UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~June~~September 30, 2019

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from �� to

Commission File Number 1-15839

ACTIVISION BLIZZARD, INC.

(Exact name of registrant as specified in its charter)



Delaware			95-4803544
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

3100 Ocean Park Boulevard	Santa Monica,	CA	90405
(Address of principal executive offices)			(Zip Code)

(310) 255-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.000001 per share	ATVI	The Nasdaq Global Select Market

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 Act of 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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an 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	☒	Non-accelerated Filer	☐	Accelerated Filer	☐

				Smaller reporting company	☐
				Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s Common Stock outstanding at ~~August 1,~~October 31, 2019 was ~~767,025,940.~~768,260,070.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

Table of Contents



	Cautionary Statement	3

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at ~~June~~September 30, 2019 and December 31, 2018	4

	Condensed Consolidated Statements of Operations for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018	5

	Condensed Consolidated Statements of Comprehensive Income for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018	6

	Condensed Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018	7

	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018	8

	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6566

Item 4.	Controls and Procedures	6768

PART II.	OTHER INFORMATION	6769

Item 1.	Legal Proceedings	6769

Item 1A.	Risk Factors	68

~~Item 5.~~	~~Other Information~~	69

Item 6.	Exhibits	69

EXHIBIT INDEX		70

SIGNATURE		71

CAUTIONARY STATEMENT

This Quarterly Report on Form 10-Q 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 a recitation 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 those related 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”~~“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 uncertain and difficult to predict.

We caution that a number of important factors could cause our 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: our ability to consistently deliver popular, high-quality titles in a timely manner; our ability to satisfy the expectations of consumers with respect to our brands, games, services, and/or business practices; concentration of revenue among a small number of titles; the continued growth in the scope and complexity of our business, including the diversion of management time and attention to issues relating to the operations of our newly acquired or started businesses and the potential impact of our expansion into new businesses on our existing businesses; our ability to realize the expected financial and operational benefits of, and effectively manage, our recently announced restructuring plans; increasing importance of revenues derived from digital distribution channels; risks associated with the retail sales business model; substantial influence of third-party platform providers over our products and costs; success and availability of video game consoles manufactured by third parties; risks associated with the free-to-play business model, including dependence on a relatively small number of consumers for a significant portion of revenues and profits from any given game; risks and costs associated with legal proceedings; changes in tax rates or exposure to additional tax liabilities, as well as the outcome of current or future tax disputes; rapid changes in technology and industry standards; competition, including from other forms of entertainment; our ability to sell products at assumed pricing levels; our ability to attract, retain, and motivate skilled personnel; reliance on external developers for development of some of our software products; the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt; counterparty risks relating to customers, licensees, licensors, and manufacturers; intellectual property claims; piracy and unauthorized copying of our products; risks and uncertainties of conducting business outside the United States (“U.S.”); fluctuations in currency exchange rates; increasing regulation of our business, products, and distribution in key territories; compliance with continually evolving laws and regulations concerning data privacy; potential data breaches and other cybersecurity risks; 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, 2018.

The forward-looking statements contained herein are based on information available to Activision Blizzard, Inc. as of the date of this filing 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.

Activision Blizzard, Inc.’s names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or trade names of Activision Blizzard, Inc. All other product or service names are the property of their respective owners. All dollar amounts referred to in, or contemplated by, this Quarterly Report on Form 10-Q refer to U.S. dollars, unless otherwise explicitly stated to the contrary.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in millions, except share data)


	At June 30, 2019			At December 31, 2018			At September 30, 2019			At December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	4,592		$	4,225		$	4,939		$	4,225
Accounts receivable, net of allowances of $108 and $190, at June 30, 2019 and December 31, 2018, respectively	455			1,035
Accounts receivable, net of allowances of $81 and $190, at September 30, 2019 and December 31, 2018, respectively							386			1,035
Inventories, net	46			43			102			43
Software development	184			264			240			264
Other current assets	386			539			345			539
Total current assets	5,663			6,106			6,012			6,106
Software development	90			65			109			65
Property and equipment, net	259			282			249			282
Deferred income taxes, net	366			458			357			458
Other assets	721			482			731			482
Intangible assets, net	633			735			583			735
Goodwill	9,763			9,762			9,764			9,762
Total assets	$	17,495		$	17,890		$	17,805		$	17,890

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	180		$	253		$	274		$	253
Deferred revenues	728			1,493			695			1,493
Accrued expenses and other liabilities	731			896			782			896
Total current liabilities	1,639			2,642			1,751			2,642
Long-term debt, net	2,673			2,671			2,674			2,671
Deferred income taxes, net	20			18			23			18
Other liabilities	1,186			1,167			1,122			1,167
Total liabilities	5,518			6,498			5,570			6,498
Commitments and contingencies (Note 19)
Shareholders’ equity:
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,195,517,884 and 1,192,093,991 shares issued at June 30, 2019 and December 31, 2018, respectively	—			—
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,196,802,874 and 1,192,093,991 shares issued at September 30, 2019 and December 31, 2018, respectively							—			—
Additional paid-in capital	11,063			10,963			11,116			10,963
Less: Treasury stock, at cost, 428,676,471 shares at June 30, 2019 and December 31, 2018	(5,563		)	(5,563		)
Less: Treasury stock, at cost, 428,676,471 shares at September 30, 2019 and December 31, 2018							(5,563		)	(5,563		)
Retained earnings	7,085			6,593			7,289			6,593
Accumulated other comprehensive loss	(608		)	(601		)	(607		)	(601		)
Total shareholders’ equity	11,977			11,392			12,235			11,392
Total liabilities and shareholders’ equity	$	17,495		$	17,890		$	17,805		$	17,890

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

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in millions, except per share data)


	For the Three Months Ended June 30,					For the Six Months Ended June 30,					For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018		2019			2018		2019			2018			2019			2018
Net revenues
Product sales	$	359		$	464	$	1,015		$	1,184	$	260		$	263		$	1,276		$	1,447
Subscription, licensing, and other revenues	1,037			1,177		2,205			2,423		1,022			1,249			3,227			3,672
Total net revenues	1,396			1,641		3,220			3,607		1,282			1,512			4,503			5,119

Costs and expenses
Cost of revenues—product sales:
Product costs	99			126		251			289		137			127			388			416
Software royalties, amortization, and intellectual property licenses	51			49		162			194		9			20			171			214
Cost of revenues—subscription, licensing, and other revenues:
Game operations and distribution costs	230			250		469			521		246			257			714			777
Software royalties, amortization, and intellectual property licenses	53			85		114			169		50			109			164			278
Product development	244			255		492			513		210			263			702			776
Sales and marketing	191			226		397			477		182			263			580			741
General and administrative	170			216		350			415		177			208			527			623
Restructuring and related costs	22			—		79			—		24			—			104			—
Total costs and expenses	1,060			1,207		2,314			2,578		1,035			1,247			3,350			3,825

Operating income	336			434		906			1,029		247			265			1,153			1,294
Interest and other expense (income), net (Note 15)	(34		)	26		(31		)	54		(2		)	13			(33		)	67
Income before income tax expense	370			408		937			975
Income tax expense	42			6		163			73
Loss on extinguishment of debt											—			40			—			40
Income before income tax expense (benefit)											249			212			1,186			1,187
Income tax expense (benefit)											45			(48		)	208			25
Net income	$	328		$	402	$	774		$	902	$	204		$	260		$	978		$	1,162

Earnings per common share
Basic	$	0.43		$	0.53	$	1.01		$	1.19	$	0.27		$	0.34		$	1.28		$	1.53
Diluted	$	0.43		$	0.52	$	1.01		$	1.17	$	0.26		$	0.34		$	1.27		$	1.51

Weighted-average number of shares outstanding
Basic	766			761		765			760		767			763			766			761
Diluted	770			770		770			770		771			771			770			771

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

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Amounts in millions)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018			2019			2018
Net income	$	328		$	402		$	774		$	902		$	204		$	260		$	978		$	1,162

Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax	(2		)	(11		)	1			(10		)	(6		)	3			(5		)	(7		)
Unrealized gains (losses) on forward contracts designated as hedges, net of tax	(8		)	48			(6		)	36			10			(11		)	4			25
Unrealized gains (losses) on investments, net of tax	4			7			(2		)	4			(3		)	—			(5		)	4
Total other comprehensive income (loss)	$	(6	)	$	44		$	(7	)	$	30		$	1		$	(8	)	$	(6	)	$	22
Comprehensive income	$	322		$	446		$	767		$	932		$	205		$	252		$	972		$	1,184

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

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in millions)


	For the Six Months Ended June 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Cash flows from operating activities:
Net income	$	774		$	902		$	978		$	1,162
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	91			95			100			175
Depreciation and amortization	166			267			246			385
Non-cash operating lease cost	34			—			49			—
Amortization of capitalized software development costs and intellectual property licenses(1)	153			206			163			238
Loss on extinguishment of debt							—			40
Share-based compensation expense (2)	100			110			127			164
Unrealized gain on equity investment (Note 8)	(38		)	—			(38		)	—
Other	28			9			47			20
Changes in operating assets and liabilities:
Accounts receivable, net	570			511			635			290
Inventories	(4		)	8			(65		)	(127		)
Software development and intellectual property licenses	(105		)	(209		)	(186		)	(305		)
Other assets	78			39			17			(15		)
Deferred revenues	(803		)	(891		)	(809		)	(710		)
Accounts payable	(75		)	(157		)	22			(14		)
Accrued expenses and other liabilities	(365		)	(352		)	(373		)	(512		)
Net cash provided by operating activities	604			538			913			791

Cash flows from investing activities:
Proceeds from maturities of available-for-sale investments	75			—			153			—
Purchases of available-for-sale investments	—			(59		)	—			(59		)
Capital expenditures	(45		)	(61		)	(79		)	(97		)
Other investing activities	7			(4		)	5			(4		)
Net cash provided by (used in) investing activities	37			(124		)	79			(160		)

Cash flows from financing activities:
Proceeds from issuance of common stock to employees	57			77			87			91
Tax payment related to net share settlements on restricted stock units	(48		)	(68		)	(55		)	(85		)
Dividends paid	(283		)	(259		)	(283		)	(259		)
Repayment of long-term debt							—			(1,740		)
Premium payment for early redemption of note							—			(25		)
Other financing activities							—			(2		)
Net cash used in financing activities	(274		)	(250		)	(251		)	(2,020		)
Effect of foreign exchange rate changes on cash and cash equivalents	3			(19		)	(24		)	(15		)
Net increase in cash and cash equivalents and restricted cash	370			145
Net increase (decrease) in cash and cash equivalents and restricted cash							717			(1,404		)
Cash and cash equivalents and restricted cash at beginning of period	4,229			4,720			4,229			4,720
Cash and cash equivalents and restricted cash at end of period	$	4,599		$	4,865		$	4,946		$	3,316


(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 Condensed Consolidated Financial Statements.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2019

(Unaudited)

(Amounts and shares in millions, except per share data)


	Common Stock				Treasury Stock					Additional Paid-In Capital				Retained Earnings			Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity			Common Stock					Treasury Stock							Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
	Shares		Amount		Shares		Amount						Shares				Accumulated Other Comprehensive Income (Loss)			Amount					Shares		Amount									Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
Balance at December 31, 2018	1,192		$	—	(429	)	$	(5,563	)	Additional Paid-In Capital			$	Retained Earnings	10,963		$	6,593			Total Shareholders’ Equity		$	(601	)	$	11,392	1,192			$	—			(429	)		$	(5,563	)		$	10,963			$	6,593			$	(601	)	$	11,392
Components of comprehensive income:
Net income	—		—		—		—			—				447			—				447			—		—			—			—				—				447				—				447
Other comprehensive loss	—		—		—		—			—				—			(1		)		(1		)	—		—			—			—				—				—				(1		)		(1		)
Issuance of common stock pursuant to employee stock options	2		—		—		—			30				—			—				30			2		—			—			—				30				—				—				30
Issuance of common stock pursuant to restricted stock units	2		—		—		—			—				—			—				—			2		—			—			—				—				—				—				—
Restricted stock surrendered for employees’ tax liability	(1	)	—		—		—			(45		)		—			—				(45		)	(1	)	—			—			—				(45		)		—				—				(45		)
Share-based compensation expense related to employee stock options and restricted stock units	—		—		—		—			56				—			—				56			—		—			—			—				56				—				—				56
Dividends ($0.37 per common share)	—		—		—		—			—				(283		)	—				(283		)	—		—			—			—				—				(283		)		—				(283		)
Balance at March 31, 2019	1,195		$	—	(429	)	$	(5,563	)	$	11,004			$	6,757		$	(602	)		$	11,596		1,195		$	—		(429	)		$	(5,563	)		$	11,004			$	6,757			$	(602	)		$	11,596
Components of comprehensive income:
Net income	—		—		—		—			—				328			—				328			—		—			—			—				—				328				—				328
Other comprehensive loss	—		—		—		—			—				—			(6		)		(6		)	—		—			—			—				—				—				(6		)		(6		)
Issuance of common stock pursuant to employee stock options	1		—		—		—			28				—			—				28			1		—			—			—				28				—				—				28
Restricted stock surrendered for employees’ tax liability	—		—		—		—			(4		)		—			—				(4		)	—		—			—			—				(4		)		—				—				(4		)
Share-based compensation expense related to employee stock options and restricted stock units	—		—		—		—			35				—			—				35			—		—			—			—				35				—				—				35
Balance at June 30, 2019	1,196		$	—	(429	)	$	(5,563	)	$	11,063			$	7,085		$	(608	)		$	11,977		1,196		$	—		(429	)		$	(5,563	)		$	11,063			$	7,085			$	(608	)		$	11,977
Components of comprehensive income:
Net income																								—		—			—			—				—				204				—				204
Other comprehensive income																								—		—			—			—				—				—				1				1
Issuance of common stock pursuant to employee stock options																								1		—			—			—				29				—				—				29
Restricted stock surrendered for employees’ tax liability																								—		—			—			—				(8		)		—				—				(8		)
Share-based compensation expense related to employee stock options and restricted stock units																								—		—			—			—				32				—				—				32
Balance at September 30, 2019																								1,197		$	—		(429	)		$	(5,563	)		$	11,116			$	7,289			$	(607	)		$	12,235

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

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2018

(Unaudited)

(Amounts and shares in millions, except per share data)


	Common Stock				Treasury Stock					Additional Paid-In Capital				Retained Earnings			Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity			Common Stock					Treasury Stock							Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
	Shares		Amount		Shares		Amount						Shares				Accumulated Other Comprehensive Income (Loss)			Amount					Shares		Amount									Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
Balance at December 31, 2017	1,186		$	—	(429	)	$	(5,563	)	Additional Paid-In Capital			$	Retained Earnings	10,747		$	4,916			Total Shareholders’ Equity		$	(638	)	$	9,462	1,186			$	—			(429	)		$	(5,563	)		$	10,747			$	4,916			$	(638	)	$	9,462
Cumulative impact from adoption of new revenue accounting standard	—		—		—		—			—				88			3				91			—		—			—			—				—				88				3				91
Components of comprehensive income:
Net income	—		—		—		—			—				500			—				500			—		—			—			—				—				500				—				500
Other comprehensive loss	—		—		—		—			—				—			(14		)		(14		)	—		—			—			—				—				—				(14		)		(14		)
Issuance of common stock pursuant to employee stock options	3		—		—		—			47				—			—				47			3		—			—			—				47				—				—				47
Issuance of common stock pursuant to restricted stock units	2		—		—		—			—				—			—				—			2		—			—			—				—				—				—				—
Restricted stock surrendered for employees’ tax liability	(1	)	—		—		—			(64		)		—			—				(64		)	(1	)	—			—			—				(64		)		—				—				(64		)
Share-based compensation expense related to employee stock options and restricted stock units	—		—		—		—			56				—			—				56			—		—			—			—				56				—				—				56
Dividends ($0.34 per common share)	—		—		—		—			—				(259		)	—				(259		)	—		—			—			—				—				(259		)		—				(259		)
Balance at March 31, 2018	1,190		$	—	(429	)	$	(5,563	)	$	10,786			$	5,245		$	(649	)		$	9,819		1,190		$	—		(429	)		$	(5,563	)		$	10,786			$	5,245			$	(649	)		$	9,819
Components of comprehensive income:
Net income	—		—		—		—			—				402			—				402			—		—			—			—				—				402				—				402
Other comprehensive income																								—		—			—			—				—				—				44				44
Issuance of common stock pursuant to employee stock options																								1		—			—			—				30				—				—				30
Restricted stock surrendered for employees’ tax liability																								—		—			—			—				(10		)		—				—				(10		)
Share-based compensation expense related to employee stock options and restricted stock units																								—		—			—			—				61				—				—				61
Balance at June 30, 2018																								1,191		$	—		(429	)		$	(5,563	)		$	10,867			$	5,647			$	(605	)		$	10,346
Components of comprehensive income:
Net income																								—		—			—			—				—				260				—				260
Other comprehensive loss	—		—		—		—			—				—			44				44			—		—			—			—				—				—				(8		)		(8		)
Issuance of common stock pursuant to employee stock options	1		—		—		—			30				—			—				30			1		—			—			—				16				—				—				16
Restricted stock surrendered for employees’ tax liability	—		—		—		—			(10		)		—			—				(10		)	—		—			—			—				(12		)		—				—				(12		)
Share-based compensation expense related to employee stock options and restricted stock units	—		—		—		—			61				—			—				61			—		—			—			—				57				—				—				57
Balance at June 30, 2018	1,191		$	—	(429	)	$	(5,563	)	$	10,867			$	5,647		$	(605	)		$	10,346
Balance at September 30, 2018																								1,192		$	—		(429	)		$	(5,563	)		$	10,928			$	5,907			$	(613	)		$	10,659

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

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Description of Business and Basis of Consolidation and Presentation

Activision Blizzard, Inc. is a leading global developer and publisher of interactive entertainment content and services. 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., and Vivendi Games, Inc., then an indirect wholly-owned subsidiary of Vivendi S.A., we were renamed Activision Blizzard, Inc.

Our Segments

Based upon our organizational structure, we conduct our business through ~~three~~3 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 platform. 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. Activision’s key product franchise is Call of Duty^®, a first-person shooter for the console and PC platforms. Also, on October 1, 2019, in collaboration with Tencent, Activision released Call of Duty: Mobile for the mobile platform, including for Google Inc.’s (“Google”) Android and Apple Inc.’s (“Apple”) iOS.

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 for the Destiny franchise to Bungie in exchange for cash and Bungie’s assumption of on-going customer obligations of Activision. Activision no longer has any material rights or obligations related to the Destiny franchise.

(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 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^®, 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 League^TM, the first 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 action role-playing franchise for the PC and console platforms; Hearthstone^®, an online collectible card franchise for the PC and mobile 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 for the mobile platform, including for ~~Google Inc.’s~~Google’s Android and ~~Apple Inc.’s~~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.

King’s key product franchises, all of which are for the mobile and PC platforms, include: Candy Crush™, which features “match three” games; Farm Heroes™, which also features “match three” games; and Bubble Witch™, which features “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 television content 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 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.

Basis of Consolidation and Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim reporting. Accordingly, certain notes or other information that are normally required by U.S. GAAP have been condensed or omitted if they substantially duplicate the disclosures contained in our annual audited consolidated financial statements. Additionally, the year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. Accordingly, the unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. In the opinion of management, all adjustments considered necessary for the fair statement of our financial position and results of operations in accordance with U.S. GAAP (consisting of normal recurring adjustments) have been included in the accompanying unaudited condensed consolidated financial statements. Actual results could differ from these estimates and assumptions.

The accompanying condensed consolidated financial statements include the accounts and operations of the Company. All intercompany accounts and transactions have been eliminated.

The Company considers events or transactions that occur after the balance sheet date, but before the financial statements are issued, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures.

During the three months ended March 31, 2019, we identified an error principally related to the initial recognition of global intangible low-taxed income of foreign subsidiaries income taxes which should have been recorded in the three months and year ended December 31, 2018. Income tax expense for the three months and year ended December 31, 2018 should have been reduced by $35 million. This amount is not material to the consolidated financial statements for the year ended December 31, 2018, and we will revise our 2018 consolidated financial statements to correct this matter in our Annual Report on Form 10-K for the year ending December 31, 2019. Our condensed consolidated balance sheet as of December 31, 2018, as presented in this Form 10-Q, has been revised to reflect the correction of this error.

Supplemental Cash Flow Information

The beginning and ending cash and cash equivalents and restricted cash reported within our condensed consolidated statement of cash flows included restricted cash amounts as follows (amounts in millions):


	At June 30,				At September 30,
	2019		2018		2019		2018
Beginning restricted cash	$	4	$	7	$	4	$	7
Ending restricted cash	7		8		7		8

2. Summary of Significant Accounting Policies

Adoption of Accounting Standards Codification (“ASC”) 842: Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance related to the accounting for leases. The new standard replaces 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 (“ROU”) asset for its leases. On January 1, 2019, we adopted the new lease accounting standard. As a result, we have updated our significant accounting policy disclosure to include our accounting policy for leases under the new standard. Refer to Note 3 for information about the impact of adoption on our condensed consolidated financial statements.

Leases

We determine if an arrangement is or contains a lease at contract inception. In certain of our lease arrangements, primarily those related to our data center arrangements, judgment is required in determining if a contract contains a lease. For these arrangements, there is judgment in evaluating if the arrangement provides us with an asset that is physically distinct, or that represents substantially all of the capacity of the asset, and if we have the right to direct the use of the asset. Lease assets and liabilities are recognized based on the present value of future lease payments over the lease term at the commencement date. Included in the lease liability are future lease payments that are fixed, in-substance fixed, or payments based on an index or rate known at the commencement date of the lease. Variable lease payments are recognized as lease expenses as incurred, and generally relate to variable payments made based on the level of services provided by the landlords of our leases. The operating lease ROU asset also includes any lease payments made prior to commencement, initial direct costs incurred, and lease incentives received. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate in determining the present value of future payments. The incremental borrowing rate represents the rate required to borrow funds over a similar term to purchase the leased asset, and is based on the information available at the commencement date of the lease. For leased assets with similar lease terms and asset type we applied a portfolio approach in determining a single incremental borrowing rate to apply to the leased assets.

In determining our lease liability, the lease term includes options to extend or terminate the lease when it is reasonably certain that we will exercise such option. For operating leases, the lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Finance lease assets are depreciated on a straight-line basis over the estimated life of the asset, not to exceed the length of the lease, with interest expense associated with finance lease liabilities recorded using the effective interest method. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and we recognize lease expense for these leases on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components. For our real estate, server and data center, and event production and broadcasting equipment leases, we elected the practical expedient to account for the lease and non-lease components as a single lease component. In all other lease arrangements, we account for lease and non-lease components separately. Additionally, for certain leases that have a group of leased assets with similar characteristics in size and composition, we may apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

Operating lease ROU assets are presented in “Other assets” and operating lease liabilities are presented in “Accrued expenses and other current liabilities” and “Other liabilities” on our condensed consolidated balance sheet.

Finance lease ROU assets are presented in “Property and equipment, net” and finance lease liabilities are presented in “Accrued expenses and other current liabilities” and “Other liabilities” on our condensed consolidated balance sheet.

3. Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Leases

As noted in Note 2 above, we adopted the new lease accounting standard effective January 1, 2019. We elected to apply an optional adoption method, which uses the effective date as the initial date of application on transition with no retrospective adjustments to prior periods. Additionally, we elected to apply the package of transition practical expedients which permitted us to, among other things, (1) not reassess if existing contracts contained leases under the new lease accounting standard and (2) carry forward our historical lease classifications.

The impact from the adoption of the new lease accounting standard to our condensed consolidated balance sheet at January 1, 2019, was as follows (amounts in millions):



Condensed Consolidated Balance Sheet:	Balance at December 31, 2018		Adjustments due to adoption of new lease accounting standard			Balance at January 1, 2019
Assets
Other current assets	$	539	$	(8	)	$	531
Other assets	482		252			734
Liabilities
Accrued expenses and other liabilities	$	896	$	54		$	950
Other liabilities	1,167		190			1,357

The adoption of this standard did not have an impact on our condensed consolidated statement of operations or condensed consolidated statements of cash flows.

Recent Accounting Pronouncements Not Yet Adopted

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, that entity will be required to perform its annual or interim goodwill impairment test by comparing 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 for fiscal years beginning after December 15, 2019, and should be applied prospectively. Early adoption is permitted. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption. We ~~are evaluating the impact, if any, of adopting~~do not currently expect this new accounting guidance to have an impact on our ~~consolidated~~ financial ~~statements.~~statements upon adoption.

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 are utilized for existing internal-use software guidance. The capitalized costs are required to be amortized over the associated term of the arrangement, 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 the impact, if any, of adopting this new accounting guidance on our financial statements.

Financial Instruments - Credit Losses

In June 2016, the FASB issued new guidance related to accounting for credit losses on financial instruments. The update replaces the existing incurred loss impairment model with an expected loss model which requires the use of historical and forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will generally result in earlier recognition of credit losses. The new standard is effective for fiscal years beginning after December 15, 2019, and will be applied on a modified retrospective basis, with the cumulative effect of adoption recorded as an adjustment to retained earnings. We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements, however, our preliminary conclusion is that the new guidance will not have a material impact on our financial statements and related disclosures.

4. Inventories, Net

Inventories, net, consist of the following (amounts in millions):


	At June 30, 2019		At December 31, 2018		At September 30, 2019		At December 31, 2018
Finished goods	$	45	$	40	$	82	$	40
Purchased parts and components	1		3		20		3
Inventories, net	$	46	$	43	$	102	$	43

At ~~June~~September 30, 2019 and December 31, 2018, inventory reserves were ~~$18~~$13 million and $22 million, respectively.

5. Software Development and Intellectual Property Licenses

The following table summarizes the components of our capitalized software development costs (amounts in millions):


	At June 30, 2019		At December 31, 2018		At September 30, 2019		At December 31, 2018
Internally-developed software costs	$	254	$	291	$	325	$	291
Payments made to third-party software developers	20		38		24		38
Total software development costs	$	274	$	329	$	349	$	329

As of both ~~June~~September 30, 2019 and December 31, 2018, 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 Three Months Ended June 30, For the Six Months Ended June 30,
2019 2018 2019 2018
Amortization of capitalized software development costs and intellectual property licenses $ 54
$ 57
$ 164
$ 209



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Amortization of capitalized software development costs and intellectual property licenses	$	11	$	33	$	175	$	242

6. Intangible Assets, Net

Intangible assets, net, consist of the following (amounts in millions):


	At June 30, 2019										At September 30, 2019
	Estimated useful lives			Gross carrying amount		Accumulated amortization			Net carrying amount		Estimated useful lives			Gross carrying amount		Accumulated amortization			Net carrying amount
Acquired definite-lived intangible assets:
Internally-developed franchises	3	-	11 years	$	1,154	$	(1,068	)	$	86	3	-	11 years	$	1,154	$	(1,086	)	$	68
Developed software	2	-	5 years	601		(518		)	83		2	-	5 years	601		(548		)	53
Trade names	7	-	10 years	54		(26		)	28		7	-	10 years	54		(28		)	26
Other	1	-	15 years	19		(16		)	3		1	-	15 years	19		(16		)	3
Total definite-lived intangible assets (1)				$	1,828	$	(1,628	)	$	200				$	1,828	$	(1,678	)	$	150

Acquired indefinite-lived intangible assets:
Activision trademark	Indefinite								386		Indefinite								386
Acquired trade names	Indefinite								47		Indefinite								47
Total indefinite-lived intangible assets									$	433									$	433
Total intangible assets, net									$	633									$	583


(1)	Beginning with the first quarter of 2019, the balances of the customer base intangible assets have been removed as such amounts were fully amortized in the prior year.



	At December 31, 2018
	Estimated useful lives			Gross carrying amount		Accumulated amortization			Net carrying amount
Acquired definite-lived intangible assets:
Internally-developed franchises	3	-	11 years	$	1,154	$	(1,032	)	$	122
Developed software	2	-	5 years	601		(456		)	145
Customer base	2 years			617		(617		)	—
Trade names	7	-	10 years	54		(23		)	31
Other	1	-	15 years	19		(15		)	4
Total definite-lived intangible assets				$	2,445	$	(2,143	)	$	302

Acquired indefinite-lived intangible assets:
Activision trademark	Indefinite								386
Acquired trade names	Indefinite								47
Total indefinite-lived intangible assets									$	433
Total intangible assets, net									$	735

Amortization expense of our intangible assets was ~~$48~~$50 million and ~~$103~~$152 million for the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively. Amortization expense of our intangible assets was ~~$77~~$84 million and ~~$196~~$280 million for the three and ~~six~~nine months ended ~~June~~September 30, 2018, respectively.

At ~~June~~September 30, 2019, future amortization of definite-lived intangible assets is estimated as follows (amounts in millions):


For the years ending December 31,
2019 (remaining six months)	$	102
2019 (remaining three months)			$	52
2020	74		74
2021	12		12
2022	7		7
2023	2		2
Thereafter	3		3
Total	$	200	$	150

7. Goodwill

The changes in the carrying amount of goodwill by reportable segment are as follows (amounts in millions):


	Activision		Blizzard		King		Total		Activision		Blizzard		King		Total
Balance at December 31, 2018	$	6,897	$	190	$	2,675	$	9,762	$	6,897	$	190	$	2,675	$	9,762
Other	1		—		—		1		1		—		1		2
Balance at June 30, 2019	$	6,898	$	190	$	2,675	$	9,763
Balance at September 30, 2019									$	6,898	$	190	$	2,676	$	9,764

8. Fair Value Measurements

The FASB literature regarding fair value measurements for certain assets and liabilities establishes a three-level fair value 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 are as 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 the fair value of the assets or liabilities, including certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.

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 the measurement date (amounts in millions):


				Fair Value Measurements at June 30, 2019 Using											Fair Value Measurements at September 30, 2019 Using
	As of June 30, 2019			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Balance Sheet Classification	As of September 30, 2019			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Balance Sheet Classification
Financial Assets:
Recurring fair value measurements:
Money market funds	$	3,866		$	3,866	$	—		$	—	Cash and cash equivalents	$	4,616		$	4,616	$	—		$	—	Cash and cash equivalents
Foreign government treasury bills	38			38		—			—		Cash and cash equivalents	36			36		—			—		Cash and cash equivalents
U.S. treasuries and government agency securities	78			78		—			—		Other current assets
Foreign currency forward contracts designated as hedges	11			—		11			—		Other current assets	23			—		23			—		Other current assets
Foreign currency forward contracts not designated as hedges	6			—		6			—		Other current assets	8			—		8			—		Other current assets
Total recurring fair value measurements	$	3,999		$	3,982	$	17		$	—		$	4,683		$	4,652	$	31		$	—

Financial Liabilities:
Foreign currency forward contracts not designated as hedges	$	(5	)	$	—	$	(5	)	$	—	Accrued expenses and other liabilities	$	(4	)	$	—	$	(4	)	$	—	Accrued expenses and other liabilities



				Fair Value Measurements at December 31, 2018 Using
	As of December 31, 2018			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Balance Sheet Classification
Financial Assets:
Recurring fair value measurements:
Money market funds	$	3,925		$	3,925	$	—		$	—	Cash and cash equivalents
Foreign government treasury bills	32			32		—			—		Cash and cash equivalents
U.S. treasuries and government agency securities	150			150		—			—		Other current assets
Foreign currency forward contracts designated as hedges	13			—		13			—		Other current assets
Foreign currency forward contracts not designated as hedges	1			—		1			—		Other current assets
Total recurring fair value measurements	$	4,121		$	4,107	$	14		$	—

Financial Liabilities:
Foreign currency forward contracts designated as hedges	$	(1	)	$	—	$	(1	)	$	—	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):


	As of June 30, 2019				As of December 31, 2018				As of September 30, 2019				As of December 31, 2018
	Notional amount		Fair value gain (loss)		Notional amount		Fair value gain (loss)		Notional amount		Fair value gain (loss)		Notional amount		Fair value gain (loss)
Foreign Currency:
Buy USD, Sell Euro	$	409	$	11	$	723	$	12	$	310	$	23	$	723	$	12

At ~~June~~September 30, 2019, our Cash Flow Hedges have remaining maturities of ~~six~~three months or less. Additionally, $2 million of net realized but unrecognized gains are recorded within “Accumulated other comprehensive income (loss)” at ~~June~~September 30, 2019 for Cash Flow Hedges that had settled but were deferred and will be amortized into earnings, along with the 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 Three Months Ended June 30, For the Six Months Ended June 30, Statement of Operations Classification
2019 2018 2019 2018
Cash Flow Hedges $ 6
$ (4 ) $ 17
$ (14 ) Net revenues



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,					Statement of Operations Classification
	2019		2018		2019		2018			Statement of Operations Classification
Cash Flow Hedges	$	7	$	3	$	24	$	(11	)	Net revenues

Foreign Currency Forward Contracts Not Designated as Hedges

The gross notional amounts and fair values of our foreign currency forward contracts not designated as hedges are as follows (amounts in millions):


	As of June 30, 2019					As of December 31, 2018				As of September 30, 2019					As of December 31, 2018
	Notional amount		Fair value gain (loss)			Notional amount		Fair value gain (loss)		Notional amount		Fair value gain (loss)			Notional amount		Fair value gain (loss)
Foreign Currency:
Buy USD, Sell SEK	$	393	$	(4	)	$	—	$	—
Buy USD, Sell EUR	142		3			—		—		$	81	$	5		$	—	$	—
Buy EUR, Sell USD	142		1			—		—		79		(3		)	—		—
Buy USD, Sell SEK										46		2			—		—
Buy SEK, Sell USD										45		(1		)	—		—
Buy USD, Sell GBP	28		1			55		1		13		1			55		1
Buy GBP, Sell USD	28		—			—		—		13		—			—		—

For the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, pre-tax net gains (losses) 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.

During the three months ended June 30, 2019, we recorded an upward adjustment of $38 million to an investment in equity securities, which has been historically recorded at cost, based on an observable and orderly transaction in the common stock of the investee. We recognized a corresponding unrealized gain within “Interest and other expense (income), net” in our condensed consolidated statement of operations. As of ~~June~~September 30, 2019, the carrying value of the investment is $42 million and is recorded in “Other assets” on our condensed consolidated balance sheet. We classify this investment as Level 3 in the fair value hierarchy as we estimated the value based on valuation methods using the observable transaction price in a market with limited activity.

For the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, there were no impairment charges related to assets that are measured on a non-recurring basis.

9. Deferred revenues

We record deferred revenues when cash payments are received or due in advance of the fulfillment of our associated performance obligations. The opening balance of deferred revenues as of January 1, 2019 and the ending balance as of ~~June~~September 30, 2019, were $1.6 billion and $0.8 billion, respectively, including our current and non-current balances. For the ~~six~~nine months ended ~~June~~September 30, 2019, 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 were primarily due to the recognition of revenues upon fulfillment of our performance obligations, both of which were in the ordinary course of business. During the three and ~~six~~nine months ended ~~June~~September 30, 2019, ~~$0.4~~$0.1 billion and ~~$1.3~~$1.4 billion of revenues, respectively, were recognized that were included in the deferred revenues balance at December 31, 2018. During the three and ~~six~~nine months ended ~~June~~September 30, 2018, ~~$0.4~~$0.1 billion and ~~$1.5~~$1.6 billion of revenues, respectively, were recognized that were included in the deferred revenues balance at January 1, 2018, as adjusted for the adoption of the new revenue standard in the prior year.

As of ~~June~~September 30, 2019, the aggregate amount of contracted revenues allocated to our unsatisfied performance obligations is ~~$1.9~~$2.5 billion, which includes our deferred revenues balances and amounts to be invoiced and recognized as revenue in future periods. We expect to recognize approximately ~~$0.9~~$1.4 billion over the next 12 months, $0.4 billion in the subsequent ~~12 month~~12-month period, 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.

10. Leases

Our lease arrangements are primarily for: (1) corporate, administrative, and development studio offices; (2) data centers and server equipment; and (3) live event production equipment. Our existing leases have remaining lease terms ranging from one year to 10 years. In certain instances, such leases include one or more options to renew, with renewal terms that generally extend the lease term by one year to five years for each option. The exercise of lease renewal options is generally at our sole discretion. Additionally, the majority of our leases are classified as operating leases; our financing leases are not material.

Components of our lease costs are as follows (amounts in millions):


	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019		Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating leases
Operating lease costs	$	20	$	40	$	19	$	58
Variable lease costs	4		9		6		16

~~Other supplemental~~Supplemental information related to our operating leases is as follows (amounts in millions):


	Six Months Ended June 30, 2019			Nine Months Ended September 30, 2019
Supplemental Operating Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities	$	43		$	61
ROU assets obtained in exchange for new lease obligations	47			55

	At June 30, 2019			At September 30, 2019
Weighted Average Lease terms and discount rates
Remaining lease term	5.34 years			5.15 years
Discount rate	4.12		%	4.09		%

Future undiscounted lease payments for our operating lease liabilities, and a reconciliation of these payments to our operating lease liabilities at ~~June~~September 30, 2019, are as follows (amounts in millions):


For the years ending December 31,
2019 (remaining six months)	$	35
2019 (remaining three months)				$	14
2020	69			74
2021	55			56
2022	48			48
2023	42			42
Thereafter	75			74
Total future lease payments	$	324		$	308
Less imputed interest	(35		)	(32		)
Total lease liabilities	$	289		$	276

As of September 30, 2019, we have entered into facility leases that have not yet commenced with future lease payments of approximately $57 million. These leases are expected to commence within the next 12 months and will have lease terms ranging from two years to five years.

Operating lease ROU assets and liabilities recorded on our condensed consolidated balance sheet as of ~~June~~September 30, 2019, were as follows (amounts in millions):


	At June 30, 2019		Balance Sheet Classification	At September 30, 2019		Balance Sheet Classification
ROU assets	$	254	Other assets	$	238	Other assets

Current lease liabilities	$	60	Accrued expenses and other current liabilities	$	61	Accrued expenses and other current liabilities
Non-current lease liabilities	229		Other liabilities	215		Other liabilities
	$	289	Total lease liabilities	$	276	Total lease liabilities

Future minimum lease payments as of December 31, 2018, prior to our adoption of the new lease accounting standard, were as follows:



For the years ending December 31,
2019	$	80
2020	70
2021	53
2022	45
2023	38
Thereafter	60
Total	$	346

11. Debt

Credit Facilities

As of ~~June~~September 30, 2019 and December 31, 2018, we had $1.5 billion available under a revolving credit facility (the “Revolver”) pursuant to a credit agreement entered into on October 11, 2013 (as amended thereafter and from time to time, the “Credit Agreement”). To date, we have not drawn on the Revolver, and we were in compliance with the terms of the Credit Agreement as of ~~June~~September 30, 2019.

Refer to Note 13 contained in our Annual Report on Form 10-K for the year ended December 31, 2018 for further details regarding the Credit Agreement, its key terms, and previous amendments made to it.

Unsecured Senior Notes

At ~~June~~September 30, 2019 and December 31, 2018, we had the following unsecured senior notes outstanding:

$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”)~~; ~~and~~

$400 million of 2.6% unsecured senior notes due June 2022 (the “2022 Notes”)~~, $400~~;

$850 million of 3.4% unsecured senior notes due September 2026 (the “2026 Notes”);

$400 million of 3.4% unsecured senior notes due June 2027 (the “2027 Notes”),; and ~~$400~~

$400 million of 4.5% unsecured senior notes due June 2047 (the “2047 Notes”, and together with the 2021 Notes, the 2022 Notes, the 2026 Notes, and the 2027 Notes, the “Notes”).

The Notes are general senior obligations of the Company and rank pari passu in right of payment to all of the Company’s existing and future senior indebtedness, including the 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 value of the collateral securing such indebtedness. We were in compliance with the terms of the Notes as of ~~June~~September 30, 2019.

Interest is payable semi-annually in arrears on March 15 and September 15 of each year for the 2021 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 other liabilities” in our condensed consolidated balance sheets. As of ~~June~~September 30, 2019 and December 31, 2018, we had accrued interest payable of $14 million and $15 million, respectively, related to the Notes.

Refer to Note 13 contained in our Annual Report on Form 10-K for the year ended December 31, 2018 for further details regarding key terms under our indentures that govern the Notes.

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 condensed consolidated statement of operations.

For the three and ~~six~~nine months ended ~~June~~September 30, 2019, interest expense was $21 million and ~~$43~~$64 million, respectively, and amortization of the debt discount and deferred financing costs was $1 million and $2$3 million, respectively. For the three and ~~six~~nine months ended ~~June~~September 30, 2018, interest expense was ~~$41~~$32 million and ~~$80~~$113 million, respectively, and amortization of the debt discount and deferred financing costs was $2$1 million and $4$5 million, respectively.

A summary of our outstanding debt is as follows (amounts in millions):


	At June 30, 2019							At September 30, 2019
	Gross Carrying Amount		Unamortized Discount and Deferred Financing Costs			Net Carrying Amount		Gross Carrying Amount		Unamortized Discount and Deferred Financing Costs			Net Carrying Amount
2021 Notes	$	650	$	(3	)	$	647	$	650	$	(2	)	$	648
2022 Notes	400		(3		)	397		400		(2		)	398
2026 Notes	850		(8		)	842		850		(8		)	842
2027 Notes	400		(4		)	396		400		(5		)	395
2047 Notes	400		(9		)	391		400		(9		)	391
Total long-term debt	$	2,700	$	(27	)	$	2,673	$	2,700	$	(26	)	$	2,674



	At December 31, 2018
	Gross Carrying Amount		Unamortized Discount and Deferred Financing Costs			Net Carrying Amount
2021 Notes	$	650	$	(3	)	$	647
2022 Notes	400		(3		)	397
2026 Notes	850		(8		)	842
2027 Notes	400		(5		)	395
2047 Notes	400		(10		)	390
Total long-term debt	$	2,700	$	(29	)	$	2,671

As of ~~June~~September 30, 2019, the scheduled maturities and contractual principal repayments of our debt for each of the five succeeding years and thereafter are as follows (amounts in millions):


For the years ending December 31,
2019 (remaining six months)	$	—
2019 (remaining three months)			$	—
2020	—		—
2021	650		650
2022	400		400
2023	—		—
Thereafter	1,650		1,650
Total	$	2,700	$	2,700

With the exception of the 2047 Notes, using Level 2 inputs (i.e., observable market prices in less-than-active markets) at ~~June~~September 30, 2019, the carrying values of the 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 ~~June~~September 30, 2019, based on Level 2 inputs, the fair value of the 2047 Notes was ~~$418~~$454 million.

Using Level 2 inputs 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, the fair values of the 2026 Notes, the 2027 Notes, and the 2047 Notes were $800 million, $376 million, and $360 million, respectively.

12. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) were as follows (amounts in millions):


	For the Six Months Ended June 30, 2019												For the Nine Months Ended September 30, 2019
	Foreign currency translation adjustments			Unrealized gain (loss) on forward contracts			Unrealized gain (loss) on available-for-sale securities			Total			Foreign currency translation adjustments			Unrealized gain (loss) on forward contracts			Unrealized gain (loss) on available-for-sale securities			Total
Balance at December 31, 2018	$	(629	)	$	23		$	5		$	(601	)	$	(629	)	$	23		$	5		$	(601	)
Other comprehensive income (loss) before reclassifications	1			11			(1		)	11			(5		)	28			3			26
Amounts reclassified from accumulated other comprehensive income (loss) into earnings	—			(17		)	(1		)	(18		)	—			(24		)	(8		)	(32		)
Balance at June 30, 2019	$	(628	)	$	17		$	3		$	(608	)
Balance at September 30, 2019													$	(634	)	$	27		$	—		$	(607	)


	For the Six Months Ended June 30, 2018											For the Nine Months Ended September 30, 2018
	Foreign currency translation adjustments			Unrealized gain (loss) on forward contracts			Unrealized gain (loss) on available-for-sale securities		Total			Foreign currency translation adjustments			Unrealized gain (loss) on forward contracts			Unrealized gain (loss) on available-for-sale securities		Total
Balance at December 31, 2017	$	(623	)	$	(15	)	$	—	$	(638	)	$	(623	)	$	(15	)	$	—	$	(638	)
Cumulative impact from adoption of new revenue accounting standard	3			—			—		3			3			—			—		3
Other comprehensive income (loss) before reclassifications	(10		)	22			4		16			(7		)	14			4		11
Amounts reclassified from accumulated other comprehensive income (loss) into earnings	—			14			—		14			—			11			—		11
Balance at June 30, 2018	$	(630	)	$	21		$	4	$	(605	)
Balance at September 30, 2018												$	(627	)	$	10		$	4	$	(613	)

13. Operating Segments and Geographic Region

Currently, we have ~~three~~3 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 our chief 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 and related 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 reportable segment net revenues and operating income for the three months ended ~~June~~September 30, 2019 and 2018, are presented below (amounts in millions):


	Three Months Ended June 30, 2019								Three Months Ended September 30, 2019
	Activision		Blizzard		King		Total		Activision		Blizzard		King		Total
Segment Net Revenues
Net revenues from external customers	$	268	$	381	$	499	$	1,148	$	209	$	392	$	500	$	1,101
Intersegment net revenues (1)	—		3		—		3		—		2		—		2
Segment net revenues	$	268	$	384	$	499	$	1,151	$	209	$	394	$	500	$	1,103

Segment operating income	$	55	$	75	$	171	$	301	$	26	$	74	$	194	$	294

	Three Months Ended June 30, 2018								Three Months Ended September 30, 2018
	Activision		Blizzard		King		Total		Activision		Blizzard		King		Total
Segment Net Revenues
Net revenues from external customers	$	338	$	485	$	502	$	1,325	$	397	$	627	$	506	$	1,530
Intersegment net revenues (1)	—		4		—		4		—		8		—		8
Segment net revenues	$	338	$	489	$	502	$	1,329	$	397	$	635	$	506	$	1,538

Segment operating income	$	84	$	133	$	169	$	386	$	112	$	189	$	184	$	485

Information on reportable segment net revenues and operating income for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, are presented below (amounts in millions):


	Six Months Ended June 30, 2019								Nine Months Ended September 30, 2019
	Activision		Blizzard		King		Total		Activision		Blizzard		King		Total
Segment Net Revenues
Net revenues from external customers	$	585	$	720	$	1,028	$	2,333	$	794	$	1,113	$	1,527	$	3,434
Intersegment net revenues (1)	—		8		—		8		—		9		—		9
Segment net revenues	$	585	$	728	$	1,028	$	2,341	$	794	$	1,122	$	1,527	$	3,443

Segment operating income	$	128	$	130	$	349	$	607	$	153	$	204	$	543	$	900

	Six Months Ended June 30, 2018								Nine Months Ended September 30, 2018
	Activision		Blizzard		King		Total		Activision		Blizzard		King		Total
Segment Net Revenues
Net revenues from external customers	$	651	$	964	$	1,036	$	2,651	$	1,047	$	1,592	$	1,542	$	4,181
Intersegment net revenues (1)	—		6		—		6		—		14		—		14
Segment net revenues	$	651	$	970	$	1,036	$	2,657	$	1,047	$	1,606	$	1,542	$	4,195

Segment operating income	$	175	$	255	$	360	$	790	$	288	$	444	$	543	$	1,275


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

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

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Reconciliation to consolidated net revenues:
Segment net revenues $ 1,151
$ 1,329
$ 2,341
$ 2,657
Revenues from non-reportable segments (1) 59
60
132
118
Net effect from recognition (deferral) of deferred net revenues (2) 189
256
755
838
Elimination of intersegment revenues (3) (3 ) (4 ) (8 ) (6 )
Consolidated net revenues $ 1,396
$ 1,641
$ 3,220
$ 3,607

Reconciliation to consolidated income before income tax expense:
Segment operating income $ 301
$ 386
$ 607
$ 790
Operating income (loss) from non-reportable segments (1) 7
—
4
(11 )
Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (2) 135
182
576
557
Share-based compensation expense (38 ) (57 ) (100 ) (111 )
Amortization of intangible assets (47 ) (77 ) (102 ) (196 )
Restructuring and related costs (4) (22 ) —
(79 ) —
Consolidated operating income 336
434
906
1,029
Interest and other expense (income), net (34 ) 26
(31 ) 54
Consolidated income before income tax expense $ 370
$ 408
$ 937
$ 975



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Reconciliation to consolidated net revenues:
Segment net revenues	$	1,103		$	1,538		$	3,443		$	4,195
Revenues from non-reportable segments (1)	113			128			245			246
Net effect from recognition (deferral) of deferred net revenues (2)	68			(146		)	824			692
Elimination of intersegment revenues (3)	(2		)	(8		)	(9		)	(14		)
Consolidated net revenues	$	1,282		$	1,512		$	4,503		$	5,119

Reconciliation to consolidated income before income tax expense:
Segment operating income	$	294		$	485		$	900		$	1,275
Operating income (loss) from non-reportable segments (1)	5			7			10			(4		)
Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (2)	53			(89		)	629			468
Share-based compensation expense	(27		)	(55		)	(127		)	(166		)
Amortization of intangible assets	(50		)	(83		)	(151		)	(279		)
Restructuring and related costs (4)	(28		)	—			(108		)	—
Consolidated operating income	247			265			1,153			1,294
Interest and other expense (income), net	(2		)	13			(33		)	67
Loss on extinguishment of debt	—			40			—			40
Consolidated income before income tax expense	$	249		$	212		$	1,186		$	1,187


(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)	Reflects the net effect from recognition (deferral) of deferred net revenues, along with related cost of revenues, on certain of our online-enabled products.


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


(4)	Reflects restructuring initiatives, primarily severance and other restructuring-related costs.

Net revenues by distribution channel, including a reconciliation to each of our reportable segment’s revenues, for the three months ended ~~June~~September 30, 2019 and 2018, were as follows (amounts in millions):


	Three Months Ended June 30, 2019																	Three Months Ended September 30, 2019
	Activision			Blizzard			King		Non-reportable segments			Elimination of intersegment revenues (3)			Total			Activision			Blizzard			King			Non-reportable segments		Elimination of intersegment revenues (3)			Total
Net revenues by distribution channel:
Digital online channels (1)	$	248		$	342		$	499	$	—		$	(3	)	$	1,086		$	179		$	335		$	502		$	—	$	(2	)	$	1,014
Retail channels	180			13			—		—			—			193			73			20			—			—		—			93
Other (2)	—			56			—		61			—			117			—			62			—			113		—			175
Total consolidated net revenues	$	428		$	411		$	499	$	61		$	(3	)	$	1,396		$	252		$	417		$	502		$	113	$	(2	)	$	1,282

Change in deferred revenues:
Digital online channels (1)	$	(51	)	$	(25	)	$	—	$	—		$	—		$	(76	)	$	(16	)	$	(21	)	$	(2	)	$	—	$	—		$	(39	)
Retail channels	(109		)	(3		)	—		—			—			(112		)	(27		)	(2		)	—			—		—			(29		)
Other (2)	—			1			—		(2		)	—			(1		)	—			—			—			—		—			—
Total change in deferred revenues	$	(160	)	$	(27	)	$	—	$	(2	)	$	—		$	(189	)	$	(43	)	$	(23	)	$	(2	)	$	—	$	—		$	(68	)

Segment net revenues:
Digital online channels (1)	$	197		$	317		$	499	$	—		$	(3	)	$	1,010		$	163		$	314		$	500		$	—	$	(2	)	$	975
Retail channels	71			10			—		—			—			81			46			18			—			—		—			64
Other (2)	—			57			—		59			—			116			—			62			—			113		—			175
Total segment net revenues	$	268		$	384		$	499	$	59		$	(3	)	$	1,207		$	209		$	394		$	500		$	113	$	(2	)	$	1,214


	Three Months Ended June 30, 2018																	Three Months Ended September 30, 2018
	Activision			Blizzard			King			Non-reportable segments		Elimination of intersegment revenues (3)			Total			Activision			Blizzard			King		Non-reportable segments		Elimination of intersegment revenues (3)			Total
Net revenues by distribution channel:
Digital online channels (1)	$	333		$	420		$	510		$	—	$	(4	)	$	1,259		$	299		$	480		$	505	$	—	$	(8	)	$	1,276
Retail channels	259			19			—			—		—			278			53			23			—		—		—			76
Other (2)	—			49			—			55		—			104			—			35			—		125		—			160
Total consolidated net revenues	$	592		$	488		$	510		$	55	$	(4	)	$	1,641		$	352		$	538		$	505	$	125	$	(8	)	$	1,512

Change in deferred revenues:
Digital online channels (1)	$	(58	)	$	4		$	(8	)	$	—	$	—		$	(62	)	$	57		$	101		$	1	$	—	$	—		$	159
Retail channels	(196		)	(6		)	—			—		—			(202		)	(12		)	(2		)	—		—		—			(14		)
Other (2)	—			3			—			5		—			8			—			(2		)	—		3		—			1
Total change in deferred revenues	$	(254	)	$	1		$	(8	)	$	5	$	—		$	(256	)	$	45		$	97		$	1	$	3	$	—		$	146

Segment net revenues:
Digital online channels (1)	$	275		$	424		$	502		$	—	$	(4	)	$	1,197		$	356		$	581		$	506	$	—	$	(8	)	$	1,435
Retail channels	63			13			—			—		—			76			41			21			—		—		—			62
Other (2)	—			52			—			60		—			112			—			33			—		128		—			161
Total segment net revenues	$	338		$	489		$	502		$	60	$	(4	)	$	1,385		$	397		$	635		$	506	$	128	$	(8	)	$	1,658

Net revenues by distribution channel, including a reconciliation to each of our reportable segment’s revenues, for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, were as follows (amounts in millions):


	Six Months Ended June 30, 2019																	Nine Months Ended September 30, 2019
	Activision			Blizzard			King		Non-reportable segments			Elimination of intersegment revenues (3)			Total			Activision			Blizzard			King		Non-reportable segments			Elimination of intersegment revenues (3)			Total
Net revenues by distribution channel:
Digital online channels (1)	$	714		$	748		$	1,025	$	—		$	(8	)	$	2,479		$	894		$	1,081		$	1,527	$	—		$	(9	)	$	3,493
Retail channels	476			29			—		—			—			505			548			51			—		—			—			599
Other (2)	—			95			—		141			—			236			—			157			—		254			—			411
Total consolidated net revenues	$	1,190		$	872		$	1,025	$	141		$	(8	)	$	3,220		$	1,442		$	1,289		$	1,527	$	254		$	(9	)	$	4,503

Change in deferred revenues:
Digital online channels (1)	$	(268	)	$	(139	)	$	3	$	—		$	—		$	(404	)	$	(285	)	$	(159	)	$	—	$	—		$	—		$	(444	)
Retail channels	(337		)	(7		)	—		—			—			(344		)	(363		)	(10		)	—		—			—			(373		)
Other (2)	—			2			—		(9		)	—			(7		)	—			2			—		(9		)	—			(7		)
Total change in deferred revenues	$	(605	)	$	(144	)	$	3	$	(9	)	$	—		$	(755	)	$	(648	)	$	(167	)	$	—	$	(9	)	$	—		$	(824	)

Segment net revenues:
Digital online channels (1)	$	446		$	609		$	1,028	$	—		$	(8	)	$	2,075		$	609		$	922		$	1,527	$	—		$	(9	)	$	3,049
Retail channels	139			22			—		—			—			161			185			41			—		—			—			226
Other (2)	—			97			—		132			—			229			—			159			—		245			—			404
Total segment net revenues	$	585		$	728		$	1,028	$	132		$	(8	)	$	2,465		$	794		$	1,122		$	1,527	$	245		$	(9	)	$	3,679


	Six Months Ended June 30, 2018																	Nine Months Ended September 30, 2018
	Activision			Blizzard			King			Non-reportable segments		Elimination of intersegment revenues (3)			Total			Activision			Blizzard			King			Non-reportable segments		Elimination of intersegment revenues (3)			Total
Net revenues by distribution channel:
Digital online channels (1)	$	809		$	875		$	1,042		$	—	$	(6	)	$	2,720		$	1,110		$	1,355		$	1,547		$	—	$	(14	)	$	3,998
Retail channels	656			33			1			—		—			690			707			57			—			—		—			764
Other (2)	—			89			—			108		—			197			—			124			—			233		—			357
Total consolidated net revenues	$	1,465		$	997		$	1,043		$	108	$	(6	)	$	3,607		$	1,817		$	1,536		$	1,547		$	233	$	(14	)	$	5,119

Change in deferred revenues:
Digital online channels (1)	$	(290	)	$	(23	)	$	(6	)	$	—	$	—		$	(319	)	$	(234	)	$	79		$	(5	)	$	—	$	—		$	(160	)
Retail channels	(524		)	(8		)	(1		)	—		—			(533		)	(536		)	(10		)	—			—		—			(546		)
Other (2)	—			4			—			10		—			14			—			1			—			13		—			14
Total change in deferred revenues	$	(814	)	$	(27	)	$	(7	)	$	10	$	—		$	(838	)	$	(770	)	$	70		$	(5	)	$	13	$	—		$	(692	)

Segment net revenues:
Digital online channels (1)	$	519		$	852		$	1,036		$	—	$	(6	)	$	2,401		$	876		$	1,434		$	1,542		$	—	$	(14	)	$	3,838
Retail channels	132			25			—			—		—			157			171			47			—			—		—			218
Other (2)	—			93			—			118		—			211			—			125			—			246		—			371
Total segment net revenues	$	651		$	970		$	1,036		$	118	$	(6	)	$	2,769		$	1,047		$	1,606		$	1,542		$	246	$	(14	)	$	4,427


(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.

Geographic information presented below is based on the location of the paying customer. Net revenues by geographic region, including a reconciliation to each of our reportable segment’s net revenues, for the three months ended ~~June~~September 30, 2019 and 2018, were as follows (amounts in millions):


	Three Months Ended June 30, 2019																		Three Months Ended September 30, 2019
	Activision			Blizzard			King			Non-reportable segments			Elimination of intersegment revenues (2)			Total			Activision			Blizzard			King			Non-reportable segments		Elimination of intersegment revenues (2)			Total
Net revenues by geographic region:
Americas	$	255		$	202		$	309		$	—		$	(2	)	$	764		$	141		$	204		$	311		$	—	$	(1	)	$	655
EMEA (1)	135			127			137			61			(1		)	459			79			124			137			113		(1		)	452
Asia Pacific	38			82			53			—			—			173			32			89			54			—		—			175
Total consolidated net revenues	$	428		$	411		$	499		$	61		$	(3	)	$	1,396		$	252		$	417		$	502		$	113	$	(2	)	$	1,282

Change in deferred revenues:
Americas	$	(105	)	$	(15	)	$	(1	)	$	—		$	1		$	(120	)	$	(20	)	$	(11	)	$	(2	)	$	—	$	—		$	(33	)
EMEA (1)	(42		)	(13		)	—			(2		)	(1		)	(58		)	(16		)	(10		)	—			—		—			(26		)
Asia Pacific	(13		)	1			1			—			—			(11		)	(7		)	(2		)	—			—		—			(9		)
Total change in deferred revenues	$	(160	)	$	(27	)	$	—		$	(2	)	$	—		$	(189	)	$	(43	)	$	(23	)	$	(2	)	$	—	$	—		$	(68	)

Segment net revenues:
Americas	$	150		$	187		$	308		$	—		$	(1	)	$	644		$	121		$	193		$	309		$	—	$	(1	)	$	622
EMEA (1)	93			114			137			59			(2		)	401			63			114			137			113		(1		)	426
Asia Pacific	25			83			54			—			—			162			25			87			54			—		—			166
Total segment net revenues	$	268		$	384		$	499		$	59		$	(3	)	$	1,207		$	209		$	394		$	500		$	113	$	(2	)	$	1,214


	Three Months Ended June 30, 2018																	Three Months Ended September 30, 2018
	Activision			Blizzard			King			Non-reportable segments		Elimination of intersegment revenues (2)			Total			Activision		Blizzard		King		Non-reportable segments		Elimination of intersegment revenues (2)			Total
Net revenues by geographic region:
Americas	$	349		$	239		$	315		$	—	$	(3	)	$	900		$	214	$	242	$	309	$	13	$	(4	)	$	774
EMEA (1)	199			155			144			55		(1		)	552			109		172		143		112		(2		)	534
Asia Pacific	44			94			51			—		—			189			29		124		53		—		(2		)	204
Total consolidated net revenues	$	592		$	488		$	510		$	55	$	(4	)	$	1,641		$	352	$	538	$	505	$	125	$	(8	)	$	1,512

Change in deferred revenues:
Americas	$	(143	)	$	7		$	(5	)	$	—	$	—		$	(141	)	$	33	$	43	$	—	$	—	$	—		$	76
EMEA (1)	(97		)	(6		)	(2		)	5		—			(100		)	8		48		1		3		—			60
Asia Pacific	(14		)	—			(1		)	—		—			(15		)	4		6		—		—		—			10
Total change in deferred revenues	$	(254	)	$	1		$	(8	)	$	5	$	—		$	(256	)	$	45	$	97	$	1	$	3	$	—		$	146

Segment net revenues:
Americas	$	206		$	246		$	310		$	—	$	(3	)	$	759		$	247	$	285	$	309	$	13	$	(4	)	$	850
EMEA (1)	102			149			142			60		(1		)	452			117		220		144		115		(2		)	594
Asia Pacific	30			94			50			—		—			174			33		130		53		—		(2		)	214
Total segment net revenues	$	338		$	489		$	502		$	60	$	(4	)	$	1,385		$	397	$	635	$	506	$	128	$	(8	)	$	1,658

Geographic information presented below is based on the location of the paying customer. Net revenues by geographic region, including a reconciliation to each of our reportable segment’s net revenues, for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, were as follows (amounts in millions):


	Six Months Ended June 30, 2019																		Nine Months Ended September 30, 2019
	Activision			Blizzard			King			Non-reportable segments			Elimination of intersegment revenues (2)			Total			Activision			Blizzard			King			Non-reportable segments			Elimination of intersegment revenues (2)			Total
Net revenues by geographic region:
Americas	$	712		$	409		$	634		$	—		$	(4	)	$	1,751		$	852		$	613		$	946		$	—		$	(5	)	$	2,406
EMEA (1)	378			276			281			141			(3		)	1,073			457			400			417			254			(3		)	1,525
Asia Pacific	100			187			110			—			(1		)	396			133			276			164			—			(1		)	572
Total consolidated net revenues	$	1,190		$	872		$	1,025		$	141		$	(8	)	$	3,220		$	1,442		$	1,289		$	1,527		$	254		$	(9	)	$	4,503

Change in deferred revenues:
Americas	$	(371	)	$	(70	)	$	4		$	—		$	—		$	(437	)	$	(390	)	$	(80	)	$	1		$	—		$	—		$	(469	)
EMEA (1)	(189		)	(61		)	—			(9		)	—			(259		)	(205		)	(71		)	—			(9		)	—			(285		)
Asia Pacific	(45		)	(13		)	(1		)	—			—			(59		)	(53		)	(16		)	(1		)	—			—			(70		)
Total change in deferred revenues	$	(605	)	$	(144	)	$	3		$	(9	)	$	—		$	(755	)	$	(648	)	$	(167	)	$	—		$	(9	)	$	—		$	(824	)

Segment net revenues:
Americas	$	341		$	339		$	638		$	—		$	(4	)	$	1,314		$	462		$	533		$	947		$	—		$	(5	)	$	1,937
EMEA (1)	189			215			281			132			(3		)	814			252			329			417			245			(3		)	1,240
Asia Pacific	55			174			109			—			(1		)	337			80			260			163			—			(1		)	502
Total segment net revenues	$	585		$	728		$	1,028		$	132		$	(8	)	$	2,465		$	794		$	1,122		$	1,527		$	245		$	(9	)	$	3,679


	Six Months Ended June 30, 2018																	Nine Months Ended September 30, 2018
	Activision			Blizzard			King			Non-reportable segments		Elimination of intersegment revenues (2)			Total			Activision			Blizzard			King			Non-reportable segments		Elimination of intersegment revenues (2)			Total
Net revenues by geographic region:
Americas	$	859		$	473		$	637		$	—	$	(3	)	$	1,966		$	1,074		$	716		$	945		$	13	$	(8	)	$	2,740
EMEA (1)	504			325			305			108		(3		)	1,239			613			497			448			220		(4		)	1,774
Asia Pacific	102			199			101			—		—			402			130			323			154			—		(2		)	605
Total consolidated net revenues	$	1,465		$	997		$	1,043		$	108	$	(6	)	$	3,607		$	1,817		$	1,536		$	1,547		$	233	$	(14	)	$	5,119

Change in deferred revenues:
Americas	$	(471	)	$	—		$	(3	)	$	—	$	—		$	(474	)	$	(439	)	$	43		$	(3	)	$	—	$	—		$	(399	)
EMEA (1)	(295		)	(14		)	(4		)	10		1			(302		)	(287		)	34			(2		)	13		—			(242		)
Asia Pacific	(48		)	(13		)	—			—		(1		)	(62		)	(44		)	(7		)	—			—		—			(51		)
Total change in deferred revenues	$	(814	)	$	(27	)	$	(7	)	$	10	$	—		$	(838	)	$	(770	)	$	70		$	(5	)	$	13	$	—		$	(692	)

Segment net revenues:
Americas	$	388		$	473		$	634		$	—	$	(3	)	$	1,492		$	635		$	759		$	942		$	13	$	(8	)	$	2,341
EMEA (1)	209			311			301			118		(2		)	937			326			531			446			233		(4		)	1,532
Asia Pacific	54			186			101			—		(1		)	340			86			316			154			—		(2		)	554
Total segment net revenues	$	651		$	970		$	1,036		$	118	$	(6	)	$	2,769		$	1,047		$	1,606		$	1,542		$	246	$	(14	)	$	4,427


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


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

The Company’s net revenues in the U.S. were ~~49%~~46% of consolidated net revenues for both the three months ended September 30, 2019 and ~~49%~~2018. The Company’s net revenues in the U.K. were 13% of consolidated net revenues for both the three months ended September 30, 2019 and 2018. No other country’s net revenues exceeded 10% of consolidated net revenues for either the three months ended September 30, 2019 or 2018.

The Company’s net revenues in the U.S. were 48% and 47% of consolidated net revenues for the ~~three~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. The Company’s net revenues in the U.K. were 9%10% and ~~10%~~11% of consolidated net revenues for the ~~three~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. No other country’s net revenues exceeded 10% of consolidated net revenues for either the ~~three~~nine months ended ~~June 30, 2019 or 2018.~~

The Company’s net revenues in the U.S. were 49% and 48% of consolidated net revenues for the six months ended June 30, 2019 and 2018, respectively. The Company’s net revenues in the U.K. were 9% and 10% of consolidated net revenues for the six months ended June 30, 2019 and 2018, respectively. No other country’s net revenues exceeded 10% of consolidated net revenues for either the six months ended JuneSeptember 30, 2019 or 2018.

Net revenues by platform, including a reconciliation to each of our reportable segment’s net revenues, for the three months ended ~~June~~September 30, 2019 and 2018, were as follows (amounts in millions):


	Three Months Ended June 30, 2019																	Three Months Ended September 30, 2019
	Activision			Blizzard			King		Non-reportable segments			Elimination of intersegment revenues (3)			Total			Activision			Blizzard			King			Non-reportable segments		Elimination of intersegment revenues (3)			Total
Net revenues by platform:
Console	$	374		$	33		$	—	$	—		$	—		$	407		$	214		$	27		$	—		$	—	$	—		$	241
PC	51			282			31		—			(3		)	361			29			286			28			—		(2		)	341
Mobile and ancillary (1)	3			40			468		—			—			511			9			42			474			—		—			525
Other (2)	—			56			—		61			—			117			—			62			—			113		—			175
Total consolidated net revenues	$	428		$	411		$	499	$	61		$	(3	)	$	1,396		$	252		$	417		$	502		$	113	$	(2	)	$	1,282

Change in deferred revenues:
Console	$	(141	)	$	(5	)	$	—	$	—		$	—		$	(146	)	$	(36	)	$	(9	)	$	—		$	—	$	—		$	(45	)
PC	(19		)	(31		)	—		—			—			(50		)	(7		)	(14		)	—			—		—			(21		)
Mobile and ancillary (1)	—			8			—		—			—			8			—			—			(2		)	—		—			(2		)
Other (2)	—			1			—		(2		)	—			(1		)	—			—			—			—		—			—
Total change in deferred revenues	$	(160	)	$	(27	)	$	—	$	(2	)	$	—		$	(189	)	$	(43	)	$	(23	)	$	(2	)	$	—	$	—		$	(68	)

Segment net revenues:
Console	$	233		$	28		$	—	$	—		$	—		$	261		$	178		$	18		$	—		$	—	$	—		$	196
PC	32			251			31		—			(3		)	311			22			272			28			—		(2		)	320
Mobile and ancillary (1)	3			48			468		—			—			519			9			42			472			—		—			523
Other (2)	—			57			—		59			—			116			—			62			—			113		—			175
Total segment net revenues	$	268		$	384		$	499	$	59		$	(3	)	$	1,207		$	209		$	394		$	500		$	113	$	(2	)	$	1,214


	Three Months Ended June 30, 2018																	Three Months Ended September 30, 2018
	Activision			Blizzard			King			Non-reportable segments		Elimination of intersegment revenues (3)			Total			Activision		Blizzard			King		Non-reportable segments		Elimination of intersegment revenues (3)			Total
Net revenues by platform:
Console	$	520		$	45		$	—		$	—	$	—		$	565		$	307	$	40		$	—	$	—	$	—		$	347
PC	69			347			39			—		(4		)	451			40		414			36		—		(8		)	482
Mobile and ancillary (1)	3			47			471			—		—			521			5		49			469		—		—			523
Other (2)	—			49			—			55		—			104			—		35			—		125		—			160
Total consolidated net revenues	$	592		$	488		$	510		$	55	$	(4	)	$	1,641		$	352	$	538		$	505	$	125	$	(8	)	$	1,512

Change in deferred revenues:
Console	$	(233	)	$	1		$	—		$	—	$	—		$	(232	)	$	29	$	(9	)	$	—	$	—	$	—		$	20
PC	(21		)	(6		)	(1		)	—		—			(28		)	16		101			—		—		—			117
Mobile and ancillary (1)	—			3			(7		)	—		—			(4		)	—		7			1		—		—			8
Other (2)	—			3			—			5		—			8			—		(2		)	—		3		—			1
Total change in deferred revenues	$	(254	)	$	1		$	(8	)	$	5	$	—		$	(256	)	$	45	$	97		$	1	$	3	$	—		$	146

Segment net revenues:
Console	$	287		$	46		$	—		$	—	$	—		$	333		$	336	$	31		$	—	$	—	$	—		$	367
PC	48			341			38			—		(4		)	423			56		515			36		—		(8		)	599
Mobile and ancillary (1)	3			50			464			—		—			517			5		56			470		—		—			531
Other (2)	—			52			—			60		—			112			—		33			—		128		—			161
Total segment net revenues	$	338		$	489		$	502		$	60	$	(4	)	$	1,385		$	397	$	635		$	506	$	128	$	(8	)	$	1,658

Net revenues by platform, including a reconciliation to each of our reportable segment’s net revenues, for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, were as follows (amounts in millions):


	Six Months Ended June 30, 2019																	Nine Months Ended September 30, 2019
	Activision			Blizzard			King		Non-reportable segments			Elimination of intersegment revenues (3)			Total			Activision			Blizzard			King			Non-reportable segments			Elimination of intersegment revenues (3)			Total
Net revenues by platform:
Console	$	1,008		$	75		$	—	$	—		$	—		$	1,083		$	1,222		$	102		$	—		$	—		$	—		$	1,324
PC	176			623			64		—			(8		)	855			204			909			92			—			(9		)	1,196
Mobile and ancillary (1)	6			79			961		—			—			1,046			16			121			1,435			—			—			1,572
Other (2)	—			95			—		141			—			236			—			157			—			254			—			411
Total consolidated net revenues	$	1,190		$	872		$	1,025	$	141		$	(8	)	$	3,220		$	1,442		$	1,289		$	1,527		$	254		$	(9	)	$	4,503

Change in deferred revenues:
Console	$	(527	)	$	(17	)	$	—	$	—		$	—		$	(544	)	$	(563	)	$	(26	)	$	—		$	—		$	—		$	(589	)
PC	(77		)	(120		)	1		—			—			(196		)	(84		)	(133		)	(1		)	—			—			(218		)
Mobile and ancillary (1)	(1		)	(9		)	2		—			—			(8		)	(1		)	(10		)	1			—			—			(10		)
Other (2)	—			2			—		(9		)	—			(7		)	—			2			—			(9		)	—			(7		)
Total change in deferred revenues	$	(605	)	$	(144	)	$	3	$	(9	)	$	—		$	(755	)	$	(648	)	$	(167	)	$	—		$	(9	)	$	—		$	(824	)

Segment net revenues:
Console	$	481		$	58		$	—	$	—		$	—		$	539		$	659		$	76		$	—		$	—		$	—		$	735
PC	99			503			65		—			(8		)	659			120			776			91			—			(9		)	978
Mobile and ancillary (1)	5			70			963		—			—			1,038			15			111			1,436			—			—			1,562
Other (2)	—			97			—		132			—			229			—			159			—			245			—			404
Total segment net revenues	$	585		$	728		$	1,028	$	132		$	(8	)	$	2,465		$	794		$	1,122		$	1,527		$	245		$	(9	)	$	3,679


	Six Months Ended June 30, 2018																	Nine Months Ended September 30, 2018
	Activision			Blizzard			King			Non-reportable segments		Elimination of intersegment revenues (3)			Total			Activision			Blizzard			King			Non-reportable segments		Elimination of intersegment revenues (3)			Total
Net revenues by platform:
Console	$	1,289		$	93		$	—		$	—	$	—		$	1,382		$	1,597		$	133		$	—		$	—	$	—		$	1,730
PC	169			726			82			—		(6		)	971			208			1,140			118			—		(14		)	1,452
Mobile and ancillary (1)	7			89			961			—		—			1,057			12			139			1,429			—		—			1,580
Other (2)	—			89			—			108		—			197			—			124			—			233		—			357
Total consolidated net revenues	$	1,465		$	997		$	1,043		$	108	$	(6	)	$	3,607		$	1,817		$	1,536		$	1,547		$	233	$	(14	)	$	5,119

Change in deferred revenues:
Console	$	(723	)	$	(17	)	$	—		$	—	$	—		$	(740	)	$	(695	)	$	(25	)	$	—		$	—	$	—		$	(720	)
PC	(91		)	(6		)	—			—		—			(97		)	(76		)	96			—			—		—			20
Mobile and ancillary (1)	—			(8		)	(7		)	—		—			(15		)	1			(2		)	(5		)	—		—			(6		)
Other (2)	—			4			—			10		—			14			—			1			—			13		—			14
Total change in deferred revenues	$	(814	)	$	(27	)	$	(7	)	$	10	$	—		$	(838	)	$	(770	)	$	70		$	(5	)	$	13	$	—		$	(692	)

Segment net revenues:
Console	$	566		$	76		$	—		$	—	$	—		$	642		$	902		$	108		$	—		$	—	$	—		$	1,010
PC	78			720			82			—		(6		)	874			132			1,236			118			—		(14		)	1,472
Mobile and ancillary (1)	7			81			954			—		—			1,042			13			137			1,424			—		—			1,574
Other (2)	—			93			—			118		—			211			—			125			—			246		—			371
Total segment net revenues	$	651		$	970		$	1,036		$	118	$	(6	)	$	2,769		$	1,047		$	1,606		$	1,542		$	246	$	(14	)	$	4,427


(1)	Net revenues from “Mobile and ancillary” include revenues from mobile devices, as well as non-platform specific game-related revenues, such as standalone sales of physical 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.

Long-lived assets by geographic region were as follows (amounts in millions):


	At June 30, 2019		At December 31, 2018		At September 30, 2019		At December 31, 2018
Long-lived assets (1) by geographic region:
Americas	$	190	$	203	$	179	$	203
EMEA	56		62		58		62
Asia Pacific	13		17		12		17
Total long-lived assets by geographic region	$	259	$	282	$	249	$	282


(1)	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.

14. Restructuring

On February 12, 2019, the Company committed to a Board-authorized restructuring plan under which the Company aims to refocus its resources on its largest opportunities and to remove unnecessary levels of complexity and duplication from certain parts of the business. ~~More specifically, we are:~~We have been, and will continue:

increasing our investment in development for our largest, internally-owned franchises—across upfront releases, in-game content, mobile, and geographic expansion;

reducing certain non-development and administrative-related costs across our business; and

integrating our global and regional sales and “go-to-market,” partnerships, and sponsorships capabilities across the business, which we believe will enable us to provide better opportunities for talent, and greater expertise and scale on behalf of our business units.

The restructuring actions are in process and are largely expected to be completed by the end of 2019, although the timing of cash payments may continue into 2020.

The following table summarizes accrued restructuring and related costs included in “Accrued expenses and other liabilities” in our condensed consolidated balance sheet (amounts in millions):


	Severance and employee related costs			Facilities and related costs			Other costs			Total			Severance and employee related costs			Facilities and related costs			Other costs			Total
Balance at December 31, 2018	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Costs charged to expense	43			—			14			57			43			—			14			57
Cash payments	(11		)	—			(1		)	(12		)	(11		)	—			(1		)	(12		)
Non-cash charge adjustment (1)	—			—			(11		)	(11		)	—			—			(11		)	(11		)
Balance at March 31, 2019	$	32		$	—		$	2		$	34		$	32		$	—		$	2		$	34
Costs charged to expense	9			9			4			22			9			9			4			22
Cash payments	(15		)	—			(5		)	(20		)	(15		)	—			(5		)	(20		)
Non-cash charge adjustment (1)	—			(9		)	—			(9		)	—			(9		)	—			(9		)
Balance at June 30, 2019	$	26		$	—		$	1		$	27		$	26		$	—		$	1		$	27
Costs charged to expense													5			13			6			24
Cash payments													(8		)	—			(3		)	(11		)
Non-cash charge adjustment (1)													—			(13		)	—			(13		)
Balance at September 30, 2019													$	23		$	—		$	4		$	27


(1)	Adjustments relate to non-cash charges included in “Costs charged to expense” for the write-down of assets from canceled projects during the three months ended March 31, 2019, and the write-down of lease facility assets, inclusive of lease right-of-use assets and associated fixed assets, that were vacated during the three months ended June 30, 2019 and September 30, 2019.

Total restructuring and related costs by segment are (amounts in millions):


	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019		Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Activision	$	2	$	11	$	1	$	12
Blizzard	13		39		12		52
King	6		13		4		17
Other segments (1)	1		16		7		23
Total	$	22	$	79	$	24	$	104


(1)	Includes charges related to operating segments managed outside the reportable segments, including our Studios and Distribution businesses. Also includes restructuring charges for our corporate and administrative functions.

During the three months ended September 30, 2019, we also recorded $4 million to write-down inventory resulting from changes to certain of our consumer product activities as part of our restructuring actions, whereby those activities will now operate under a licensing business model rather than being direct sales. This write-down is recorded within “Cost of revenues—product sales: Product costs” in our condensed consolidated statement of operations.

We expect to incur aggregate pre-tax restructuring charges of approximately $150 million in 2019 associated with the restructuring ~~plan.~~plan, which includes the inventory write-down discussed above. These charges will primarily relate to severance (approximately 55% of the aggregate charge), including, in many cases, amounts above those that are legally required, facilities costs (approximately 20% of the aggregate charge), and other asset write-downs and costs (approximately 25% of the aggregate charge). A majority of the total pre-tax charge associated with the restructuring will be paid in cash using amounts on hand and the outlays are expected to be largely incurred throughout ~~2019.~~2019, with the remainder continuing into 2020.

The total expected pre-tax restructuring charges related to the restructuring plan by segment, inclusive of amounts already incurred, are presented below (amounts in millions):


	Year Ending December 31, 2019		Year Ending December 31, 2019
Activision	$	14	$	15
Blizzard	77		66
King	27		27
Other segments (1)	32		42
Total	$	150	$	150


(1)	Includes charges related to operating segments managed outside the reportable segments, including our Studios and Distribution businesses. Also includes restructuring charges for our corporate and administrative functions.


15.	Interest and Other Expense (Income), Net

Interest and other expense (income), net is comprised of the following (amounts in millions):


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018			2019			2018
Interest income	$	(19	)	$	(18	)	$	(41	)	$	(32	)	$	(20	)	$	(17	)	$	(61	)	$	(50	)
Interest expense from debt and amortization of debt discount and deferred financing costs	23			43			46			84			23			33			68			118
Unrealized gain on equity investment	(38		)	—			(38		)	—			—			—			(38		)	—
Other expense (income), net	—			1			2			2			(5		)	(3		)	(2		)	(1		)
Interest and other expense (income), net	$	(34	)	$	26		$	(31	)	$	54		$	(2	)	$	13		$	(33	)	$	67

16. Income Taxes

We account for our provision for income taxes in accordance with ASC 740, Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the interim period, taking into account year-to-date amounts and projected results for the full year. The provision for income taxes represents federal, foreign, state, and local income taxes. Our effective tax rate could be different from the statutory U.S. income tax rate due to: the effect of state and local income taxes; tax rates that apply to our foreign income (including U.S. tax on foreign income); research and development credits; and certain nondeductible expenses. Our effective tax rate could fluctuate significantly from quarter to quarter based on recurring and nonrecurring factors including, but not limited to: variations in the estimated and actual level of pre-tax income or loss by jurisdiction; changes in enacted tax laws and regulations, and interpretations thereof, including with respect to tax credits and state and local income taxes; developments in tax audits and other matters; recognition of excess tax benefits and tax deficiencies from share-based payments; and certain nondeductible expenses. Changes in judgment from the evaluation of new information resulting in the recognition, derecognition, or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.

The income tax expense of ~~$42~~$45 million for the three months ended ~~June~~September 30, 2019, reflects an effective tax rate of ~~11%~~18%, which is higher than the effective tax rate of 1%(23)% for the three months ended ~~June~~September 30, 2018. The increase is primarily due to a discrete tax benefit recognized in the ~~prior-year~~prior year in connection with ~~an audit settlement~~adjustments made to the provisional amounts initially recorded in connection with tax reform legislation known as the ~~Internal Revenue Service (“IRS”~~Tax Cuts and Jobs Act enacted in December 22, 2017 (the “U.S. Tax Reform Act”), lower excess tax benefits from share-based payments in the current year, and an increase in U.S. tax on foreign earnings.

The income tax expense of $208 million for the nine months ended September 30, 2019, reflects an effective tax rate of 18%, which is higher than the effective tax rate of 2% for the nine months ended September 30, 2018. The increase is due to a discrete tax benefit recognized in the prior year in connection with an audit settlement with the Internal Revenue Service (“IRS”), a discrete tax benefit recognized in the prior year in connection with adjustments made to the provisional amounts initially recorded in connection with the U.S. Tax Reform Act, and lower excess tax benefits from share-based payments in the current year. This increase was partially offset by a valuation allowance recorded in the prior year with regard to California research and development credit carryforwards (“CA R&D Credits”) ~~and a discrete tax benefit in the current year from a foreign tax audit settlement.~~

The income tax expense of $163 million for the six months ended June 30, 2019, reflects an effective tax rate of 17%, which is higher than the effective tax rate of 7% for the six months ended June 30, 2018. The increase is primarily due to the factors discussed above for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018..

The effective tax rate of ~~11% and 17%~~18% for both the three and ~~six~~nine months ended ~~June~~September 30, 2019, ~~respectively,~~ is lower than the U.S. statutory rate of 21%, primarily due to ~~a discrete~~foreign earnings taxed at lower statutory rates as compared to domestic earnings, which is partially offset by U.S. tax ~~benefit in the current year related to a~~on foreign ~~tax audit settlement~~earnings, and the recognition of federal research and development ~~credits, partially offset by the valuation allowance recorded with regard to CA R&D Credits.~~credits.

Activision Blizzard’s 2009 through 2018 tax years remain open to examination by certain major taxing jurisdictions to which we are subject. The IRS is currently examining our federal tax returns for the 2012 through 2016 tax years. We also have several state and non-U.S. audits pending, including the French ~~and Swedish audits~~audit discussed below. In addition, we are currently seeking a multilateral agreement among the tax authorities in the U.K., Sweden, and other relevant jurisdictions with respect to King’s transfer pricing for tax years dating back to 2013. While the outcome of any discussions aimed at such an agreement remains uncertain, they could result in an agreement that changes the allocation of profits and losses between these and other relevant jurisdictions or a failure to reach an agreement that 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 of a Swedish subsidiary of King for the 2016 tax year (“Initial Decision”). The Initial Decision described the basis for issuing a transfer pricing assessment of approximately 3.5kr billion (approximately ~~$379~~$359 million), primarily concerning an alleged intercompany asset transfer. On June 17, 2019, we received a reassessment from the STA (“Reassessment”) which changed the Initial Decision based on a revision of the transfer pricing approach reflected in King’s 2016 Swedish tax return and removal of the alleged intercompany asset transfer that was the basis of the Initial Decision. The STA also, at the same time, reassessed the 2017 tax year on the same transfer pricing basis as 2016. The transfer pricing approach reflected in the Reassessment for both 2016 and 2017 remains subject to further review by taxing authorities in other jurisdictions. In July 2019, the Company made a payment to the STA for the Reassessment for the 2016 and 2017 tax years, which did not result in a significant impact to our condensed consolidated financial statements.

In December 2017, we received a Notice of Reassessment from the French Tax Authority (“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 ~~$650~~$625 million). We disagree with the proposed assessment and ~~intend~~continue 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 ~~June~~September 30, 2019, ~~are appropriate, until~~were 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 October 2019, we completed an intra-entity transfer of certain intellectual property rights to one of our subsidiaries in the U.K. The transfer did not result in a taxable gain; however, our U.K. subsidiary received a step-up in tax basis. We are currently assessing the tax impacts associated with this transfer, including its impact to deferred taxes. We expect to record a one-time benefit for the recognition of a deferred tax asset in the U.K. related to the amortizable tax basis in the transferred intellectual property, partially offset by a related deferred tax liability for U.S. taxes on foreign earnings. The net tax impact of this intra-entity asset transfer will be recorded in the quarter ending December 31, 2019. While this one-time impact may be material to our financial statements, we do not expect the transfer to materially affect cash taxes or operating cash flows in 2019.

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 our options, including the pursuit of judicial remedies.

We regularly assess the likelihood of adverse outcomes resulting from these examinations and monitor the progress of ongoing discussions with tax authorities in determining the appropriateness of our tax provisions. The final resolution of the Company’s global tax disputes is uncertain. There is significant judgment required in the analysis 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 a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations, except as noted above.

17. 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 Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
Numerator:
Consolidated net income	$	328	$	402	$	774	$	902	$	204	$	260	$	978	$	1,162
Denominator:
Denominator for basic earnings per common share—weighted-average common shares outstanding	766		761		765		760		767		763		766		761
Effect of potential dilutive common shares under the treasury stock method—employee stock options and awards	4		9		5		10		4		8		4		10
Denominator for basic earnings per common share—weighted-average dilutive common shares outstanding	770		770		770		770		771		771		770		771

Basic earnings per common share	$	0.43	$	0.53	$	1.01	$	1.19	$	0.27	$	0.34	$	1.28	$	1.53
Diluted earnings per common share	$	0.43	$	0.52	$	1.01	$	1.17	$	0.26	$	0.34	$	1.27	$	1.51

The vesting of certain of our employee-related restricted stock units and options is contingent upon the satisfaction of 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. Additionally, 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.

Weighted-average shares excluded from the computation of diluted earnings per share were as follows (amounts in millions):


	For the Three Months Ended June 30,		For the Six Months Ended June 30,		For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2019	2018	2019	2018	2019	2018	2019	2018
Restricted stock units and options with performance measures not yet met	4	6	3	6	4	6	3	6
Anti-dilutive employee stock options	6	2	6	2	6	1	6	2

18. Capital Transactions

Repurchase Program

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 a determination by the Board of Directors to discontinue the repurchase program. As of ~~June~~September 30, 2019, we have not repurchased any shares under this program.

Dividends

On February 12, 2019, our Board of Directors declared a cash dividend of $0.37 per common share. On May 9, 2019, we made an aggregate cash dividend payment of $283 million 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.

19. Commitments and Contingencies

Legal Proceedings

In December 2018, we received a decision from the STA informing us of an audit assessment of a Swedish subsidiary of King for the 2016 tax year. The Initial Decision described the basis for issuing a transfer pricing assessment of approximately 3.5kr billion (approximately $379 million), primarily concerning an alleged intercompany asset transfer. On June 17, 2019, we received a reassessment from the STA which changed the Initial Decision based on a revision of the transfer pricing approach reflected in King’s 2016 Swedish tax return and removal of the alleged intercompany asset transfer that was the basis of the Initial Decision. The STA also, at the same time, reassessed the 2017 tax year on the same transfer pricing basis as 2016. The transfer pricing approach reflected in the Reassessment for both 2016 and 2017 remains subject to further review by taxing authorities in other jurisdictions. In July 2019, the Company made a payment to the STA for the Reassessment for the 2016 and 2017 tax years, which did not result in a significant impact to our condensed consolidated financial statements.

~~In addition, we~~We are party to routine claims, suits, investigations, audits, and other proceedings arising from the ordinary course of business, including with respect to intellectual property rights, contractual claims, labor and employment matters, regulatory matters, tax matters, unclaimed property matters, compliance matters, and collection matters. 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 a material adverse effect on our business, financial condition, results of operations, or liquidity.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

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, and Vivendi Games, Inc., then an indirect wholly-owned subsidiary of Vivendi S.A., we were renamed Activision Blizzard, Inc.

Our Segments

Based on 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 platform. 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. Activision’s key product franchise is Call of Duty^®, a first-person shooter for the console and PC platforms. Also, on October 1, 2019, in collaboration with Tencent, Activision released Call of Duty: Mobile for the mobile platform, including for Google Inc.’s (“Google”) Android and Apple Inc.’s (“Apple”) iOS.

(ii) Blizzard Entertainment, Inc.

(iii) King Digital Entertainment

King Digital Entertainment (“King”) is a leading global developer and publisher of interactive entertainment content and services, particularly for the mobile platform, including for ~~Google Inc.’s (“Google”)~~Google’s Android and ~~Apple Inc.’s (“Apple”)~~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 Activision Blizzard Studios (“Studios”) business, which is devoted to creating original film and television content 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

Business Results and Highlights

Financial Results

For the three months ended ~~June~~September 30, 2019:

consolidated net revenues decreased 15% to ~~$1.40~~$1.28 billion, and consolidated operating income decreased ~~23%~~7% to ~~$336~~$247 million, as compared to consolidated net revenues of ~~$1.64~~$1.51 billion and consolidated operating income of ~~$434~~$265 million for the three months ended ~~June~~September 30, 2018;

revenues from digital online channels were ~~$1.09~~$1.01 billion, or ~~78%~~79% of consolidated net revenues, as compared to ~~$1.26~~$1.28 billion, or ~~77%~~84% of consolidated net revenues, for the three months ended ~~June~~September 30, 2018;

operating margin was ~~24.1%~~19.3%, which includes ~~$22~~$28 million in restructuring and related costs, as compared to ~~26.4%~~17.5% for the three months ended ~~June~~September 30, 2018;

consolidated net income decreased ~~18%~~22% to ~~$328~~$204 million, as compared to ~~$402~~$260 million for the three months ended ~~June~~September 30, 2018; net income for the 2018 period included ~~$25~~$72 million of net tax benefits from ~~several~~ discrete tax items primarily related to the settlement with the Internal Revenue Service (“IRS”) with respect to intercompany transfer pricing arrangements, the establishment of a valuation allowance on California research and development credit carryforwards (“CA R&D Credits”), and updates to our accounting for the Tax Cuts and Jobs Act (see “Consolidated Results” discussion below for additional details); and

diluted earnings per common share decreased ~~17%~~24% to ~~$0.43,~~$0.26, as compared to ~~$0.52~~$0.34 for the three months ended ~~June~~September 30, 2018.

For the ~~six~~nine months ended ~~June~~September 30, 2019:

consolidated net revenues decreased ~~11%~~12% to ~~$3.22~~$4.50 billion, and consolidated operating income decreased ~~12%~~11% to ~~$906 million,~~$1.15 billion, as compared to consolidated net revenues of ~~$3.61~~$5.12 billion and consolidated operating income of ~~$1.03~~$1.29 billion for the ~~six~~nine months ended ~~June~~September 30, 2018;

revenues from digital online channels were ~~$2.48~~$3.49 billion, or ~~77%~~78% of consolidated net revenues, as compared to ~~$2.72~~$4.00 billion, or ~~75%~~78% of consolidated net revenues, for the ~~six~~nine months ended ~~June~~September 30, 2018;

operating margin was ~~28.1%~~25.6%, which includes ~~$79~~$108 million in restructuring and related costs, as compared to ~~28.5%~~25.3% for the ~~six~~nine months ended ~~June~~September 30, 2018;

cash flows from operating activities were ~~$604~~$913 million, an increase of ~~12%~~15%, as compared to ~~$538~~$791 million for the ~~six~~nine months ended ~~June~~September 30, 2018;

consolidated net income decreased ~~14%~~16% to ~~$774~~$978 million, as compared to ~~$902 million~~$1.16 billion for the ~~six~~nine months ended ~~June~~September 30, 2018; net income for the 2018 period included ~~$25~~$97 million of net tax benefits from several discrete tax items ~~as discussed above;~~(see “Consolidated Results” discussion below for additional details); and

diluted earnings per common share decreased ~~14%~~16% to ~~$1.01,~~$1.27, as compared to ~~$1.17~~$1.51 for the ~~six~~nine months ended ~~June~~September 30, 2018.

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 and then recognize the attributable revenues over the relevant estimated service periods, which are generally less than a year. Net revenues and operating income for the three months ended ~~June~~September 30, 2019, include a net effect of ~~$189~~$68 million and ~~$135~~$53 million, respectively, from the recognition of deferred net revenues and related cost of revenues. Net revenues and operating income for the ~~six~~nine months ended ~~June~~September 30, 2019, include a net effect of ~~$755~~$824 million and ~~$576~~$629 million, respectively, from the recognition of deferred net revenues and related cost of revenues.

Content Release and Event Highlights

During the three months ended ~~June~~September 30, 2019, Activision released ~~Crash~~Spyro^TM ~~Team Racing Nitro~~Reignited Trilogy- on Nintendo Switch and PC,~~Fueled~~ and Blizzard released World of Warcraft^® Classic, a re-creation of the pre-expansion version of the game, and the latest ~~expansion~~expansions to Hearthstone—~~Rise~~Saviors of ~~Shadows~~Uldum^TMand Tombs of Terror^TM.

Operating Metrics

The following operating metrics are key performance indicators that we use to evaluate our business.

Net ~~Bookings~~bookings and In-game net bookings

We monitor net bookings as a key operating metric in evaluating the performance of our business. Net bookings is 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. Net bookings is equal to net revenues excluding the impact from deferrals. In-game net bookings primarily includes the net amount of downloadable content and microtransactions sold during the period, and is equal to in-game net revenues excluding the impact from deferrals.

Net bookings ~~was~~and in-game net bookings were as follows (amounts in millions):


	June 30, 2019		June 30, 2018		Increase (Decrease)			September 30, 2019		September 30, 2018		Increase (Decrease)
Net bookings
Three Months Ended	$	1,207	$	1,385	$	(178	)	$	1,214	$	1,658	$	(444	)
Six Months Ended	$	2,465	$	2,769	$	(304	)
Nine Months Ended								$	3,679	$	4,427	$	(748	)
In-game net bookings
Three Months Ended								$	709	$	1,032	$	(323	)
Nine Months Ended								$	2,281	$	2,999	$	(718	)

Q2Net bookings

Q3 2019 vs. Q2Q3 2018

The decrease in net bookings for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June 30, 2018, was primarily due to:~~

~~lower net bookings from the Destiny franchise, the publishing rights to which we sold to Bungie in December 2018, as previously disclosed; and~~


•	~~lower net bookings from~~ ~~Overwatch~~.

~~The decrease was partially offset by net bookings from~~ ~~Crash Team Racing Nitro-Fueled~~,~~which was released in June 2019.~~

~~YTD Q2 2019 vs. YTD Q2 2018~~

~~The decrease in net bookings for the six months ended June 30, 2019, as compared to the six months ended June~~September 30, 2018, was primarily due to:

•

~~lower~~a decrease in Blizzard net bookings ~~from the Call~~ of ~~Duty franchise, primarily~~$241 million driven by (1) overall lower net bookings from ~~Call~~World of ~~Duty: Black Ops 4~~Warcraft expansion and in-game content sales, primarily due to World of Warcraft: Battle for Azeroth, which was released in ~~October~~August 2018, ~~as compared~~with no comparable release in 2019, (although subscription revenues remained relatively comparable to the prior-year period due to the release of ~~Call~~World of ~~Duty: WWII~~WarcraftClassic in August 2019), and (2) lower net bookings from Hearthstone, primarily due to lower net bookings from the Saviors of Uldum expansion, which was released in ~~November 2017;~~August 2019, as compared to the Boomsday™ expansion, which was released in August 2018; and

a decrease in Activision net bookings of $188 million driven by (1) lower net bookings from the Destiny franchise (reflecting our sale of the publishing rights for Destiny to Bungie in December 2018), and (2) lower net bookings from the Call of Duty franchise catalog titles.

YTD Q3 2019 vs. YTD Q3 2018

The decrease in net bookings for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was primarily due to:


•	a decrease in Blizzard net bookings of $484 million driven by (1) lower net bookings from World of Warcraft,, primarily due to the ~~prior year including net bookings associated with in-game content delivered to customers upon pre-purchase~~launch of World of Warcraft: Battle for Azeroth^TM, ~~with no comparable~~and (2) lower net bookings ~~in the current period;~~from Overwatch; and


•	a decrease in Activision net bookings of $253 million driven by (1) lower net bookings from ~~Overwatch~~.

~~The decrease was~~the Destiny franchise and (2) lower net bookings from the Call of Duty franchise catalog titles, partially offset by net bookings from Sekiro^TM: Shadows Die Twice, which was released in March 2019.

In-game net bookings

Q3 2019 vs. Q3 2018

The decrease in in-game net bookings for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, was primarily due to a decrease in Blizzard and Activision in-game net bookings of $183 million and $113 million, respectively, due to the same drivers discussed for net bookings above.

YTD Q3 2019 vs. YTD Q3 2018

The decrease in in-game net bookings for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was primarily due to:


•	a decrease in Blizzard in-game net bookings of $400 million driven by (1) lower in-game net bookings from World of Warcraft, primarily due to the launch of World of Warcraft: Battle for Azeroth, and (2) lower in-game net bookings from Overwatch and Hearthstone; and

a decrease in Activision in-game net bookings of $254 million driven by (1) lower in-game net bookings from the Destiny franchise and (2) lower in-game net bookings from the Call of Duty franchise, primarily driven by catalog titles.

Monthly Active Users

We monitor monthly active users (“MAUs”) as a key measure of the overall size of our user base. MAUs are the number 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):


	June 30, 2019	March 31, 2019	December 31, 2018	September 30, 2018	June 30, 2018	March 31, 2018	September 30, 2019	June 30, 2019	March 31, 2019	December 31, 2018	September 30, 2018	June 30, 2018
Activision	37	41	53	46	45	51	36	37	41	53	46	45
Blizzard	32	32	35	37	37	38	33	32	32	35	37	37
King	258	272	268	262	270	285	247	258	272	268	262	270
Total	327	345	356	345	352	374	316	327	345	356	345	352

Average MAUs decreased by 1811 million, or 5%3%, for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~March 31,~~June 30, 2019, primarily driven by a decrease in average MAUs for ~~King and Activision.~~King. The decrease in King’s average MAUs is primarily due to decreases from the Candy Crush franchise. The ~~decrease~~slight increase in ~~Activision’s~~Blizzard’s average MAUs is ~~primarily~~ due to ~~decreases from the Call~~an increase in average MAUs for World of ~~Duty franchise.~~Warcraft, largely offset by lower average MAUs for Hearthstone.

Average MAUs decreased by 2529 million, or 7%8%, for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018. The year-over-year decrease in average MAUs is due to:


•	decreases across King’s various franchises, other than Candy Crush, primarily from less engaged users leaving the network, partially offset by an increase in average MAUs for the Candy Crush franchise, primarily ~~given~~driven by the launch of Candy Crush Friends Saga^TM in the fourth quarter of 2018;

lower average MAUs for Activision, primarily due to the absence of Destiny MAUs in our operating metric and lower average MAUs from the Call of Duty ~~franchise and the absence of Destiny MAUs in our operating metric;~~franchise; and


•	lower average MAUs for Blizzard, primarily due to lower average MAUs for ~~Overwatch~~Hearthstone and ~~and~~ ~~Hearthstone~~Overwatch.

King MAUs were also negatively impacted by a King network outage in the second quarter of 2018, resulting from changes made by a third-party partner which inadvertently impacted some users’ ability to play and spend money in King games.

Management’s Overview of Business Trends

Interactive Entertainment and Mobile Gaming Growth

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 more commonplace across age groups and as more developing regions gain access to this form of entertainment.

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 our other 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.~~franchises, such as the October 2019 launch of Call of Duty: Mobile.

Opportunities to Expand Franchises Outside of Games

Our fans spend significant time investing in our franchises through purchases of our game content, whether through purchases 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. Our efforts to build these adjacent 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 esports opportunities, ~~during 2017,~~ we ~~completed the sale of 12~~have sold rights for 20 teams ~~for~~that are participating in the Overwatch League, which ~~concluded~~recently completed its ~~inaugural season in July 2018. During 2018, we also completed the sale of eight additional teams for the Overwatch League, which are competing in the league’s~~ second ~~season that began in February 2019.~~season. Additionally, we have sold the first ~~eight~~12 teams for ~~our professional~~the Call of Duty ~~city-based league.~~League.

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 from video games based on a few popular franchises, and these video games have been responsible for a disproportionately high percentage 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.

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 an effort 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. We also have mobile titles in development based on ~~Activision~~Activision’s and ~~Blizzards~~Blizzard’s intellectual property, such as the ~~previously announced~~ recently releasedCall of ~~Duty~~Duty: Mobile and previously announced Diablo Immortal^TM.

Overall, we do expect that a limited number of popular franchises will continue to produce a disproportionately high percentage 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

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 and microtransactions, 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 or PC platforms.

Consolidated Statements of Operations Data

The following table sets forth condensed consolidated statements of operations data for the periods indicated (amounts in millions) and as a percentage of total net revenues, except for cost of revenues, which are presented as a percentage of associated revenues:


	For the Three Months Ended June 30,									For the Six Months Ended June 30,									For the Three Months Ended September 30,										For the Nine Months Ended September 30,
	2019					2018				2019					2018				2019					2018					2019					2018
Net revenues
Product sales	$	359		26	%	$	464	28	%	$	1,015		32	%	$	1,184	33	%	$	260		20	%	$	263		17	%	$	1,276		28	%	$	1,447	28	%
Subscription, licensing, and other revenues	1,037			74		1,177		72		2,205			68		2,423		67		1,022			80		1,249			83		3,227			72		3,672		72
Total net revenues	1,396			100		1,641		100		3,220			100		3,607		100		1,282			100		1,512			100		4,503			100		5,119		100

Costs and expenses:
Costs and expenses
Cost of revenues—product sales:
Product costs	99			28		126		27		251			25		289		24		137			53		127			48		388			30		416		29
Software royalties, amortization, and intellectual property licenses	51			14		49		11		162			16		194		16		9			3		20			8		171			13		214		15
Cost of revenues—subscription, licensing, and other revenues:
Game operations and distribution costs	230			22		250		21		469			21		521		22		246			24		257			21		714			22		777		21
Software royalties, amortization, and intellectual property licenses	53			5		85		7		114			5		169		7		50			5		109			9		164			5		278		8
Product development	244			17		255		16		492			15		513		14		210			16		263			17		702			16		776		15
Sales and marketing	191			14		226		14		397			12		477		13		182			14		263			17		580			13		741		14
General and administrative	170			12		216		13		350			11		415		12		177			14		208			14		527			12		623		12
Restructuring and related costs	22			2		—		—		79			2		—		—		24			2		—			—		104			2		—		—
Total costs and expenses	1,060			76		1,207		74		2,314			72		2,578		71		1,035			81		1,247			82		3,350			74		3,825		75

Operating income	336			24		434		26		906			28		1,029		29		247			19		265			18		1,153			26		1,294		25
Interest and other expense (income), net	(34		)	(2	)	26		2		(31		)	(1	)	54		1		(2		)	—		13			1		(33		)	(1	)	67		1
Income before income tax expense	370			27		408		25		937			29		975		27
Income tax expense	42			3		6		—		163			5		73		2
Loss on extinguishment of debt (1)																			—			—		40			3		—			—		40		1
Income before income tax expense (benefit)																			249			19		212			14		1,186			26		1,187		23
Income tax expense (benefit)																			45			4		(48		)	(3	)	208			5		25		—
Net income	$	328		23	%	$	402	24	%	$	774		24	%	$	902	25	%	$	204		16	%	$	260		17	%	$	978		22	%	$	1,162	23	%


(1)	Represents the loss on extinguishment of debt we recognized in connection with our debt financing activities during the nine months ended September 30, 2018. The loss on extinguishment is comprised of a $25 million premium payment and a $15 million write-off of unamortized discount and deferred financing costs.

Consolidated Net Revenues

The following table summarizes our consolidated net revenues, in-game net revenues, and ~~the~~ increase (decrease) in deferred net revenues recognized (amounts in millions):


	For the Three Months Ended June 30,									For the Six Months Ended June 30,									For the Three Months Ended September 30,										For the Nine Months Ended September 30,
	2019		2018		Increase (Decrease)			% Change		2019		2018		Increase (Decrease)			% Change		2019		2018			Increase (Decrease)			% Change		2019		2018		Increase (Decrease)			% Change
Consolidated net revenues	$	1,396	$	1,641	$	(245	)	(15	)%	$	3,220	$	3,607	$	(387	)	(11	)%	$	1,282	$	1,512		$	(230	)	(15	)%	$	4,503	$	5,119	$	(616	)	(12	)%
In-game net revenues (1)																			734		994			(260		)	(26	)%	2,479		3,016		(537		)	(18	)%
Net effect from recognition (deferral) of deferred net revenues	189		256		(67		)			755		838		(83		)			68		(146		)	214					824		692		132


(1)	In-game net revenues primarily includes the net amount of revenue recognized for downloadable content and microtransactions during the period.

Consolidated Net Revenues

Q2Q3 2019 vs. Q2Q3 2018

The decrease in consolidated net revenues and in-game net revenues for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to:

•

a decrease ~~of $164 million~~ in Blizzard revenues recognized from Activision, primarily due to (1) lower revenues recognized from the Destiny franchise, the publishing rights to which we sold to Bungie in December 2018, as previously disclosed, and (2) lower 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~~


•	~~a decrease of~~ ~~$77~~$121 million, ~~in revenues recognized from Blizzard,~~ primarily due to lower revenues recognized from ~~Overwatch~~World of Warcraft.; and

a decrease in Activision revenues recognized of $100 million, primarily due to lower revenues recognized from the Destiny franchise (reflecting our sale of the publishing rights for Destiny to Bungie in December 2018).

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

The decrease in consolidated net revenues and in-game net revenues for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was primarily due to:


•	a decrease ~~of $275 million~~ in Activision revenues recognized ~~from Activision,~~of $375 million, primarily due to (1) lower revenues recognized from the Destiny franchise and (2) lower revenues recognized from the Call of Duty franchise catalog titles, partially offset by revenues from Sekiro: Shadows Die Twice, which was released in March 2019; and


•	a decrease ~~of $125 million~~ in Blizzard revenues recognized ~~from Blizzard,~~of $247 million, primarily due to lower revenues recognized from Overwatch.

In-game Net Revenues

Q3 2019 vs. Q3 2018

The decrease in in-game net revenues for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, was primarily due to a decrease in Blizzard and Activision in-game revenues recognized of $121 million and $116 million, respectively, due to the same drivers discussed for consolidated net revenues above.

YTD Q3 2019 vs. YTD Q3 2018

The decrease in in-game net revenues for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was primarily due to:


•	a decrease in Blizzard in-game revenues recognized of $250 million, primarily due to lower in-game revenues recognized from Overwatch and Hearthstone;and

a decrease in Activision in-game revenues recognized of $219 million, primarily due to lower in-game revenues recognized from the Destiny franchise.

Change in Deferred Revenues Recognized

Q2Q3 2019 vs. Q2Q3 2018

The ~~decrease~~increase in net deferred revenues recognized for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to (1) an increase of $120 million in net deferred revenues recognized from Blizzard, primarily due to the prior year period including a ~~decrease~~net deferral of ~~$94~~revenues from World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable release in 2019 and (2) an increase of $88 million in net deferred revenues recognized from Activision, primarily due to lower net ~~deferred~~deferral of revenues ~~recognized~~ from ~~Call~~the Destiny franchise (reflecting our sale of ~~Duty: Black Ops 4, which was released~~the publishing rights for Destiny to Bungie in ~~October 2018, as compared to~~ ~~Call of Duty: WWII, which was released in November 2017.~~December 2018).

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

The ~~decrease~~increase in net deferred revenues recognized for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was primarily due to a decrease of $209 million in net deferred revenues recognized from Activision, primarily due to lower net deferred revenues recognized from the Destiny franchise. The decrease from Activision was partially offset by an increase of ~~$117~~$237 million in net deferred revenues recognized from Blizzard, primarily due to higher net deferred revenues recognized for World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable release in 2017. The increase from Blizzard was partially offset by a decrease of $122 million in net deferred revenues recognized from Activision, primarily due to lower net deferred revenues recognized from the Destiny franchise.

Foreign Exchange Impact

Changes in foreign exchange rates had a negative impact of ~~$39~~$27 million and ~~$105~~$133 million on our consolidated net revenues for the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively, as compared to the same period 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.

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 our chief 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 and related 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.

Information on reportable segment net revenues and operating income for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, are presented below (amounts in millions):


	Three Months Ended June 30, 2019								$ Increase / (Decrease)												Three Months Ended September 30, 2019								$ Increase / (Decrease)
	Activision		Blizzard		King		Total		Activision			Blizzard			King			Total			Activision		Blizzard		King		Total		Activision			Blizzard			King			Total
Segment Net Revenues
Net revenues from external customers	$	268	$	381	$	499	$	1,148	$	(70	)	$	(104	)	$	(3	)	$	(177	)	$	209	$	392	$	500	$	1,101	$	(188	)	$	(235	)	$	(6	)	$	(429	)
Intersegment net revenues(1)	—		3		—		3		—			(1		)	—			(1		)	—		2		—		2		—			(6		)	—			(6		)
Segment net revenues	$	268	$	384	$	499	$	1,151	$	(70	)	$	(105	)	$	(3	)	$	(178	)	$	209	$	394	$	500	$	1,103	$	(188	)	$	(241	)	$	(6	)	$	(435	)

Segment operating income	$	55	$	75	$	171	$	301	$	(29	)	$	(58	)	$	2		$	(85	)	$	26	$	74	$	194	$	294	$	(86	)	$	(115	)	$	10		$	(191	)

	Three Months Ended June 30, 2018																				Three Months Ended September 30, 2018
	Activision		Blizzard		King		Total														Activision		Blizzard		King		Total
Segment Net Revenues
Net revenues from external customers	$	338	$	485	$	502	$	1,325													$	397	$	627	$	506	$	1,530
Intersegment net revenues (1)	—		4		—		4														—		8		—		8
Segment net revenues	$	338	$	489	$	502	$	1,329													$	397	$	635	$	506	$	1,538

Segment operating income	$	84	$	133	$	169	$	386													$	112	$	189	$	184	$	485


	Six Months Ended June 30, 2019								$ Increase / (Decrease)												Nine Months Ended September 30, 2019								$ Increase / (Decrease)
	Activision		Blizzard		King		Total		Activision			Blizzard			King			Total			Activision		Blizzard		King		Total		Activision			Blizzard			King			Total
Segment Net Revenues
Net revenues from external customers	$	585	$	720	$	1,028	$	2,333	$	(66	)	$	(244	)	$	(8	)	$	(318	)	$	794	$	1,113	$	1,527	$	3,434	$	(253	)	$	(479	)	$	(15	)	$	(747	)
Intersegment net revenues (1)	—		8		—		8		—			2			—			2			—		9		—		9		—			(5		)	—			(5		)
Segment net revenues	$	585	$	728	$	1,028	$	2,341	$	(66	)	$	(242	)	$	(8	)	$	(316	)	$	794	$	1,122	$	1,527	$	3,443	$	(253	)	$	(484	)	$	(15	)	$	(752	)

Segment operating income	$	128	$	130	$	349	$	607	$	(47	)	$	(125	)	$	(11	)	$	(183	)	$	153	$	204	$	543	$	900	$	(135	)	$	(240	)	$	—		$	(375	)

	Six Months Ended June 30, 2018																				Nine Months Ended September 30, 2018
	Activision		Blizzard		King		Total														Activision		Blizzard		King		Total
Segment Net Revenues
Net revenues from external customers	$	651	$	964	$	1,036	$	2,651													$	1,047	$	1,592	$	1,542	$	4,181
Intersegment net revenues (1)	—		6		—		6														—		14		—		14
Segment net revenues	$	651	$	970	$	1,036	$	2,657													$	1,047	$	1,606	$	1,542	$	4,195

Segment operating income	$	175	$	255	$	360	$	790													$	288	$	444	$	543	$	1,275


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


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018			2019			2018
Reconciliation to consolidated net revenues:
Segment net revenues	$	1,151		$	1,329		$	2,341		$	2,657		$	1,103		$	1,538		$	3,443		$	4,195
Revenues from non-reportable segments (1)	59			60			132			118			113			128			245			246
Net effect from recognition (deferral) of deferred net revenues	189			256			755			838			68			(146		)	824			692
Elimination of intersegment revenues (2)	(3		)	(4		)	(8		)	(6		)	(2		)	(8		)	(9		)	(14		)
Consolidated net revenues	$	1,396		$	1,641		$	3,220		$	3,607		$	1,282		$	1,512		$	4,503		$	5,119

Reconciliation to consolidated income before income tax expense:
Segment operating income	$	301		$	386		$	607		$	790		$	294		$	485		$	900		$	1,275
Operating income (loss) from non-reportable segments (1)	7			—			4			(11		)	5			7			10			(4		)
Net effect from recognition (deferral) of deferred net revenues and related cost of revenues	135			182			576			557			53			(89		)	629			468
Share-based compensation expense	(38		)	(57		)	(100		)	(111		)	(27		)	(55		)	(127		)	(166		)
Amortization of intangible assets	(47		)	(77		)	(102		)	(196		)	(50		)	(83		)	(151		)	(279		)
Restructuring and related costs (3)	(22		)	—			(79		)	—			(28		)	—			(108		)	—
Consolidated operating income	336			434			906			1,029			247			265			1,153			1,294
Interest and other expense (income), net	(34		)	26			(31		)	54			(2		)	13			(33		)	67
Loss on extinguishment of debt													—			40			—			40
Consolidated income before income tax expense	$	370		$	408		$	937		$	975		$	249		$	212		$	1,186		$	1,187


(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 restructuring initiatives, primarily severance and other restructuring-related costs.

Segment Net Revenues

Activision

Q2Q3 2019 vs. Q2Q3 2018

The decrease in Activision’s net revenues for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to:

lower revenues from the Destiny franchise (reflecting our sale of the publishing rights ~~to which we sold~~for Destiny to Bungie in December ~~2018, as previously disclosed;~~2018);

lower revenues from the Call of Duty franchise catalog titles; and


•	lower revenues from Crash Bandicoot™ N. Sane Trilogy, which was released on the Xbox One, PC, and Nintendo Switch in June ~~2018;~~

~~lower revenues from the Call of Duty franchise catalog titles; and~~


•	~~lower revenues 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.~~2018.

The decrease was partially offset by:


•	revenues from Crash Team Racing Nitro-Fueled, which was released in June 2019; and


•	higher revenues from the ~~Sekiro: Shadows Die Twice~~Spyro Reignited Trilogy, which was released on Nintendo Switch in ~~March 2019.~~September 2019, after having been released on Playstation 4 and Xbox One in November 2018.

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

The decrease in Activision’s net revenues for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was primarily due to:

lower revenues from the Destiny franchise;

lower revenues from Call of Duty franchise catalog titles;


•	lower revenues 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

~~lower revenues from the Destiny franchise;~~

~~lower revenues from Call of Duty franchise catalog titles; and~~


•	lower revenues from Crash Bandicoot N. Sane Trilogy.

The decrease was partially offset by revenues from Sekiro: Shadows Die Twice, which was released in March 2019, and Crash Team Racing Nitro-Fueled.

Blizzard

Q2Q3 2019 vs. Q2Q3 2018

The decrease in Blizzard’s net revenues for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to:


•	overall lower revenues from ~~Overwatch~~World of Warcraft, primarily due to World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable release in 2019 (although subscription revenues remained relatively comparable to the prior-year period due to the release of World of WarcraftClassic in August 2019);


•	lower revenues from Hearthstone, primarily ~~driven by~~due to lower revenues from the ~~Rise~~Saviors of ~~Shadows~~ Uldumexpansion,, which was released in ~~April~~August 2019, as compared to the ~~The Witchwood™~~Boomsday™ expansion,, which was released in ~~April 2018~~; August 2018; and


•	lower revenues from ~~World of Warcraft~~Overwatch~~, primarily due to the prior year including revenues associated with in-game content delivered to customers upon pre-purchase of~~ ~~World of Warcraft: Battle for Azeroth,~~ ~~with no comparable revenues in the current period.~~.

The decrease was partially offset by higher revenues from the Overwatch League.

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

The decrease in Blizzard’s net revenues for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was primarily due to:


•	lower revenues from World of Warcraft, primarily due to ~~the prior year including revenues associated with in-game content delivered to customers upon pre-purchase of~~ World of Warcraft: Battle for ~~Azeroth, with no comparable revenues in the current period;~~Azeroth;


•	lower revenues from Overwatch; and


•	lower revenues from Hearthstone.

King

Q2Q3 2019 vs. Q2Q3 2018

King’s net revenues for the three months ended ~~June~~September 30, 2019, were roughly equal to net revenues for the three months ended ~~June~~September 30, ~~2018.~~2018, as lower in-game revenues from player purchases were largely offset by an increase in advertising revenues.

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

King’s net revenues for the ~~six~~nine months ended ~~June~~September 30, 2019, were roughly equal to net revenues for the ~~six~~nine months ended ~~June~~September 30, ~~2018.~~2018 due to the same driver and offsetting factor discussed above.

Segment Income from Operations

Activision

Q2Q3 2019 vs. Q2Q3 2018

The decrease in Activision’s operating income for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to lower revenues, as discussed above. The decrease was partially offset by lower operating costs associated with the Destiny franchise (reflecting our sale of the publishing rights ~~to which we sold~~for Destiny to Bungie in December ~~2018, as previously disclosed.~~2018).

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

The decrease in Activision’s operating income for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was primarily due to:

lower revenues, ~~primarily driven by the Call of Duty franchise,~~ as discussed above; and


•	~~higher cost of revenues and higher spending on sales and marketing, primarily associated with the launches of~~ ~~Sekiro: Shadows Die Twice~~ ~~and~~ ~~Crash Team Racing Nitro-Fueled~~ ~~in March and June 2019, respectively; and~~

an increase in bad debt provisions.

The decrease was partially offset by lower cost of revenues and operating costs, primarily associated with the Destiny ~~franchise.~~franchise, which were partially offset by costs related to the current year releases of Sekiro: Shadows Die Twice and Crash Team Racing Nitro-Fueled in March and June 2019, respectively.

Blizzard

Q2Q3 2019 vs. Q2Q3 2018

The decrease in Blizzard’s operating income for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to lower revenues, as discussed above. The decrease is partially offset by:


•	lower spending on sales and marketing, primarily driven by lower marketing for esports initiatives and World of Warcraft;

~~lower spending on sales and marketing, primarily driven by Overwatch;~~


•	lower software amortization from World of Warcraft,primarily due to World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable release in 2019; and

~~lower charitable contributions; and~~

~~lower personnel costs.~~higher capitalization of software development costs due to the timing of game development cycles.

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

The decrease in Blizzard’s operating income for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was primarily due to lower revenues, as discussed above. The decrease is partially offset by:

~~lower spending on sales and marketing, primarily driven by lower marketing for esports initiatives and Overwatch;~~


•	lower spending on sales and marketing, primarily driven by lower marketing for esports initiatives, Overwatch, and World of Warcraft;

lower personnel costs; ~~and~~


•	lower software amortization from World of Warcraft,primarily due to World of Warcraft: Battle for Azeroth; and

lower service provider fees, such as digital storefront fees (e.g. fees retained by Apple and Google for our sales on their platforms), payment processor fees, and server bandwidth fees.

King

Q2Q3 2019 vs. Q2Q3 2018

The increase in King’s operating income for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, despite the slight decrease in revenues, was primarily due to:

lower service provider fees, primarily digital storefront fees (e.g. fees retained by Apple and Google for our sales on their platforms); and

lower product development costs.

YTD Q3 2019 vs. YTD Q3 2018

King’s operating income for the ~~three~~nine months ended ~~June~~September 30, 2019, was ~~roughly equal to the three months ended June 30, 2018.~~

~~YTD Q2 2019 vs. YTD Q2 2018~~

~~The decrease in King’s operating income for the six months ended June 30, 2019,~~flat as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, ~~was primarily~~ due ~~to higher sales~~to:

lower revenues, as discussed above; and ~~marketing costs driven by the Candy Crush franchise, partially~~


•	higher sales and marketing costs driven by the Candy Crush franchise, in part due to the launch of Candy Crush Friends Saga in October 2018.

The impacts from above were offset by:

lower service provider fees, such as digital storefront fees (e.g. fees retained by Apple and Google for our sales on their platforms), payment processor fees, and server bandwidth fees; and

lower ~~product development~~personnel costs.

Foreign Exchange Impact

Changes in foreign exchange rates had a negative impact of ~~$30~~$20 million and ~~$72~~$92 million on reportable segment net revenues for the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively, as compared to the same ~~period~~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.

Consolidated Results

Net Revenues by Distribution Channel

The following table details our consolidated net revenues by distribution channel (amounts in millions):


	For the Three Months Ended June 30,							For the Six Months Ended June 30,							For the Three Months Ended September 30,							For the Nine Months Ended September 30,
	2019		2018		Increase (Decrease)			2019		2018		Increase (Decrease)			2019		2018		Increase (Decrease)			2019		2018		Increase (Decrease)
Net revenues by distribution channel:
Digital online channels (1)	$	1,086	$	1,259	$	(173	)	$	2,479	$	2,720	$	(241	)	$	1,014	$	1,276	$	(262	)	$	3,493	$	3,998	$	(505	)
Retail channels	193		278		(85		)	505		690		(185		)	93		76		17			599		764		(165		)
Other (2)	117		104		13			236		197		39			175		160		15			411		357		54
Total consolidated net revenues	$	1,396	$	1,641	$	(245	)	$	3,220	$	3,607	$	(387	)	$	1,282	$	1,512	$	(230	)	$	4,503	$	5,119	$	(616	)


(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

Q2Q3 2019 vs. Q2Q3 2018

The decrease in net revenues from digital online channels for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to:

lower revenues recognized from the Destiny franchise (reflecting our sale of the publishing rights ~~to which we sold~~for Destiny to Bungie in December 2018); and


•	lower revenues recognized from World of Warcraft.

YTD Q3 2019 vs. YTD Q3 2018

The decrease in net revenues from digital online channels for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, ~~as previously disclosed;~~was primarily due to:

lower revenues recognized from the Destiny franchise; and


•	lower revenues recognized from Overwatch.

~~YTD Q2~~Retail Channel Net Revenues

Q3 2019 vs. ~~YTD Q2~~Q3 2018

The ~~decrease~~increase in net revenues from ~~digital online~~retail channels for the ~~six~~three months ended ~~June~~September 30, 2019, as compared to the ~~six~~three months ended ~~June~~September 30, 2018, was primarily due ~~to lower revenues recognized from the Destiny franchise.~~to:


•	revenues recognized from Crash Team Racing Nitro-Fueled,which was released in June 2019; and

~~Retail Channel Net Revenues~~


•	higher revenues from the Spyro Reignited Trilogy,which was released on Nintendo Switch in September 2019, after having been released on Playstation 4 and Xbox One in November 2018.

YTD Q3 2019 vs. Q2YTD Q3 2018

The decrease in net revenues from retail channels for the ~~three~~nine months ended ~~June~~September 30, 2019, as compared to the ~~three~~nine months ended ~~June~~September 30, 2018, was primarily due to:


•	lower 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;


•	~~lower revenues from~~ ~~Crash Bandicoot N. Sane Trilogy~~,~~which was released on the Xbox One, PC, and Nintendo Switch in June 2018; and~~

lower revenues recognized from the Destiny ~~franchise.~~

~~The decrease was partially offset by revenues recognized from~~ ~~Crash Team Racing Nitro-Fueled~~,~~which was released~~franchise (reflecting our sale of the publishing rights for Destiny to Bungie in ~~June 2019.~~

~~YTD Q2 2019 vs. YTD Q2 2018~~

~~The decrease in net revenues from retail channels for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018, was primarily due to:~~


•	~~lower revenues recognized from~~ ~~Call of Duty: Black Ops 4, as compared to~~ ~~Call of Duty: WWII~~December 2018);

~~lower revenues recognized from the Destiny franchise;~~ and


•	lower revenues from Crash Bandicoot N. Sane Trilogy., which was released on the Xbox One, PC, and Nintendo Switch in June 2018.

The decrease was partially offset ~~by revenues from~~ ~~Sekiro: Shadows Die Twice~~,~~which was released in March 2019.~~by:


•	revenues from Sekiro: Shadows Die Twice,which was released in March 2019; and


•	revenues recognized from Crash Team Racing Nitro-Fueled.

Net Revenues by Geographic Region

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


	For the Three Months Ended June 30,							For the Six Months Ended June 30,							For the Three Months Ended September 30,							For the Nine Months Ended September 30,
	2019		2018		Increase (Decrease)			2019		2018		Increase (Decrease)			2019		2018		Increase (Decrease)			2019		2018		Increase (Decrease)
Net revenues by geographic region:
Americas	$	764	$	900	$	(136	)	$	1,751	$	1,966	$	(215	)	$	655	$	774	$	(119	)	$	2,406	$	2,740	$	(334	)
EMEA (1)	459		552		(93		)	1,073		1,239		(166		)	452		534		(82		)	1,525		1,774		(249		)
Asia Pacific	173		189		(16		)	396		402		(6		)	175		204		(29		)	572		605		(33		)
Consolidated net revenues	$	1,396	$	1,641	$	(245	)	$	3,220	$	3,607	$	(387	)	$	1,282	$	1,512	$	(230	)	$	4,503	$	5,119	$	(616	)


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

Americas

Q2Q3 2019 vs. Q2Q3 2018

The decrease in net revenues from the Americas region for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to lower revenues recognized from the Destiny franchise (reflecting our sale of the publishing rights ~~to which we sold~~for Destiny to Bungie in December ~~2018, as previously disclosed.~~2018).

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

The decrease in net revenues from the Americas region for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was primarily due to lower revenues recognized from the Destiny franchise.

EMEA

Q2Q3 2019 vs. Q2Q3 2018

The decrease in net revenues from the EMEA region for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to:

lower revenues recognized from the Destiny franchise; and


•	lower revenues recognized from World of Warcraft.

YTD Q3 2019 vs. YTD Q3 2018

The decrease in net revenues from the EMEA region for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was primarily due to:

lower revenues recognized from the Destiny franchise; and


•	lower revenues recognized from the Call of Duty franchise, primarily driven by lower 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~~2017.

~~lower revenues recognized from the Destiny franchise.~~

~~YTD Q2 2019 vs. YTD Q2 2018~~

The decrease in net revenues from the EMEA region for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018, was primarily due to the same drivers applicable to the three months ended June 30, 2019 discussed above.

Asia Pacific

Q2Q3 2019 vs. Q2Q3 2018

The decrease in net revenues from the Asia Pacific region for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to lower revenues recognized from Hearthstone~~primarily driven by lower revenues recognized from the~~ ~~Rise of Shadows~~ ~~expansion~~, ~~which was released in April 2019, as compared to~~ ~~The Witchwood~~ ~~expansion~~, ~~which was released in April 2018.~~.

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

The decrease in net revenues from the Asia Pacific region for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was primarily due to lower revenues recognized from the Destiny franchise.

Net Revenues by Platform

The following table details our consolidated net revenues by platform (amounts in millions):


	For the Three Months Ended June 30,							For the Six Months Ended June 30,							For the Three Months Ended September 30,							For the Nine Months Ended September 30,
	2019		2018		Increase (Decrease)			2019		2018		Increase (Decrease)			2019		2018		Increase (Decrease)			2019		2018		Increase (Decrease)
Net revenues by platform:
Console	$	407	$	565	$	(158	)	$	1,083	$	1,382	$	(299	)	$	241	$	347	$	(106	)	$	1,324	$	1,730	$	(406	)
PC	361		451		(90		)	855		971		(116		)	341		482		(141		)	1,196		1,452		(256		)
Mobile and ancillary (1)	511		521		(10		)	1,046		1,057		(11		)	525		523		2			1,572		1,580		(8		)
Other (2)	117		104		13			236		197		39			175		160		15			411		357		54
Total consolidated net revenues	$	1,396	$	1,641	$	(245	)	$	3,220	$	3,607	$	(387	)	$	1,282	$	1,512	$	(230	)	$	4,503	$	5,119	$	(616	)


(1)	Net revenues from “Mobile and ancillary” include revenues from mobile devices, as well as non-platform-specific game-related revenues, such as standalone sales of physical 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.

Console

Q2Q3 2019 vs. Q2Q3 2018

The decrease in net revenues from the console platform for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to:

lower revenues recognized from the Destiny franchise (reflecting our sale of the publishing rights for Destiny to Bungie in December 2018);

lower revenues recognized from the Call of Duty franchise catalog titles;


•	lower revenues recognized from Overwatch;


•	lower 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

~~lower revenues recognized from the Destiny franchise, the publishing rights to which we sold to Bungie in December 2018, as previously disclosed;~~


•	lower revenues from Crash Bandicoot N. Sane Trilogy which was released on the Xbox One, PC, and Nintendo Switch in June ~~2018;~~2018.

The decrease was partially offset by:


•	revenues recognized from Crash Team Racing Nitro-Fueled,which was released in June 2019; and

~~lower revenues recognized from Call of Duty franchise catalog titles.~~

~~The decrease was partially offset by revenues recognized from~~ ~~Crash Team Racing Nitro-Fueled~~,~~which was released in June 2019.~~


•	higher revenues from the Spyro Reignited Trilogy,which was released on Nintendo Switch in September 2019, after having been released on Playstation 4 and Xbox One in November 2018.

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

The decrease in net revenues from the console platform for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was primarily due to:

lower revenues recognized from the Destiny franchise;

lower revenues recognized from Call of Duty franchise catalog titles; and


•	lower revenues recognized ~~from~~ from Call of Duty: Black Ops 4, as compared to Call of Duty: ~~WWII~~;~~and~~WWII.

~~lower revenues recognized from Call of Duty franchise catalog titles.~~

The decrease was partially offset by revenues from Sekiro: Shadows Die Twice, which was released in March 2019.

Q2Q3 2019 vs. Q2Q3 2018

The decrease in net revenues from the PC platform for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to:


•	lower revenues recognized from World of Warcraft;

~~lower revenues recognized from the Destiny franchise;~~


•	lower revenues recognized from Hearthstone;


•	lower revenues recognized from Overwatch; and


•	~~lower revenues recognized from~~ ~~Hearthstone,~~ ~~primarily driven by lower revenues recognized from the~~ ~~Rise of Shadows~~ ~~expansion,which was released in April 2019, as compared to~~ ~~The Witchwood~~ ~~expansion,which was released in April 2018.~~ lower revenues recognized from the Destiny franchise.

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

The decrease in net revenues from the PC platform for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was primarily due to:

lower revenues recognized from the Destiny franchise;


•	lower revenues recognized from Overwatch; and


•	lower revenues recognized from Hearthstone.

~~The decrease was partially offset by 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.~~

Mobile and Ancillary

Q2Q3 2019 vs. Q2Q3 2018

Net revenues from mobile and ancillary for the three months ended ~~June~~September 30, 2019, were roughly ~~equal~~flat as compared to net revenues for the three months ended ~~June~~September 30, 2018.

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

Net revenues from mobile and ancillary for the ~~six~~nine months ended ~~June~~September 30, 2019, were roughly ~~equal~~flat as compared to net revenues for the ~~six~~nine months ended ~~June~~September 30, 2018.

Costs and Expenses

Cost of Revenues

The following table details the components of cost of revenues in dollars (amounts in millions) and as a percentage of associated net revenues:


	Three Months Ended June 30, 2019		% of associated net revenues		Three Months Ended June 30, 2018		% of associated net revenues		Increase (Decrease)			Three Months Ended September 30, 2019		% of associated net revenues		Three Months Ended September 30, 2018		% of associated net revenues		Increase (Decrease)
Cost of revenues—product sales:
Product costs	$	99	28	%	$	126	27	%	$	(27	)	$	137	53	%	$	127	48	%	$	10
Software royalties, amortization, and intellectual property licenses	51		14		49		11		2			9		3		20		8		(11		)
Cost of revenues—subscription, licensing, and other revenues:
Game operations and distribution costs	230		22		250		21		(20		)	246		24		257		21		(11		)
Software royalties, amortization, and intellectual property licenses	53		5		85		7		(32		)	50		5		109		9		(59		)
Total cost of revenues	$	433	31	%	$	510	31	%	$	(77	)	$	442	34	%	$	513	34	%	$	(71	)

	Six Months Ended June 30, 2019		% of associated net revenues		Six Months Ended June 30, 2018		% of associated net revenues		Increase (Decrease)			Nine Months Ended September 30, 2019		% of associated net revenues		Nine Months Ended September 30, 2018		% of associated net revenues		Increase (Decrease)
Cost of revenues—product sales:
Product costs	$	251	25	%	$	289	24	%	$	(38	)	$	388	30	%	$	416	29	%	$	(28	)
Software royalties, amortization, and intellectual property licenses	162		16		194		16		(32		)	171		13		214		15		(43		)
Cost of revenues—subscription, licensing, and other revenues:
Game operations and distribution costs	469		21		521		22		(52		)	714		22		777		21		(63		)
Software royalties, amortization, and intellectual property licenses	114		5		169		7		(55		)	164		5		278		8		(114		)
Total cost of revenues	$	996	31	%	$	1,173	33	%	$	(177	)	$	1,437	32	%	$	1,685	33	%	$	(248	)

Cost of Revenues—Product Sales:

Q2Q3 2019 vs. Q2Q3 2018

The ~~decrease~~increase in product costs for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was in line with the ~~decrease in product sales.~~

~~The slight~~ increase in software royalties, amortization, and intellectual property licenses related to product sales for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018, was primarily due to an increase of $9 million in software amortization and royalties from Blizzard, driven by the release of ~~World of Warcraft: Battle for Azeroth~~ in August 2018, with no comparable release in 2017. The increase from Blizzard was partially offset by a decrease of $6 million in software amortization and royalties from Activision, driven by the Destiny franchise, the publishing rights to which we sold to Bungie in December 2018, as previously disclosed.

~~YTD Q2 2019 vs. YTD Q2 2018~~

~~The decrease in product costs for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018, was in line with the decrease in product sales.~~retail revenues.

The decrease in software royalties, amortization, and intellectual property licenses related to product sales for the ~~six~~three months ended ~~June~~September 30, 2019, as compared to the ~~six~~three months ended ~~June~~September 30, 2018, was primarily due to a decrease of ~~$48~~$8 million in software amortization and royalties from Activision, driven by the Destiny franchise (reflecting our sale of the publishing rights for Destiny to Bungie in December 2018).

YTD Q3 2019 vs. YTD Q3 2018

The decrease in product costs for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was in line with the decrease in product sales.

The decrease in software royalties, amortization, and intellectual property licenses related to product sales for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was primarily due to a decrease of $56 million in software amortization and royalties from Activision, driven by the Destiny franchise. ~~The~~This decrease ~~in software amortization and royalties from the Destiny franchise~~ was partially offset by:


•	higher software amortization and royalties for 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


•	software amortization and royalties from Sekiro: Shadows Die Twice, which was released in March 2019, with no comparable release in 2018.

The decrease from Activision was partially offset by an increase of ~~$16~~$12 million in software amortization and royalties from Blizzard, driven by the release of World of Warcraft: Battle for Azeroth., which was released in August 2018, with no comparable release in 2017.

Cost of Revenues—Subscription, Licensing, and Other Revenues:

Q2Q3 2019 vs. Q2Q3 2018

The decrease in game operations and distribution costs for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to a decrease of ~~$13~~$18 million in service provider fees such as digital storefront fees (e.g. fees retained by Apple and Google for our sales on their platforms), payment processor fees, and server bandwidth fees.

The decrease in software royalties, amortization, and intellectual property licenses related to subscription, licensing, and other revenues for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to to:

a decrease of ~~$29~~$34 million in amortization of internally-developed franchise intangible assets acquired as part of our acquisition of ~~King.~~King;

lower software amortization and royalties from Activision of $14 million, driven by the Destiny franchise; and


•	lower amortization of capitalized film costs of $12 million given the release of the third season of the animated TV series, Skylanders Academy, in September 2018, with no comparable release in 2019.

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

The decrease in game operations and distribution costs for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was primarily due to a decrease of ~~$32~~$50 million in service provider fees such as digital storefront fees (e.g. fees retained by Apple and Google for our sales on their platforms), payment processor fees, and server bandwidth fees.

The decrease in software royalties, amortization, and intellectual property licenses related to subscription, licensing, and other revenues for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was primarily due to to:

a decrease of ~~$49~~$83 million in amortization of internally-developed franchise intangible assets acquired as part of our acquisition of ~~King.~~King;

lower software amortization and royalties from Activision of $22 million, driven by the Destiny franchise; and


•	lower amortization of capitalized film costs of $12 million given the release of the third season of the animated TV series, Skylanders Academy, in September 2018, with no comparable release in 2019.

Product Development (amounts in millions)


	June 30, 2019		% of consolidated net revenues		June 30, 2018		% of consolidated net revenues		Increase (Decrease)			September 30, 2019		% of consolidated net revenues		September 30, 2018		% of consolidated net revenues		Increase (Decrease)
Three Months Ended	$	244	17	%	$	255	16	%	$	(11	)	$	210	16	%	$	263	17	%	$	(53	)
Six Months Ended	$	492	15	%	$	513	14	%	$	(21	)
Nine Months Ended												$	702	16	%	$	776	15	%	$	(74	)

Q2Q3 2019 vs. Q2Q3 2018

The decrease in product development costs for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily ~~driven by~~ due to:

lower product development costs for existing and upcoming title releases of $33 million, primarily due to lower personnel costs; and

lower product development costs from the Destiny franchise (reflecting our sale of the publishing rights ~~to which we sold~~for Destiny to Bungie in December ~~2018, as previously disclosed.~~2018).

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

The decrease in product development costs for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was primarily ~~driven by~~ due to:

lower product development costs for existing and upcoming title releases of $66 million, primarily due to lower personnel costs; and

lower product development costs from the Destiny franchise.

Sales and Marketing (amounts in millions)


	June 30, 2019		% of consolidated net revenues		June 30, 2018		% of consolidated net revenues		Increase (Decrease)			September 30, 2019		% of consolidated net revenues		September 30, 2018		% of consolidated net revenues		Increase (Decrease)
Three Months Ended	$	191	14	%	$	226	14	%	$	(35	)	$	182	14	%	$	263	17	%	$	(81	)
Six Months Ended	$	397	12	%	$	477	13	%	$	(80	)
Nine Months Ended												$	580	13	%	$	741	14	%	$	(161	)

Q2Q3 2019 vs. Q2Q3 2018

The decrease in sales and marketing expenses for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to a decrease of ~~$35~~$81 million in marketing spending and personnel costs, primarily associated with lower marketing costs for the ~~Overwatch~~Destiny, World of Warcraft, and ~~Destiny~~Call of Duty franchises, ~~partially offset by higher marketing costs for the Candy Crush franchise.~~and esports initiatives.

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

The decrease in sales and marketing expenses for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was primarily due to:


•	a decrease of ~~$47~~$130 million in marketing spending and personnel costs, primarily associated with lower marketing costs for esports initiatives, the Destiny franchise, and Overwatch, partially offset by higher marketing costs for the Candy Crush franchise; and

a decrease of $44 million in amortization of the customer base intangible asset acquired as part of our acquisition of King, as the asset was fully amortized during the first quarter of 2018.

General and Administrative (amounts in millions)


	June 30, 2019		% of consolidated net revenues		June 30, 2018		% of consolidated net revenues		Increase (Decrease)			September 30, 2019		% of consolidated net revenues		September 30, 2018		% of consolidated net revenues		Increase (Decrease)
Three Months Ended	$	170	12	%	$	216	13	%	$	(46	)	$	177	14	%	$	208	14	%	$	(31	)
Six Months Ended	$	350	11	%	$	415	12	%	$	(65	)
Nine Months Ended												$	527	12	%	$	623	12	%	$	(96	)

Q2Q3 2019 vs. Q2Q3 2018

The decrease in general and administrative expenses for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due ~~to:~~

to a ~~$33~~$22 million decrease in personnel ~~costs; and~~costs.


•	~~a $13 million decrease in charitable contributions, primarily driven by a charitable campaign in~~ ~~Overwatch~~ ~~during the prior year where all proceeds from the sale of a special in-game item were donated to charity, with no equivalent campaign in 2019.~~

YTD Q2Q3 2019 vs. YTD Q2Q3 2018

The decrease in general and administrative expenses for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was primarily due to a ~~$47~~$69 million decrease in personnel costs.

Restructuring and related costs (amounts in millions)


	June 30, 2019		% of consolidated net revenues		June 30, 2018		% of consolidated net revenues		Increase (Decrease)		September 30, 2019		% of consolidated net revenues		September 30, 2018		% of consolidated net revenues		Increase (Decrease)
Three Months Ended	$	22	2	%	$	—	—	%	$	22	$	24	2	%	$	—	—	%	$	24
Six Months Ended	$	79	2	%	$	—	—	%	$	79
Nine Months Ended											$	104	2	%	$	—	—	%	$	104

On February 12, 2019, the Company committed to a Board-authorized restructuring plan under which ~~we are refocusing our~~the Company aims to refocus its resources on ~~our~~its largest opportunities and ~~removing~~remove unnecessary levels of complexity and duplication from certain parts of ~~our~~the business. Since the roll out of the plan, we have been, and will continue focusing on these goals. The restructuring and related costs incurred during the three and ~~six~~nine months ended ~~June~~September 30, 2019, relate primarily to severance costs, write-downs of lease facility assets, and the write-downs of other assets that will no longer be used. Refer to Note 14 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for further discussion.

Interest and Other Expense (Income), Net (amounts in millions)


	June 30, 2019			% of consolidated net revenues		June 30, 2018		% of consolidated net revenues		Increase (Decrease)			September 30, 2019			% of consolidated net revenues		September 30, 2018		% of consolidated net revenues		Increase (Decrease)
Three Months Ended	$	(34	)	(2	)%	$	26	2	%	$	(60	)	$	(2	)	—	%	$	13	1	%	$	(15	)
Six Months Ended	$	(31	)	(1	)%	$	54	1	%	$	(85	)
Nine Months Ended													$	(33	)	(1	)%	$	67	1	%	$	(100	)

Q2Q3 2019 vs. Q2Q3 2018

The decrease in interest and other expense (income), net, for the three months ended ~~June~~September 30, 2019, as compared to the three months ended ~~June~~September 30, 2018, was primarily due to an $11 million decrease in interest expense and amortization of deferred financing costs associated with our debt obligations, due to a decrease in our total debt outstanding as a result of our debt redemptions and repayment activities during 2018.

YTD Q3 2019 vs. YTD Q3 2018

The decrease in interest and other expense (income), net, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was primarily due to:

a $49 million decrease in interest expense and amortization of deferred financing costs associated with our debt obligations, reflecting a decrease in our total debt outstanding as a result of our debt redemptions and repayment activities during 2018;

a $38 million gain recognized as a result of adjusting a cost-method equity investment to fair value, with no comparable activity in the prior period (refer to Note 8 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q); and

~~a $20~~an $11 million ~~decrease~~increase in interest ~~expense and amortization of deferred financing costs associated with our debt obligations~~income due to our ~~lower total debt outstanding as a result of our debt redemptions~~cash and ~~repayment activities during 2018.~~

~~YTD Q2 2019 vs. YTD Q2 2018~~

~~The decrease~~cash equivalent balances earning interest at higher rates, along with an overall higher cash balance, in ~~interest and other expense (income), net, for the six months ended June 30,~~ 2019 as compared to ~~the six months ended June 30, 2018, was primarily due to:~~2018.

~~a $38 million gain recognized as a result of adjusting a cost-method equity investment to fair value, with no comparable activity in the prior period; and~~

~~a $38 million decrease in interest expense and amortization of deferred financing costs associated with our debt obligations.~~

Income Tax Expense (amounts in millions)


	June 30, 2019		% of pretax income		June 30, 2018		% of pretax income		Increase (Decrease)		September 30, 2019		% of pretax income		September 30, 2018			% of pretax income		Increase (Decrease)
Three Months Ended	$	42	11	%	$	6	1	%	$	36	$	45	18	%	$	(48	)	(23	)%	$	93
Six Months Ended	$	163	17	%	$	73	7	%	$	90
Nine Months Ended											$	208	18	%	$	25		2	%	$	183

The income tax expense of ~~$42~~$45 million for the three months ended ~~June~~September 30, 2019, reflects an effective tax rate of ~~11%~~18%, which is higher than the effective tax rate of 1%(23)% for the three months ended ~~June~~September 30, 2018. The increase is primarily due to a discrete tax benefit recognized in the ~~prior-year~~prior year in connection with ~~an IRS audit settlement,~~adjustments made to the provisional amounts initially recorded in connection with tax reform legislation known as the Tax Cuts and Jobs Act enacted in December 22, 2017 (the “U.S. Tax Reform Act”), lower excess tax benefits from share-based payments in the current year, and an increase in U.S. tax on foreign earnings.

The income tax expense of $208 million for the nine months ended September 30, 2019, reflects an effective tax rate of 18%, which is higher than the effective tax rate of 2% for the nine months ended September 30, 2018. The increase is due to a discrete tax benefit recognized in the prior year in connection with an audit settlement with the Internal Revenue Service (“IRS”), a discrete tax benefit recognized in the prior year in connection with adjustments made to the provisional amounts initially recorded in connection with the U.S. Tax Reform Act, and lower excess tax benefits from share-based payments in the current year. This increase was partially offset by a valuation allowance recorded in the prior year with regard to California research and development credit carryforwards (“CA R&D ~~Credits and a discrete tax benefit in the current year from a foreign tax audit settlement.~~

Our effective tax rate could be different from the statutory U.S. income tax rate due to the effect of state and local income taxes, tax rates that apply to our foreign income (including U.S. tax on foreign income), research and development credits, and certain nondeductible expenses. Our effective tax rate could fluctuate significantly from quarter to quarter based on recurring and nonrecurring factors including, but not limited to: variations in the estimated and actual level of pre-tax income or loss by jurisdiction; changes in enacted tax laws and regulations, and interpretations thereof, including with respect to tax credits and state and local income taxes; developments in tax audits and other matters; recognition of excess tax benefits and tax deficiencies from share-based payments; and certain nondeductible expenses. Changes in judgment from the evaluation of new information resulting in the recognition, derecognition, or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.

Further information about our income taxes is provided in Note 16 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

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 and short-term investments of ~~$4.7~~$4.9 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 of liquidity, which are available to us to fund cash outflows such as ~~our anticipated~~potential dividend payments or share repurchases, and scheduled debt maturities, include our cash and cash equivalents, short-term investments, and cash flows provided by operating activities.

As of ~~June~~September 30, 2019, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was ~~$2.0~~$2.3 billion, as compared to $1.4 billion as of December 31, 2018. These cash balances are generally available for use in the U.S., subject in some cases to certain restrictions.

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)


	June 30, 2019			December 31, 2018			Increase (Decrease)			September 30, 2019			December 31, 2018			Increase (Decrease)
Cash and cash equivalents	$	4,592		$	4,225		$	367		$	4,939		$	4,225		$	714
Short-term investments	84			155			(71		)	7			155			(148		)
	$	4,676		$	4,380		$	296		$	4,946		$	4,380		$	566
Percentage of total assets	27		%	24		%				28		%	24		%


	For the Six Months Ended June 30,									For the Nine Months Ended September 30,
	2019			2018			Increase (Decrease)			2019			2018			Increase (Decrease)
Net cash provided by operating activities	$	604		$	538		$	66		$	913		$	791		$	122
Net cash provided by (used in) investing activities	37			(124		)	161			79			(160		)	239
Net cash used in financing activities	(274		)	(250		)	(24		)	(251		)	(2,020		)	1,769
Effect of foreign exchange rate changes	3			(19		)	22			(24		)	(15		)	(9		)
Net increase in cash and cash equivalents and restricted cash	$	370		$	145		$	225
Net increase (decrease) in cash and cash equivalents and restricted cash										$	717		$	(1,404	)	$	2,121

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.

Net cash provided by operating activities for the ~~six~~nine months ended ~~June~~September 30, 2019, was ~~$604~~$913 million, as compared to ~~$538~~$791 million for the ~~six~~nine months ended ~~June~~September 30, 2018. The increase was primarily due to changes in our working capital resulting from the timing of collections and payments and lower cash spent to support the Destiny franchise (reflecting our sale of the publishing rights ~~to which we sold~~for Destiny to Bungie in December ~~2018, as previously disclosed.~~2018). This increase was partially offset by lower net income and a decrease in non-cash adjustments to net income, primarily due to lower amortization on intangible assets related to King and lower amortization of capitalized software development costs and intellectual property licenses for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018.

Net Cash Provided by (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.

Net cash provided by investing activities for the ~~six~~nine months ended ~~June~~September 30, 2019, was ~~$37~~$79 million, as compared to net cash used in investing activities of ~~$124~~$160 million for the ~~six~~nine months ended ~~June~~September 30, 2018. The increase was primarily due to ~~cash flow activities associated with available-for-sale investments, for which, in the six months ended June 30, 2019, there were $75~~$153 million of cash proceeds from the maturities of available-for-sale investments, as compared to purchases of available-for-sale investments of $59 million in the prior-year period. Additionally, capital expenditures of ~~$45~~$79 million for the ~~six~~nine months ended ~~June~~September 30, 2019, were lower than the capital expenditures of ~~$61~~$97 million for the prior-year period.

Net Cash Used in Financing Activities

The primary drivers of net cash flows associated with financing activities typically include the proceeds from, and repayments 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.

Net cash used in financing activities for the ~~six~~nine months ended ~~June~~September 30, 2019, was ~~$274~~$251 million, as compared to ~~$250 million~~$2.0 billion for the ~~six~~nine months ended ~~June~~September 30, 2018. The ~~increase~~decrease was primarily due ~~to:~~

~~higher~~to debt repayments, inclusive of premium payments, of $1.8 billion during the nine months ended September 30, 2018, with no comparable repayment activity in the nine months ended September 30, 2019. The Company paid dividends ~~paid~~ of $283 million ~~for~~during the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to $259 million ~~for the prior-year period; and~~

~~lower proceeds from stock option exercises of $57 million for the six months ended June 30, 2019, as compared to $77 million for the prior-year period.~~

~~The increase was partially offset by lower tax payments made for net share settlements on restricted stock units of $48 million for the six months ended June 30, 2019, as compared to $68 million for~~during the prior-year period.

Effect of Foreign Exchange Rate Changes

Changes in foreign exchange rates had a ~~positive~~negative impact of $3$24 million on our cash and cash equivalents and restricted cash for the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to a negative impact of ~~$19~~$15 million for the ~~six~~nine months ended ~~June~~September 30, 2018. The change was primarily due to changes in the value of the U.S. dollar relative to the euro and the British pound.

Debt

~~As of June~~At both September 30, 2019 and December 31, 2018, our total outstanding debt was $2.7 billion, bearing interest at a weighted average rate of 3.18%.

A summary of our outstanding debt is as follows (amounts in millions):


	At June 30, 2019							At September 30, 2019
	Gross Carrying Amount		Unamortized Discount and Deferred Financing Costs			Net Carrying Amount		Gross Carrying Amount		Unamortized Discount and Deferred Financing Costs			Net Carrying Amount
2021 Notes	$	650	$	(3	)	$	647	$	650	$	(2	)	$	648
2022 Notes	400		(3		)	397		400		(2		)	398
2026 Notes	850		(8		)	842		850		(8		)	842
2027 Notes	400		(4		)	396		400		(5		)	395
2047 Notes	400		(9		)	391		400		(9		)	391
Total long-term debt	$	2,700	$	(27	)	$	2,673	$	2,700	$	(26	)	$	2,674



	At December 31, 2018
	Gross Carrying Amount		Unamortized Discount and Deferred Financing Costs			Net Carrying Amount
2021 Notes	$	650	$	(3	)	$	647
2022 Notes	400		(3		)	397
2026 Notes	850		(8		)	842
2027 Notes	400		(5		)	395
2047 Notes	400		(10		)	390
Total long-term debt	$	2,700	$	(29	)	$	2,671

Refer to Note 11 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for further disclosures regarding our debt obligations.

Dividends

Capital Expenditures

For the year ending December 31, 2019, we anticipate total capital expenditures of approximately ~~$140~~$130 million, primarily for leasehold improvements, computer hardware, and software purchases. During the ~~six~~nine months ended ~~June~~September 30, 2019, capital expenditures were ~~$45~~$79 million.

Off-Balance Sheet Arrangements

At each of ~~June~~September 30, 2019 and December 31, 2018, Activision Blizzard had no significant relationships with unconsolidated entities or financial 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

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that they are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments, and assumptions, and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results, include the following:

•Revenue Recognition;

•Income Taxes;

•Allowances for Returns and Price Protection;

•Software Development Costs;

•Fair Value Estimates (including Business Combinations and Assessment of Impairment of Assets); and

•Share-Based Payments.

During the ~~six~~nine months ended ~~June~~September 30, 2019, there were no significant changes to the above critical accounting policies and estimates. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018, for a more complete discussion of our critical accounting policies and estimates.

Recently Issued Accounting Pronouncements

Below are recently issued accounting pronouncements that were most significant to our accounting policy activities. For a detailed discussion of all relevant recently issued accounting pronouncements, see Note 3 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

Recently Adopted Accounting Pronouncements

Leases

As noted in Note 2 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, we adopted the new lease accounting standard effective January 1, 2019. We elected to apply an optional adoption method, which uses the effective date as the initial date of application on transition with no retrospective adjustments to prior periods. Additionally, we elected to apply the package of transition practical expedients which permitted us to, among other things, (1) not reassess if existing contracts contained leases under the new lease accounting standard, and (2) carry forward our historical lease classifications.

For additional discussion regarding the impact of our adoption of the new lease accounting standard to our condensed consolidated balance sheet, see Note 3 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

Item 3. 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 of foreign 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 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.

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.

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):


	As of June 30, 2019				As of December 31, 2018				As of September 30, 2019				As of December 31, 2018
	Notional amount		Fair value gain (loss)		Notional amount		Fair value gain (loss)		Notional amount		Fair value gain (loss)		Notional amount		Fair value gain (loss)
Foreign Currency:
Buy USD, Sell Euro	$	409	$	11	$	723	$	12	$	310	$	23	$	723	$	12

For the Three Months Ended June 30, For the Six Months Ended June 30, Statement of Operations Classification
2019 2018 2019 2018
Cash Flow Hedges $ 6
$ (4 ) $ 17
$ (14 ) Net revenues



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,					Statement of Operations Classification
	2019		2018		2019		2018			Statement of Operations Classification
Cash Flow Hedges	$	7	$	3	$	24	$	(11	)	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 June 30, 2019					As of December 31, 2018				As of September 30, 2019					As of December 31, 2018
	Notional amount		Fair value gain (loss)			Notional amount		Fair value gain (loss)		Notional amount		Fair value gain (loss)			Notional amount		Fair value gain (loss)
Foreign Currency:
Buy USD, Sell SEK	$	393	$	(4	)	$	—	$	—
Buy USD, Sell EUR	142		3			—		—		$	81	$	5		$	—	$	—
Buy EUR, Sell USD	142		1			—		—		79		(3		)	—		—
Buy USD, Sell SEK										46		2			—		—
Buy SEK, Sell USD										45		(1		)	—		—
Buy USD, Sell GBP	28		1			55		1		13		1			55		1
Buy GBP, Sell USD	28		—			—		—		13		—			—		—

In the absence of hedging activities for the ~~six~~nine months ended ~~June~~September 30, 2019, a hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in a theoretical decline of our net income of approximately ~~$90~~$78 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 our outstanding 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 and must be reinvested at the then-current market rates, interest income on a portfolio consisting of cash, cash equivalents, or short-term securities is more subject to market fluctuations than a portfolio of longer-term securities. Conversely, the fair value of such a portfolio is less sensitive to market fluctuations than a portfolio of longer-term securities. At ~~June~~September 30, 2019, our cash and cash equivalents ~~was~~were comprised primarily of money market funds.

The Company has determined that, based on the composition of our investment portfolio as of ~~June~~September 30, 2019, there was no material interest rate risk exposure to the Company’s consolidated financial condition, results of operations, or liquidity as of that date.

Item 4. 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 Securities Exchange Act of 1934 (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 Securities and Exchange Commission’s rules and forms; and (2) accumulated and communicated to 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 system of 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, has evaluated the effectiveness of our disclosure controls and procedures at ~~June~~September 30, 2019, the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at ~~June~~September 30, 2019, 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 (i) recorded, processed, summarized, and reported on a timely basis, and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated any changes in our internal control over financial reporting that occurred during the fiscal quarter ended ~~June~~September 30, 2019. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at ~~June~~September 30, 2019, 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In December 2018, we received a decision from the Swedish Tax Agency (“STA”) informing us of an audit assessment of a Swedish subsidiary of King for the 2016 tax year (“Initial Decision”). The Initial Decision described the basis for issuing a transfer pricing assessment of approximately 3.5kr billion (approximately $379 million), primarily concerning an alleged intercompany asset transfer. On June 17, 2019, we received a reassessment from the STA (“Reassessment”) which changed the Initial Decision based on a revision of the transfer pricing approach reflected in King’s 2016 Swedish tax return and removal of the alleged intercompany asset transfer that was the basis of the Initial Decision. The STA also, at the same time, reassessed the 2017 tax year on the same transfer pricing basis as 2016. The transfer pricing approach reflected in the Reassessment for both 2016 and 2017 remains subject to further review by taxing authorities in other jurisdictions. In July 2019, the Company made a payment to the STA for the Reassessment for the 2016 and 2017 tax years, which did not result in a significant impact to our condensed consolidated financial statements.

Item 1A. Risk Factors

Various risks associated with our business are described in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2018.

~~Item 5. Other Information~~

On August 5, 2019, Stephen Wereb, age 54, our Chief Accounting Officer, notified us of his decision to retire from the Company, effective August 15, 2019, in order to pursue personal interests. Mr. Wereb has been with the Company for 13 years and his retirement is not the result of any dispute related to accounting policies or internal controls or any other disagreement with the Company.

~~Upon the effectiveness of Mr. Wereb’s retirement, Dennis Durkin will assume Mr. Wereb’s responsibilities as the Company’s principal accounting officer until a successor is named.~~

Mr. Durkin, age 48, 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. He served as our Chief Corporate Officer from May 2017 until January 2019.

Item 6. Exhibits

The exhibits listed on the accompanying Exhibit Index are hereby incorporated by reference into this Quarterly Report on Form 10-Q.

EXHIBIT INDEX



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).

3.2		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).

10.1*		~~Employment Agreement, dated May 22, 2019, between Activision Blizzard, Inc. and Riccardo Zacconi (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K, filed May 24, 2019)~~.

31.1		Certification of Robert A. Kotick pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Dennis Durkin pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Robert A. Kotick pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Dennis Durkin pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).


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

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: ~~August 8,~~November 7, 2019

ACTIVISION BLIZZARD, INC.



/s/ DENNIS DURKIN		~~/s/ STEPHEN WEREB~~
Dennis Durkin		~~Stephen Wereb~~
Chief Financial Officer, ~~and~~		~~Deputy Chief Financial Officer, Chief Accounting Officer,~~
Principal Financial Officer, ofand
	~~and~~ Principal Accounting Officer of
~~Activision Blizzard, Inc.~~		Activision Blizzard, Inc.



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Reconciliation to consolidated net revenues:
Segment net revenues	$	1,151		$	1,329		$	2,341		$	2,657
Revenues from non-reportable segments (1)	59			60			132			118
Net effect from recognition (deferral) of deferred net revenues (2)	189			256			755			838
Elimination of intersegment revenues (3)	(3		)	(4		)	(8		)	(6		)
Consolidated net revenues	$	1,396		$	1,641		$	3,220		$	3,607

Reconciliation to consolidated income before income tax expense:
Segment operating income	$	301		$	386		$	607		$	790
Operating income (loss) from non-reportable segments (1)	7			—			4			(11		)
Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (2)	135			182			576			557
Share-based compensation expense	(38		)	(57		)	(100		)	(111		)
Amortization of intangible assets	(47		)	(77		)	(102		)	(196		)
Restructuring and related costs (4)	(22		)	—			(79		)	—
Consolidated operating income	336			434			906			1,029
Interest and other expense (income), net	(34		)	26			(31		)	54
Consolidated income before income tax expense	$	370		$	408		$	937		$	975