total assets 7,050 7,759 9,073 10,751 Liabilities Short-term debt Total current liabilities 2,418 1,625 1,957 2,247 Long-term debt Total liabilities 3,652 3,001 3,333 3,623 Shareholder equity 3,396 4,758 5,740 7,128 Total liabilities and equity 7,048 7,759 9,073 10,751 Net debt (1,343) (2,100) (3,386) (5,049) Per share 3/16A 3/17E 3/18E 3/19E No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Free cash flow per share Earnings 3/16A 3/17E 3/18E 3/19E Sales growth (%) EBIT growth (%) Net profit growth (%) EPS growth (%) EBIT margin (%) Valuation 3/16A 3/17E 3/18E 3/19E EV/Sales (x) EV/EBIT (x) P/E (x) Quarterly EPS 2016A Q Q Q Q E E Company Background Electronic Arts creates, markets, and distributes interactive entertainment software. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) (from ) We have elected to run a Blue Sky scenario for EA shares leveraging historic P/E multiples on next twelve month earnings estimates. EA has historically traded in a range of ~10x-37x with an average of ~20.5 and a standard deviation of ~5.5x. In terms of upside potential, we apply a higher bound (avg. plus one standard deviation) multiple of ~26x to our calendar year 2018 EPS estimate of $4.75 to derive a blue sky scenario of $124. Our Grey Sky Scenario (US$) (from 74.00) In terms of downside risk, we apply a lower bound P/E multiple of ~15x (average less one standard deviation) to our calendar year 2018 EPS estimate of $4.75, to derive a grey sky scenario of $ Share price performance A p r Ju l O c t Jan EA.O Q S& P IN D EX On 30-Jan-2017 the S&P 500 INDEX closed at Daily Feb01, Jan30, 2017, 02/01/16 = US$64.2 Source: Company data, Thomson Reuters, Credit Suisse estimates Online Videogames 12

13 Electronic Arts, Inc. (EA): Ongoing Value Creation from Longer-Term Initiatives Electronic Arts is set to report its 3QFY17 results on 31 January 2017 after market close. We are rolling out a new model for EA which now individually accounts for the contribution of each mobile title. While the headline console products released during 3QFY17 will likely dominate the discussion, we will be most interested in whether or not there is an upward step-function or acceleration in the growth rate of FIFA Ultimate Team following the inclusion of 'The Journey' which catalyzed sellthru of the main FIFA 17 SKU to accelerate to +13% YOY. Coming out of EA's Investor Day last May, we called out that the presentation laid out a more concrete roadmap for near/medium term (mobile) as well as long-term (Player Network) product development. With that in mind, we will be particularly interested in any comments on early performance of FIFA Mobile Soccer as with the large installed base of fans globally, this could be a potential beachhead product in connecting EA's user base and building the Player Network across hardware mediums. As we look towards FY18 we do not expect any major changes to the release slate but note that there is a title which remains as of yet unannounced. We are currently carrying a conservative 2 million units in the model and note that there is potential for an upward bias to estimates as more details are unveiled. From a risk/reward perspective we continue to favor EA as our Blue Sky Gray Sky analysis suggests favorable risk/reward with upside potential to $124 and downside risk to $72. Per our usual practice we have updated our game-by-game forecast with the latest release date shifts and product clarity (in order of importance): Increased estimates for Battlefield 1 by 1 million units to 15.0 million units for FY17 and million total over the life of the title, from million and 12.2 million respectively. We believe past Battlefield iterations likely sold thru million units and comments from DICE suggested that this iteration was the biggest launch in their history Shifted Mass Effect: Andromeda into 4QFY17 given the 21 March 2017 release date while the initial ship-in units of the game will land in FY17, follow-on and reorders will show up in FY18 we are currently modeling 0.4 million units for FY17 and 5.3 million units for FY18 Increased the relative contribution of FIFA Ultimate Team within the Extra Content, F2P revenue bucket as we recalibrated our digital assumptions Explicitly modeled the contribution from each mobile title as we believe this will be an area of material value creation for EA in the longer-term We have taken steps to isolate the FX-driven versus the fundamental changes to our near to medium term estimates the net result is summarized in the table below: Figure 12: Electronic Arts, Inc. CS Estimate Revisions US$ in millions, unless otherwise stated 3QFY17 3QFY17 % 3QFY17 % FY17 FY17 % FY17 % FY18 FY18 % FY18 % Prior FX-Only Δ Current Δ Prior FX-Only Δ Current Δ Prior FX-Only Δ Current Δ Non-GAAP Net Revenue % % % % % % Adjusted EBITDA % % % % % % Adjusted EPS $2.26 $ % $ % $3.72 $ % $ % $4.12 $ % $ % Online Videogames 13

14 Battlefield 1 Released 21 October 2016 Our first inclination was to discount WWI as uncharted territory for the Battlefield franchise, and now we are increasing estimates for Battlefield 1 for the second time on the heels of commentary from DICE which suggested this was the largest launch in the studio's history. We are now modeling 15.0 million units for the year and million units over the life, versus prior 11.2 million and 12.2 million units, respectively. Our split for units in 3QFY17 versus 4QFY17 is ~12.5 million and ~2.5 million respectively and we still believe our estimates have an appropriate level of conservatism as we believe prior iterations of the Battlefield franchise have likely sold million units. To gauge the more near-term impact of Battlefield 1's contribution we have put together a sensitivity study of what the upside potential and downside risk based on Battlefield 1 units may be from a range of 12 million units to 19 million, which is as shown below: Figure 13: Electronic Arts, Inc. Battlefield 1 Sensitivity Analysis Battlefield 1 Units Sold (in millions) Units (mm) Revenue ($mm) EPS $3.44 $3.54 $3.63 $3.73 $3.83 $3.93 $4.02 $4.12 Each incremental million units of Battlefield 1 yields ~$0.10 in EPS. New IP Expected Release 3QFY18 As we have previously highlighted, there is a new title in FY18 that is yet to be unveiled to investors. What we do know is that it will be EA's return to the Action genre this is a category in which the company has historically has not much success. For now we are only carrying 2 million units in our model as we would rather err on the side of caution, but concede nonetheless that there is upward bias to our estimates. We believe this New IP, in addition to Star Wars Battlefront 2 will be key focus items in EA's FY18 product slate with the New IP having the greatest degree of variability in terms of unit estimates, hence we repeat the sensitivity analysis on our FY18 Revenue and EPS estimates to help investors gauge the impact of an incremental million units plus or minus of New IP from 1 million to 8 million, which is as shown below: Figure 14: Electronic Arts, Inc. New IP Sensitivity Analysis New IP Units Sold (in millions) Units (mm) Revenue ($mm) EPS $3.78 $3.88 $3.97 $4.07 $4.16 $4.26 $4.35 $4.45 Each incremental million units of New IP yields ~$0.10 in EPS. We maintain our Outperform investment rating and our target price remains at $100 our near-term product expectations are as summarized below: Online Videogames 14

15 Figure 15: Electronic Arts, Inc. FY17 and FY18 Release Slate FY17E FY18E CPG PC HH FGD DLC Total CPG PC HH FGD DLC Total Sims Expansion Pack 1Q17 1 Sims Expansion Pack 1Q18 1 Star Wars Battlefront Outer Rim DLC 1 Star Wars Battlefront Bespin DLC 1 Mirror's Edge Catalyst 3 1Q17E Total Q18E Total CPG PC HH FGD DLC Total CPG PC HH FGD DLC Total Madden NFL 17 4 Madden NFL 18 4 NHL NHL FIFA 17 4 FIFA 18 4 Star Wars Battlefront Death Star DLC 1 2Q17E Total Q18E Total CPG PC HH FGD DLC Total CPG PC HH FGD DLC Total Battlefield 1 3 Sims Expansion Pack 3Q18 1 Sims 4 City Living Expansion Pack 1 Star Wars Battlefront 2 2 Titanfall 2 2 New IP 2 Star Wars Battlefront Rogue One: Scarif DLC 1 3Q17E Total Q18E Total CPG PC HH FGD DLC Total CPG PC HH FGD DLC Total Sims Expansion Pack 4Q17 1 Sims Expansion Pack 4Q18 1 NBA Live 17 3 NBA Live 18 3 Mass Effect: Andromeda 3 Sims 5 1 4Q17E Total Q18E Total CPG PC HH FGD DLC Total CPG PC HH FGD DLC Total FY17E Total FY18E Total We include below our updated unit sales projections by title for FY17 and FY18: Online Videogames 15

16 Figure 16: Electronic Arts, Inc. FY17 and FY18 Unit Sales Projections FY17 Units (mm) FY18 Units (mm) 1Q17 Releases 1Q18 Releases Sims Expansion Pack 1Q Sims Expansion Pack 1Q Star Wars Battlefront Outer Rim DLC 0.6 Star Wars Battlefront Bespin DLC 0.6 Mirror's Edge Catalyst 0.5 Total 1.8 Total 0.1 2Q17 Releases 2Q18 Releases Madden NFL Madden NFL NHL NHL FIFA FIFA Star Wars Battlefront Death Star DLC 0.6 Total 22.5 Total Q17 Releases 3Q18 Releases Battlefield Sims Expansion Pack 3Q Sims 4 City Living Expansion Pack 0.1 Star Wars Battlefront Titanfall New IP 2.0 Star Wars Battlefront Rogue One: Scarif DLC 0.4 Total 24.8 Total Q17 Releases 4Q18 Releases Sims Expansion Pack 4Q Sims Expansion Pack 4Q NBA Live NBA Live Mass Effect: Andromeda 0.4 Sims Total 2.0 Total 5.7 FY17 Total 51.0 FY18 Total 40.9 Valuation We maintain out Outperform rating and our DCF derived target price for EA remains at $100. Our weighted cost of capital assumption is 11% and our terminal growth assumption remains 3%. Online Videogames 16

17 Figure 17: Electronic Arts, Inc. Discounted Cash Flow Statement US$ in millions, unless otherwise stated CAGR '17-'22 EBITDA % Net Income % Depreciation & Amortization % Other Non-Cash Charges (Benefits) Interest Expense (Income) 1.1 (10.4) (25.2) (42.8) (77.3) (101.8) Changes in Operating Assets & Liabilities (13.6) (15.8) (0.4) (10.0) Unlevered Cash Flows % Capital Expenditures % Unlevered Free Cash Flows % Y/Y % Change 41.0% 30.2% 21.9% 14.6% 9.3% 5.9% Weighted Average Cost of Capital 11.0% Perpetual UFCF Growth Rate ("G") 3.0% 2017 NPV of Unlevered Free Cash Flows Present Value of Terminal Value Enterprise Value Off-Balance Sheet Assets 0.0 Adjusted Enterprise Value Year End Net Debt (Cash) (4302.5) Equity Value Diluted Shares Outstanding Equity Value Per Share $100 We have also elected to run a Blue Sky and Grey Sky scenario for EA shares leveraging historic P/E multiples on next twelve month earnings estimates. Electronic Arts historically traded in a range of ~10x-37x with an average of ~20.5x and a standard deviation of ~5.5x during the past decade. As we think about where we will be at the end of 2017, we apply a lower bound P/E multiple of ~15x (average less one standard deviation) to our calendar year 2018 EPS estimate of $4.75, to derive a grey sky scenario of $72. In terms of upside potential, we apply a higher bound (average plus one standard deviation) multiple of ~26x to the same and derive a blue sky scenario of $124. Figure 18: Electronic Arts, Inc. Historical Forward P/E Range Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Risks to our Outperform rating and $100 target price for EA shares are: Online Videogames 17

18 Lack of commercial traction for any of its upcoming releases Failure to establish a recurring franchise with the Star Wars license Failure to transition existing console and PC properties to online free to play Online Videogames 18

19 Americas/United States Consumer Internet Rating NEUTRAL Price (30-Jan-17, US$) Target price (US$) (from 51.00) week price range (US$) Market cap (US$ m) 4, Target price is for 12 months. Share price performance Research Analysts Stephen Ju stephen.ju@credit-suisse.com Christopher Ford christopher.ford@credit-suisse.com A p r Ju l O c t Ja n T T WO.O Q S& P IN D EX On 30-Jan-2017 the S&P 500 INDEX closed at Daily Feb01, Jan30, 2017, 02/01/16 = US$34.62 Quarterly EPS Q1 Q2 Q3 Q4 2016A E E Take-Two Interactive Software Inc. (TTWO) Recurrent Consumer Spending Exerting a Larger Impact on the P&L Event: We preview Take-Two's 3QFY17 results which will be reported on 7 February 2017 after the close. We have gone back and reassessed our assumptions for recurrent consumer spending and concurrent with this preview we are releasing a completely rebuilt model for the company. We maintain our Neutral rating and our target price increases to $53 vs. prior $51. Our FY17 adj. EPS estimate is now $1.95 vs. prior $1.88. Investment Case: We continue to believe that FY17 will be a relative trough EPS year in its product release cycle, and as we get closer to E3 we believe the investor dialogue will shift to upside potential for unit volume estimates for Red Dead Redemption 2. We maintain our Neutral rating on TTWO shares even as we extend our product-by-product estimates out for the next five years to include the impact of 41mm units of a GTA sequel in FY20 we cannot get there on valuation. As we have noted before, the set of circumstances that may change our stance may be: 1) incremental distribution agreements for online version of Rockstar franchises (whether GTA or otherwise) outside the current Western markets, 2) better-thanexpected monetization existing console and PC users via microtransactions. Changes to Our Estimates: Our FY17 revenue and adj. EPS are now $1.81b and $1.95 vs. guidance for $1.67b-$1.77b and $1.55-$1.80 and prior $1.81b and $1.88. Valuation: Our DCF based target price increases to $53 versus prior $51, and uses a 12% WACC and 3% terminal growth. Financial and valuation metrics Year 3/16A 3/17E 3/18E 3/19E EPS (Excl. ESO) (US$) EPS (CS adj., ) Prev. EPS (CS adj., US$) P/E (CS adj.) (x) P/E rel. (CS adj., %) Revenue (US$ m) 1, , , ,844.2 EBITDA (US$ m) Net Debt (US$ m) -1,033-1,164-1,433-1,524 OCFPS (US$) P/OCF (x) Number of shares (m) Price/Sales (x) 3.46 BV/share (Next Qtr., US$) 6.3 P/BVPS (x) 8.1 Net debt (Next Qtr., US$ m) -1,067.8 Dividend (current, US$) - Dividend yield (%) - Source: Company data, Thomson Reuters, Credit Suisse estimates Online Videogames 19

20 Take-Two Interactive Software Inc. (TTWO) Price (30 Jan 2017): US$53.49; Rating: NEUTRAL; Target Price: (from US$51.00) US$53.00; Analyst: Stephen Ju Income Statement 3/16A 3/17E 3/18E 3/19E Revenue (US$ m) 1, , , ,844.2 Sales 1, , , ,844.2 EBITDA Operating profit Recurring profit Cash Flow 3/16A 3/17E 3/18E 3/19E Cash flow from operations CAPEX (37) (28) (39) (46) Free cashflow to the firm Cash flow from investments (325) 36 (39) (46) Net share issue(/repurchase) Dividends paid Issuance (retirement) of debt Other 305 (28) (1) (0) Cashflow from financing activities 305 (27) (1) (0) Effect of exchange rates (1) (4) 0 0 Changes in Net Cash/Debt Net debt at end (1,033) (1,164) (1,433) (1,524) Balance Sheet ($US) 3/16A 3/17E 3/18E 3/19E Assets Other current assets Total current assets 2,045 1,920 2,379 2,155 Total assets 2,590 2,535 3,108 3,014 Liabilities Short-term debt Total current liabilities 1,220 1,342 1,512 1,275 Long-term debt Total liabilities 2,009 1,794 1,965 1,440 Shareholder equity ,144 1,574 Total liabilities and equity 2,590 2,535 3,108 3,014 Net debt (1,033) (1,164) (1,433) (1,524) Per share 3/16A 3/17E 3/18E 3/19E No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Free cash flow per share Earnings 3/16A 3/17E 3/18E 3/19E Sales growth (%) (6.5) (16.8) EBIT growth (%) (22.2) Net profit growth (%) EPS growth (%) 6.9 (7.9) EBIT margin (%) Valuation 3/16A 3/17E 3/18E 3/19E EV/Sales (x) EV/EBIT (x) P/E (x) Quarterly EPS 2016A Q Q Q Q E E Company Background Take-Two Interactive Software, Inc. is a developer, marketer and publisher of interactive entertainment for consumers worldwide. Blue/Grey Sky Scenario Our Blue Sky Scenario (US$) (from 85.00) We have elected to run a Blue Sky scenario for TTWO shares leveraging historic P/E multiples on next twelve month earnings estimates. Take-Two has historically traded in a range of ~4x-26x at an average of ~14.7x and a standard deviation of ~6.4x since current management has been in place. We apply a higher bound (average plus one standard deviation) multiple of ~21.x to our calendar 18 EPS estimate of $4.59 and derive a blue sky scenario of $97. Our Grey Sky Scenario (US$) (from 32.00) In terms of a Grey Sky scenario to gauge downside potential, we apply a lower bound P/E multiple of ~8.2x (average less one standard deviation) to our calendar 18 EPS estimate of $4.59, to derive a grey sky scenario of $ Share price performance A p r Ju l O c t Jan T T WO.O Q S& P IN D EX On 30-Jan-2017 the S&P 500 INDEX closed at Daily Feb01, Jan30, 2017, 02/01/16 = US$34.62 Source: Company data, Thomson Reuters, Credit Suisse estimates Online Videogames 20

21 Take-Two Interactive Software (TTWO): Recurrent Consumer Spending Exerting a Larger Impact on the P&L Take-Two is set to report its 3QFY17 earnings results on 7 February 2017 after market close and concurrent with this preview we are releasing a completely rebuilt model for the company. We have gone back and reassessed our assumptions for recurrent consumer spending given the progress the company has made on the free-to-play/microtransaction theme with Grand Theft Auto Online and NBA 2K Online, as well as layered in explicit contributions for what should be Red Dead Redemption 2 Online. Figure 19: Take-Two Interactive Software, Inc. CS Estimates for Recurrent Consumer Spending USD in millions, unless otherwise stated 2016A 2017E 2018E 2019E 2020E 2021E 2022E GTA Online NBA 2K Online WWE SuperCard: Mobile Civilization Online Pro Baseball 2K Online Evolve Stage Red Dead Online Paid DLC We continue to believe that FY17 will be a relative trough in the product cycle for TTWO and as we get closer to E3, we see the dialogue shifting to upside potential for unit volume estimates for Red Dead Redemption 2. We have also extended our SKU-by-SKU bottoms up forecast out thru FY20 and although we may be off on the release time frame by a few quarters, especially for some of the titles we have modeled further into the horizon, in the context of our five-year DCF we were more interested in explicitly accounting for the impact from these games: FY18: NBA 2K million units in FY18 Red Dead Redemption 2 we maintain our estimate for 16.0 million units in FY18 BioShock million units in FY18, 3.5 million units over the life FY19: NBA 2K million units in FY19 Borderlands million units in FY19 FY20: NBA 2K million units in FY20 Grand Theft Auto VI 41.0 million units in FY20, 50.0 million over its lifecycle While we are encouraged by the continued progress of digital revenue and recurrent consumer spending, we remain on the sidelines based primarily on balanced risk/reward. We have taken steps to isolate the FX-driven versus the fundamental changes to our near to medium term estimates the net result is summarized in the table below: Online Videogames 21