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 September 30, 20192020
OR
☐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.) |
| | | | |
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) (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 | ☐ |
| | | | | | | |
Large Accelerated Filer | ☒ | | Non-accelerated Filer | ☐ | | Accelerated FilerSmaller reporting company | ☐ |
| | | | | | | |
| | | | | | 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 October 31, 201922, 2020 was 768,260,070.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
Table of Contents
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,“aims,” “believes,” “may,” “might,” “expects,” “intends,” “intends as,“seeks,” “anticipates,” “estimate,” “future,” “positioned,” “potential,” “project,” “remain,” “scheduled,” “set to,” “subject to,” “upcoming,” and other similar words and 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, many of which are beyond our control, 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: the ongoing global impact of a novel strain of coronavirus which emerged in December 2019 (“COVID-19”) (including, without limitation, the potential for significant short- and long-term global unemployment and economic weakness and a resulting impact on global discretionary spending; potential strain on the retailers and distributors who sell our physical product to customers; effects on our ability to release our content in a timely manner; the impact of large-scale intervention by the Federal Reserve and other central banks around the world, including the impact on interest rates; and volatility in foreign exchange rates); our ability to consistently deliver popular, high-quality titles in a timely manner;manner, which has been made more difficult as a result of the COVID-19 pandemic; concentration of revenue among a small number of franchises; our ability to satisfy the expectations of consumers with respect to our brands, games, services, and/or business practices; concentrationour ability to attract, retain and motivate skilled personnel; rapid changes in technology and industry standards; competition, including from other forms of revenue among a small numberentertainment; increasing importance of titles;revenues derived from digital distribution channels; risks associated with the retail sales business model; 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; risks associated with transitions to next-generation consoles; 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; our ability to realize the expected financial and operational benefits of, and effectively implement and manage, our restructuring actions; our ability to quickly adjust our cost structure in response to sudden changes in demand; risks and costs associated with legal proceedings; intellectual property claims; 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; the seasonality in the sale of our products; counterparty risks relating to customers, licensees, licensors, and manufacturers; intellectual property claims;manufacturers, which have been magnified as a result of the COVID-19 pandemic; risks associated with our use of open source software; piracy and unauthorized copying of our products; insolvency or business failure of any of our partners, which has been magnified as a result of the COVID-19 pandemic; risks and uncertainties of conducting business outside the United States (“U.S.(the “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; reliance on servers and networks to operate our games and our proprietary online gaming service; 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, 2018.2019, our Quarterly Report on Form 10-Q for the period ended March 31, 2020, and our Quarterly Report on Form 10-Q for the period ended June 30, 2020.
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 September 30, 2019 | | At December 31, 2018 | | At September 30, 2020 | | At December 31, 2019 |
Assets | |
| | |
| Assets | | | |
Current assets: | |
| | |
| Current assets: | | | |
Cash and cash equivalents | $ | 4,939 |
| | $ | 4,225 |
| Cash and cash equivalents | $ | 7,415 | | | $ | 5,794 | |
Accounts receivable, net of allowances of $81 and $190, at September 30, 2019 and December 31, 2018, respectively | 386 |
| | 1,035 |
| |
Inventories, net | 102 |
| | 43 |
| |
| Accounts receivable, net of allowances of $88 and $132, at September 30, 2020 and December 31, 2019, respectively | | Accounts receivable, net of allowances of $88 and $132, at September 30, 2020 and December 31, 2019, respectively | 619 | | | 848 | |
| Software development | 240 |
| | 264 |
| Software development | 398 | | | 322 | |
| Other current assets | 345 |
| | 539 |
| Other current assets | 570 | | | 328 | |
Total current assets | 6,012 |
| | 6,106 |
| Total current assets | 9,002 | | | 7,292 | |
| Software development | 109 |
| | 65 |
| Software development | 145 | | | 54 | |
| Property and equipment, net | 249 |
| | 282 |
| Property and equipment, net | 211 | | | 253 | |
Deferred income taxes, net | 357 |
| | 458 |
| Deferred income taxes, net | 1,287 | | | 1,293 | |
Other assets | 731 |
| | 482 |
| Other assets | 699 | | | 658 | |
Intangible assets, net | 583 |
| | 735 |
| Intangible assets, net | 469 | | | 531 | |
| Goodwill | 9,764 |
| | 9,762 |
| Goodwill | 9,764 | | | 9,764 | |
Total assets | $ | 17,805 |
| | $ | 17,890 |
| Total assets | $ | 21,577 | | | $ | 19,845 | |
| | | | | | | |
Liabilities and Shareholders’ Equity | |
| | |
| Liabilities and Shareholders’ Equity | | | |
Current liabilities: | |
| | |
| Current liabilities: | | | |
Accounts payable | $ | 274 |
| | $ | 253 |
| Accounts payable | $ | 224 | | | $ | 292 | |
Deferred revenues | 695 |
| | 1,493 |
| Deferred revenues | 1,108 | | | 1,375 | |
Accrued expenses and other liabilities | 782 |
| | 896 |
| Accrued expenses and other liabilities | 855 | | | 1,248 | |
| Total current liabilities | 1,751 |
| | 2,642 |
| Total current liabilities | 2,187 | | | 2,915 | |
Long-term debt, net | 2,674 |
| | 2,671 |
| Long-term debt, net | 3,604 | | | 2,675 | |
Deferred income taxes, net | 23 |
| | 18 |
| Deferred income taxes, net | 480 | | | 505 | |
Other liabilities | 1,122 |
| | 1,167 |
| Other liabilities | 924 | | | 945 | |
Total liabilities | 5,570 |
| | 6,498 |
| Total liabilities | 7,195 | | | 7,040 | |
Commitments and contingencies (Note 19) |
|
| |
|
| |
Commitments and contingencies (Note 16) | | Commitments and contingencies (Note 16) | | | |
Shareholders’ equity: | | | | Shareholders’ equity: | |
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 | — |
| | — |
| |
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,201,482,888 and 1,197,436,644 shares issued at September 30, 2020 and December 31, 2019, respectively | | Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,201,482,888 and 1,197,436,644 shares issued at September 30, 2020 and December 31, 2019, respectively | 0 | | | 0 | |
Additional paid-in capital | 11,116 |
| | 10,963 |
| Additional paid-in capital | 11,395 | | | 11,174 | |
Less: Treasury stock, at cost, 428,676,471 shares at September 30, 2019 and December 31, 2018 | (5,563 | ) | | (5,563 | ) | |
Less: Treasury stock, at cost, 428,676,471 shares at September 30, 2020 and December 31, 2019 | | Less: Treasury stock, at cost, 428,676,471 shares at September 30, 2020 and December 31, 2019 | (5,563) | | | (5,563) | |
Retained earnings | 7,289 |
| | 6,593 |
| Retained earnings | 9,183 | | | 7,813 | |
Accumulated other comprehensive loss | (607 | ) | | (601 | ) | Accumulated other comprehensive loss | (633) | | | (619) | |
Total shareholders’ equity | 12,235 |
| | 11,392 |
| Total shareholders’ equity | 14,382 | | | 12,805 | |
Total liabilities and shareholders’ equity | $ | 17,805 |
| | $ | 17,890 |
| Total liabilities and shareholders’ equity | $ | 21,577 | | | $ | 19,845 | |
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 September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Net revenues | |
| | |
| | | | | Net revenues | | | | | | | |
Product sales | $ | 260 |
| | $ | 263 |
| | $ | 1,276 |
| | $ | 1,447 |
| Product sales | $ | 408 | | | $ | 260 | | | $ | 1,484 | | | $ | 1,276 | |
Subscription, licensing, and other revenues | 1,022 |
| | 1,249 |
| | 3,227 |
| | 3,672 |
| Subscription, licensing, and other revenues | 1,546 | | | 1,022 | | | 4,190 | | | 3,227 | |
Total net revenues | 1,282 |
| | 1,512 |
| | 4,503 |
| | 5,119 |
| Total net revenues | 1,954 | | | 1,282 | | | 5,674 | | | 4,503 | |
| | | | | | | | |
Costs and expenses | |
| | |
| | | | |
| Costs and expenses | | | | | |
Cost of revenues—product sales: | | | | | | | | Cost of revenues—product sales: | |
Product costs | 137 |
| | 127 |
| | 388 |
| | 416 |
| Product costs | 101 | | | 137 | | | 357 | | | 388 | |
Software royalties, amortization, and intellectual property licenses | 9 |
| | 20 |
| | 171 |
| | 214 |
| Software royalties, amortization, and intellectual property licenses | 37 | | | 9 | | | 152 | | | 171 | |
Cost of revenues—subscription, licensing, and other revenues: | | | | | | | | Cost of revenues—subscription, licensing, and other revenues: | |
Game operations and distribution costs | 246 |
| | 257 |
| | 714 |
| | 777 |
| Game operations and distribution costs | 290 | | | 246 | | | 819 | | | 714 | |
Software royalties, amortization, and intellectual property licenses | 50 |
| | 109 |
| | 164 |
| | 278 |
| Software royalties, amortization, and intellectual property licenses | 41 | | | 50 | | | 115 | | | 164 | |
Product development | 210 |
| | 263 |
| | 702 |
| | 776 |
| Product development | 274 | | | 210 | | | 802 | | | 702 | |
Sales and marketing | 182 |
| | 263 |
| | 580 |
| | 741 |
| Sales and marketing | 238 | | | 182 | | | 722 | | | 580 | |
General and administrative | 177 |
| | 208 |
| | 527 |
| | 623 |
| General and administrative | 186 | | | 177 | | | 529 | | | 527 | |
Restructuring and related costs | 24 |
| | — |
| | 104 |
| | — |
| Restructuring and related costs | 9 | | | 24 | | | 39 | | | 104 | |
Total costs and expenses | 1,035 |
| | 1,247 |
| | 3,350 |
| | 3,825 |
| Total costs and expenses | 1,176 | | | 1,035 | | | 3,535 | | | 3,350 | |
| | | | | | | | | | | | | | | |
Operating income | 247 |
| | 265 |
| | 1,153 |
| | 1,294 |
| Operating income | 778 | | | 247 | | | 2,139 | | | 1,153 | |
Interest and other expense (income), net (Note 15) | (2 | ) | | 13 |
| | (33 | ) | | 67 |
| |
| Interest and other expense (income), net (Note 12) | | Interest and other expense (income), net (Note 12) | 25 | | | (2) | | | 55 | | | (33) | |
Loss on extinguishment of debt | — |
| | 40 |
| | — |
| | 40 |
| Loss on extinguishment of debt | 31 | | | 0 | | | 31 | | | 0 | |
Income before income tax expense (benefit) | 249 |
| | 212 |
| | 1,186 |
| | 1,187 |
| |
Income tax expense (benefit) | 45 |
| | (48 | ) | | 208 |
| | 25 |
| |
Income before income tax expense | | Income before income tax expense | 722 | | | 249 | | | 2,053 | | | 1,186 | |
| Income tax expense | | Income tax expense | 118 | | | 45 | | | 365 | | | 208 | |
| Net income | $ | 204 |
| | $ | 260 |
| | $ | 978 |
| | $ | 1,162 |
| Net income | $ | 604 | | | $ | 204 | | | $ | 1,688 | | | $ | 978 | |
| | | | | | | | | | | | | | | |
Earnings per common share | |
| | |
| | | | |
| Earnings per common share | | | | | |
Basic | $ | 0.27 |
| | $ | 0.34 |
| | $ | 1.28 |
| | $ | 1.53 |
| Basic | $ | 0.78 | | | $ | 0.27 | | | $ | 2.19 | | | $ | 1.28 | |
Diluted | $ | 0.26 |
| | $ | 0.34 |
| | $ | 1.27 |
| | $ | 1.51 |
| Diluted | $ | 0.78 | | | $ | 0.26 | | | $ | 2.17 | | | $ | 1.27 | |
| | | | | | | | |
Weighted-average number of shares outstanding | |
| | |
| | | | |
| Weighted-average number of shares outstanding | | | | | |
Basic | 767 |
| | 763 |
| | 766 |
| | 761 |
| Basic | 772 | | | 767 | | | 771 | | | 766 | |
Diluted | 771 |
| | 771 |
| | 770 |
| | 771 |
| Diluted | 779 | | | 771 | | | 777 | | | 770 | |
|
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 September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Net income | $ | 204 |
| | $ | 260 |
| | $ | 978 |
| | $ | 1,162 |
| Net income | $ | 604 | | | $ | 204 | | | $ | 1,688 | | | $ | 978 | |
| | | | | | | | |
Other comprehensive income (loss): | | | | | | | | Other comprehensive income (loss): | |
Foreign currency translation adjustment, net of tax | (6 | ) | | 3 |
| | (5 | ) | | (7 | ) | Foreign currency translation adjustment, net of tax | 21 | | | (6) | | | 11 | | | (5) | |
Unrealized gains (losses) on forward contracts designated as hedges, net of tax | 10 |
| | (11 | ) | | 4 |
| | 25 |
| Unrealized gains (losses) on forward contracts designated as hedges, net of tax | (18) | | | 10 | | | (26) | | | 4 | |
Unrealized gains (losses) on investments, net of tax | (3 | ) | | — |
| | (5 | ) | | 4 |
| Unrealized gains (losses) on investments, net of tax | (2) | | | (3) | | | 1 | | | (5) | |
| Total other comprehensive income (loss) | $ | 1 |
| | $ | (8 | ) | | $ | (6 | ) | | $ | 22 |
| Total other comprehensive income (loss) | $ | 1 | | | $ | 1 | | | $ | (14) | | | $ | (6) | |
Comprehensive income | $ | 205 |
| | $ | 252 |
| | $ | 972 |
| | $ | 1,184 |
| Comprehensive income | $ | 605 | | | $ | 205 | | | $ | 1,674 | | | $ | 972 | |
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 Nine Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2019 | | 2018 | | 2020 | | 2019 |
Cash flows from operating activities: | |
| | |
| Cash flows from operating activities: | | | |
Net income | $ | 978 |
| | $ | 1,162 |
| Net income | $ | 1,688 | | | $ | 978 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
Deferred income taxes | 100 |
| | 175 |
| Deferred income taxes | (13) | | | 100 | |
| Depreciation and amortization | 246 |
| | 385 |
| Depreciation and amortization | 152 | | | 246 | |
Non-cash operating lease cost | 49 |
| | — |
| Non-cash operating lease cost | 48 | | | 49 | |
Amortization of capitalized software development costs and intellectual property licenses (1) | 163 |
| | 238 |
| Amortization of capitalized software development costs and intellectual property licenses (1) | 141 | | | 163 | |
Loss on extinguishment of debt | — |
| | 40 |
| |
| Share-based compensation expense (2) | 127 |
| | 164 |
| Share-based compensation expense (2) | 138 | | | 127 | |
Unrealized gain on equity investment (Note 8) | (38 | ) | | — |
| |
| Other | 47 |
| | 20 |
| Other | 39 | | | 9 | |
Changes in operating assets and liabilities: | | | |
| Changes in operating assets and liabilities: | | |
Accounts receivable, net | 635 |
| | 290 |
| Accounts receivable, net | 225 | | | 635 | |
Inventories | (65 | ) | | (127 | ) | |
| Software development and intellectual property licenses | (186 | ) | | (305 | ) | Software development and intellectual property licenses | (300) | | | (186) | |
Other assets | 17 |
| | (15 | ) | Other assets | (206) | | | (48) | |
Deferred revenues | (809 | ) | | (710 | ) | Deferred revenues | (322) | | | (809) | |
Accounts payable | 22 |
| | (14 | ) | Accounts payable | (71) | | | 22 | |
Accrued expenses and other liabilities | (373 | ) | | (512 | ) | Accrued expenses and other liabilities | (407) | | | (373) | |
Net cash provided by operating activities | 913 |
| | 791 |
| Net cash provided by operating activities | 1,112 | | | 913 | |
| | | | | | | |
Cash flows from investing activities: | | | |
| Cash flows from investing activities: | | |
Proceeds from maturities of available-for-sale investments | 153 |
| | — |
| Proceeds from maturities of available-for-sale investments | 36 | | | 153 | |
Purchases of available-for-sale investments | — |
| | (59 | ) | Purchases of available-for-sale investments | (158) | | | 0 | |
| Capital expenditures | (79 | ) | | (97 | ) | Capital expenditures | (56) | | | (79) | |
Other investing activities | 5 |
| | (4 | ) | Other investing activities | 0 | | | 5 | |
Net cash provided by (used in) investing activities | 79 |
| | (160 | ) | Net cash provided by (used in) investing activities | (178) | | | 79 | |
| | | | | | | |
Cash flows from financing activities: | | | |
| Cash flows from financing activities: | | |
Proceeds from issuance of common stock to employees | 87 |
| | 91 |
| Proceeds from issuance of common stock to employees | 114 | | | 87 | |
Tax payment related to net share settlements on restricted stock units | (55 | ) | | (85 | ) | Tax payment related to net share settlements on restricted stock units | (41) | | | (55) | |
| Dividends paid | (283 | ) | | (259 | ) | Dividends paid | (316) | | | (283) | |
Proceeds from issuance of debt, net of discounts | | Proceeds from issuance of debt, net of discounts | 1,994 | | | 0 | |
Repayment of long-term debt | — |
| | (1,740 | ) | Repayment of long-term debt | (1,050) | | | 0 | |
Premium payment for early redemption of note | — |
| | (25 | ) | |
Other financing activities | — |
| | (2 | ) | |
Net cash used in financing activities | (251 | ) | | (2,020 | ) | |
Payment of financing costs | | Payment of financing costs | (20) | | | 0 | |
Premium payment for early redemption of notes | | Premium payment for early redemption of notes | (28) | | | 0 | |
| Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 653 | | | (251) | |
Effect of foreign exchange rate changes on cash and cash equivalents | (24 | ) | | (15 | ) | Effect of foreign exchange rate changes on cash and cash equivalents | 32 | | | (24) | |
Net increase (decrease) in cash and cash equivalents and restricted cash | 717 |
| | (1,404 | ) | |
Net increase in cash and cash equivalents and restricted cash | | Net increase in cash and cash equivalents and restricted cash | 1,619 | | | 717 | |
Cash and cash equivalents and restricted cash at beginning of period | 4,229 |
| | 4,720 |
| Cash and cash equivalents and restricted cash at beginning of period | 5,798 | | | 4,229 | |
Cash and cash equivalents and restricted cash at end of period | $ | 4,946 |
| | $ | 3,316 |
| Cash and cash equivalents and restricted cash at end of period | $ | 7,417 | | | $ | 4,946 | |
| |
(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. |
(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 Nine Months Ended September 30, 2020
(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 |
| Shares | | Amount | | Shares | | Amount | | | | |
Balance at December 31, 2019 | 1,197 | | | $ | 0 | | | (429) | | | $ | (5,563) | | | $ | 11,174 | | | $ | 7,813 | | | $ | (619) | | | $ | 12,805 | |
Cumulative impact from adoption of new credit loss standard | — | | | — | | | — | | | — | | | — | | | (3) | | | — | | | (3) | |
Components of comprehensive income: | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 505 | | | — | | | 505 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (9) | | | (9) | |
Issuance of common stock pursuant to employee stock options | 1 | | | — | | | — | | | — | | | 27 | | | — | | | — | | | 27 | |
Issuance of common stock pursuant to restricted stock units | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | 0 | |
Restricted stock surrendered for employees’ tax liability | — | | | — | | | — | | | — | | | (31) | | | — | | | — | | | (31) | |
Share-based compensation expense related to employee stock options and restricted stock units | — | | | — | | | — | | | — | | | 43 | | | — | | | — | | | 43 | |
Dividends ($0.41 per common share) | — | | | — | | | — | | | — | | | — | | | (316) | | | — | | | (316) | |
Balance at March 31, 2020 | 1,199 | | | $ | 0 | | | (429) | | | $ | (5,563) | | | $ | 11,213 | | | $ | 7,999 | | | $ | (628) | | | $ | 13,021 | |
Components of comprehensive income: | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 580 | | | — | | | 580 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | |
Issuance of common stock pursuant to employee stock options | 1 | | | — | | | — | | | — | | | 44 | | | — | | | — | | | 44 | |
Restricted stock surrendered for employees’ tax liability | — | | | — | | | — | | | — | | | (3) | | | — | | | — | | | (3) | |
Share-based compensation expense related to employee stock options and restricted stock units | — | | | — | | | — | | | — | | | 46 | | | — | | | — | | | 46 | |
Balance at June 30, 2020 | 1,200 | | | $ | 0 | | | (429) | | | $ | (5,563) | | | $ | 11,300 | | | $ | 8,579 | | | $ | (634) | | | $ | 13,682 | |
Components of comprehensive income: | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 604 | | | — | | | 604 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
Issuance of common stock pursuant to employee stock options | 1 | | | — | | | — | | | — | | | 43 | | | — | | | — | | | 43 | |
| | | | | | | | | | | | | | | |
Restricted stock surrendered for employees’ tax liability | — | | | — | | | — | | | — | | | (6) | | | — | | | — | | | (6) | |
Share-based compensation expense related to employee stock options and restricted stock units | — | | | — | | | — | | | — | | | 58 | | | — | | | — | | | 58 | |
| | | | | | | | | | | | | | | |
Balance at September 30, 2020 | 1,201 | | | $ | 0 | | | (429) | | | $ | (5,563) | | | $ | 11,395 | | | $ | 9,183 | | | $ | (633) | | | $ | 14,382 | |
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 Nine Months Ended 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 |
| Shares | | Amount | | Shares | | Amount | | | | |
Balance at December 31, 2018 | 1,192 |
| | $ | — |
| | (429 | ) | | $ | (5,563 | ) | | $ | 10,963 |
| | $ | 6,593 |
| | $ | (601 | ) | | $ | 11,392 |
|
Components of comprehensive income: | | | | | | | | | | | | | | | |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 447 |
| | — |
| | 447 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
Issuance of common stock pursuant to employee stock options | 2 |
| | — |
| | — |
| | — |
| | 30 |
| | — |
| | — |
| | 30 |
|
Issuance of common stock pursuant to restricted stock units | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Restricted stock surrendered for employees’ tax liability | (1 | ) | | — |
| | — |
| | — |
| | (45 | ) | | — |
| | — |
| | (45 | ) |
Share-based compensation expense related to employee stock options and restricted stock units | — |
| | — |
| | — |
| | — |
| | 56 |
| | — |
| | — |
| | 56 |
|
Dividends ($0.37 per common share) | — |
| | — |
| | — |
| | — |
| | — |
| | (283 | ) | | — |
| | (283 | ) |
Balance at March 31, 2019 | 1,195 |
| | $ | — |
| | (429 | ) | | $ | (5,563 | ) | | $ | 11,004 |
| | $ | 6,757 |
| | $ | (602 | ) | | $ | 11,596 |
|
Components of comprehensive income: | | | | | | | | | | | | | | | |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 328 |
| | — |
| | 328 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) |
Issuance of common stock pursuant to employee stock options | 1 |
| | — |
| | — |
| | — |
| | 28 |
| | — |
| | — |
| | 28 |
|
Restricted stock surrendered for employees’ tax liability | — |
| | — |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) |
Share-based compensation expense related to employee stock options and restricted stock units | — |
| | — |
| | — |
| | — |
| | 35 |
| | — |
| | — |
| | 35 |
|
Balance at June 30, 2019 | 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 Nine Months Ended 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 | | Amount | | Shares | | Amount | | |
Balance at December 31, 2017 | 1,186 |
| | $ | — |
| | (429 | ) | | $ | (5,563 | ) | | $ | 10,747 |
| | $ | 4,916 |
| | $ | (638 | ) | | $ | 9,462 |
| |
Cumulative impact from adoption of new revenue accounting standard | — |
| | — |
| | — |
| | — |
| | — |
| | 88 |
| | 3 |
| | 91 |
| |
Balance at December 31, 2018 | | Balance at December 31, 2018 | 1,192 | | | $ | 0 | | | (429) | | | $ | (5,563) | | | $ | 10,963 | | | $ | 6,593 | | | $ | (601) | | | $ | 11,392 | |
Components of comprehensive income: | | | | | | | | | | | | | | | | Components of comprehensive income: | |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 500 |
| | — |
| | 500 |
| Net income | — | | | — | | | — | | | — | | | — | | | 447 | | | — | | | 447 | |
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (14 | ) | | (14 | ) | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
Issuance of common stock pursuant to employee stock options | 3 |
| | — |
| | — |
| | — |
| | 47 |
| | — |
| | — |
| | 47 |
| Issuance of common stock pursuant to employee stock options | 2 | | | — | | | — | | | — | | | 30 | | | — | | | — | | | 30 | |
Issuance of common stock pursuant to restricted stock units | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Issuance of common stock pursuant to restricted stock units | 2 | | | — | | | — | | | — | | | — | | | — | | | �� | | | 0 | |
Restricted stock surrendered for employees’ tax liability | (1 | ) | | — |
| | — |
| | — |
| | (64 | ) | | — |
| | — |
| | (64 | ) | Restricted stock surrendered for employees’ tax liability | (1) | | | — | | | — | | | — | | | (45) | | | — | | | — | | | (45) | |
Share-based compensation expense related to employee stock options and restricted stock units | — |
| | — |
| | — |
| | — |
| | 56 |
| | — |
| | — |
| | 56 |
| Share-based compensation expense related to employee stock options and restricted stock units | — | | | — | | | — | | | — | | | 56 | | | — | | | — | | | 56 | |
Dividends ($0.34 per common share) | — |
| | — |
| | — |
| | — |
| | — |
| | (259 | ) | | — |
| | (259 | ) | |
Balance at March 31, 2018 | 1,190 |
| | $ | — |
| | (429 | ) | | $ | (5,563 | ) | | $ | 10,786 |
| | $ | 5,245 |
| | $ | (649 | ) | | $ | 9,819 |
| |
Dividends ($0.37 per common share) | | Dividends ($0.37 per common share) | — | | | — | | | — | | | — | | | — | | | (283) | | | — | | | (283) | |
Balance at March 31, 2019 | | Balance at March 31, 2019 | 1,195 | | | $ | 0 | | | (429) | | | $ | (5,563) | | | $ | 11,004 | | | $ | 6,757 | | | $ | (602) | | | $ | 11,596 | |
Components of comprehensive income: | | Components of comprehensive income: | | | | | | | | | | | | | | | |
Net income | | Net income | — | | | — | | | — | | | — | | | — | | | 328 | | | — | | | 328 | |
Other comprehensive loss | | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | |
Issuance of common stock pursuant to employee stock options | | Issuance of common stock pursuant to employee stock options | 1 | | | — | | | — | | | — | | | 28 | | | — | | | — | | | 28 | |
| Restricted stock surrendered for employees’ tax liability | | Restricted stock surrendered for employees’ tax liability | — | | | — | | | — | | | — | | | (4) | | | — | | | — | | | (4) | |
Share-based compensation expense related to employee stock options and restricted stock units | | Share-based compensation expense related to employee stock options and restricted stock units | — | | | — | | | — | | | — | | | 35 | | | — | | | — | | | 35 | |
Balance at June 30, 2019 | | Balance at June 30, 2019 | 1,196 | | | $ | 0 | | | (429) | | | $ | (5,563) | | | $ | 11,063 | | | $ | 7,085 | | | $ | (608) | | | $ | 11,977 | |
Components of comprehensive income: | | | | | | | | | | | | | | | | Components of comprehensive income: | | | | | | | | | | | | | | | |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 402 |
| | — |
| | 402 |
| Net income | — | | | — | | | — | | | — | | | — | | | 204 | | | — | | | 204 | |
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 44 |
| | 44 |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
Issuance of common stock pursuant to employee stock options | 1 |
| | — |
| | — |
| | — |
| | 30 |
| | — |
| | — |
| | 30 |
| Issuance of common stock pursuant to employee stock options | 1 | | | — | | | — | | | — | | | 29 | | | — | | | — | | | 29 | |
Restricted stock surrendered for employees’ tax liability | — |
| | — |
| | — |
| | — |
| | (10 | ) | | — |
| | — |
| | (10 | ) | Restricted stock surrendered for employees’ tax liability | — | | | — | | | — | | | — | | | (8) | | | — | | | — | | | (8) | |
Share-based compensation expense related to employee stock options and restricted stock units | — |
| | — |
| | — |
| | — |
| | 61 |
| | — |
| | — |
| | 61 |
| Share-based compensation expense related to employee stock options and restricted stock units | — | | | — | | | — | | | — | | | 32 | | | — | | | — | | | 32 | |
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 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8 | ) | | (8 | ) | |
Issuance of common stock pursuant to employee stock options | 1 |
| | — |
| | — |
| | — |
| | 16 |
| | — |
| | — |
| | 16 |
| |
Restricted stock surrendered for employees’ tax liability | — |
| | — |
| | — |
| | — |
| | (12 | ) | | — |
| | — |
| | (12 | ) | |
Share-based compensation expense related to employee stock options and restricted stock units | — |
| | — |
| | — |
| | — |
| | 57 |
| | — |
| | — |
| | 57 |
| |
Balance at September 30, 2018 | 1,192 |
| | $ | — |
| | (429 | ) | | $ | (5,563 | ) | | $ | 10,928 |
| | $ | 5,907 |
| | $ | (613 | ) | | $ | 10,659 |
| |
Balance at September 30, 2019 | | Balance at September 30, 2019 | 1,197 | | | $ | 0 | | | (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
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 onoffer digital advertising within our intellectual property.content. 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.,S.A, and Vivendi Games, Inc., then an indirect wholly-owned subsidiary of Vivendi S.A.pursuant to which we acquired Blizzard Entertainment, Inc. (“Blizzard”), we were renamed Activision Blizzard, Inc. On February 23, 2016, we acquired King Digital Entertainment plc ("King") by purchasing all of its outstanding shares.
Our Segments
Based upon our organizational structure, we conduct our business through 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 also includes the activities of the Call of Duty LeagueTM, a global professional esports league with city-based teams.
Activision’s key product franchise is Call of Duty®, a first-person shooteraction title for the console, PC, and PCmobile 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,subscription, 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 LeagueTM, the first majora 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.teams.
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 shooteraction title 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’s Android and Apple’s iOS.platform. 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:franchise is Candy Crush™, which features “match three” games; Farm Heroes™, which also features “match three” games;games for the mobile and Bubble Witch™, which features “bubble shooter” games.PC platforms.
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
|
including 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, 2018.2019.
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. Generally, making these estimates and developing our assumptions requires consideration of forecasted information, which, in context of the COVID-19 pandemic, involves additional uncertainty. While there was no material impact to our estimates in the current period, in future periods, facts and circumstances (including, without limitation, the impact of the ongoing global COVID-19 pandemic) could change and impact our estimates. Additionally, actual results could differ from these estimates and assumptions. 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,Certain reclassifications have been made to provide additional evidence relativeprior-year amounts to certain estimates or to identify matters that require additional disclosures.
During the three months ended March 31, 2019, we identified an error principally relatedconform 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.current period presentation.
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 September 30, |
| 2019 | | 2018 |
Beginning restricted cash | $ | 4 |
| | $ | 7 |
|
Ending restricted cash | 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 do not currently expect this new accounting guidance to have an impact on our financial statements upon adoption.
Cloud Computing Arrangements
In August 2018, the FASBFinancial Accounting Standards Board (“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. TheWe adopted the new standard is effective for fiscal years beginning after December 15, 2019,under a prospective approach during the first quarter of 2020 and canit did not have a material impact on our condensed consolidated financial statements.
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 applied retrospectivelyrequired to perform its annual or prospectively. Early adoption is permitted. We are evaluatinginterim goodwill impairment test by (1) comparing the impact,fair value of a reporting unit, as determined in Step 1 from the goodwill impairment test, with its carrying amount and (2) recognizing 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 adopting thisgoodwill allocated to the reporting unit. We adopted the new accounting guidancestandard under a prospective approach during the first quarter of 2020 and it did not have a material impact on our condensed consolidated 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 ana methodology that reflects a current expected losscredit losses 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. TheWe adopted the new standard is effective for fiscal years beginning after December 15, 2019, and will be applied onunder a modified retrospective basis, with the cumulative effect of adoption recorded as an adjustment to retained earnings. earnings during the first quarter of 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued new guidance which is intended to simplify various aspects of accounting for income taxes by removing certain exceptions to the general principles in Topic 740 for recognizing deferred taxes for investments, performing an intraperiod allocation and calculating income taxes in interim periods. The amendment also clarifies and amends certain areas of existing guidance to reduce complexity and improve consistency in the application of Topic 740. The new standard is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. Generally, the topics must be applied prospectively upon adoption, with the exception of certain topics which are required to be applied on a retrospective or modified retrospective basis. 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.statements.
4.Inventories, Net
Inventories, net, consist of the following (amounts in millions):
|
| | | | | | | |
| At September 30, 2019 | | At December 31, 2018 |
Finished goods | $ | 82 |
| | $ | 40 |
|
Purchased parts and components | 20 |
| | 3 |
|
Inventories, net | $ | 102 |
| | $ | 43 |
|
At September 30, 2019 and December 31, 2018, inventory reserves were $13 million and $22 million, respectively.
5.3. Software Development and Intellectual Property Licenses
The following table summarizes the components of our capitalized software development costs (amounts in millions):
|
| | | | | | | |
| At September 30, 2019 | | At December 31, 2018 |
Internally-developed software costs | $ | 325 |
| | $ | 291 |
|
Payments made to third-party software developers | 24 |
| | 38 |
|
Total software development costs | $ | 349 |
| | $ | 329 |
|
| | | | | | | | | | | |
| At September 30, 2020 | | At December 31, 2019 |
Internally-developed software costs | $ | 510 | | | $ | 345 | |
Payments made to third-party software developers | 33 | | | 31 | |
Total software development costs | $ | 543 | | | $ | 376 | |
| | | |
| | | |
As of both September 30, 20192020 and December 31, 2018,2019, 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 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Amortization of capitalized software development costs and intellectual property licenses | $ | 37 | | | $ | 11 | | | $ | 149 | | | $ | 175 | |
| | | | | | | |
6.4. Intangible Assets, Net
Intangible assets, net, consist of the following (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2020 |
| Estimated useful lives | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Acquired definite-lived intangible assets: | | | | | | | | | |
Internally-developed franchises | 3 | - | 11 years | | $ | 1,154 | | | $ | (1,139) | | | $ | 15 | |
Developed software | 2 | - | 5 years | | 601 | | | (600) | | | 1 | |
Trade names | 7 years | | 54 | | | (36) | | | 18 | |
Other | 1 | - | 10 years | | 19 | | | (17) | | | 2 | |
Total definite-lived intangible assets | | | | | $ | 1,828 | | | $ | (1,792) | | | $ | 36 | |
| | | | | | | | | |
Acquired indefinite-lived intangible assets: | | | | | | | | | |
Activision trademark | Indefinite | | | | | | 386 | |
Acquired trade names | Indefinite | | | | | | 47 | |
Total indefinite-lived intangible assets | | | | | | | | | $ | 433 | |
Total intangible assets, net | | | | | | | | | $ | 469 | |
|
| | | | | | | | | | | | | | | |
| At September 30, 2019 |
| Estimated useful lives | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Acquired definite-lived intangible assets: | | | | | |
| | |
| | |
|
Internally-developed franchises | 3 | - | 11 years | | $ | 1,154 |
| | $ | (1,086 | ) | | $ | 68 |
|
Developed software | 2 | - | 5 years | | 601 |
| | (548 | ) | | 53 |
|
Trade names | 7 | - | 10 years | | 54 |
| | (28 | ) | | 26 |
|
Other | 1 | - | 15 years | | 19 |
| | (16 | ) | | 3 |
|
Total definite-lived intangible assets (1) | | | | | $ | 1,828 |
| | $ | (1,678 | ) | | $ | 150 |
|
| | | | | | | | | |
Acquired indefinite-lived intangible assets: | | | | | |
| | |
| | |
|
Activision trademark | Indefinite | | |
| | |
| | 386 |
|
Acquired trade names | Indefinite | | |
| | |
| | 47 |
|
Total indefinite-lived intangible assets | | | | | |
| | |
| | $ | 433 |
|
Total intangible assets, net | | | | | | | | | $ | 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2019 |
| Estimated useful lives | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Acquired definite-lived intangible assets: | | | | | | | | | |
Internally-developed franchises | 3 | - | 11 years | | $ | 1,154 | | | $ | (1,105) | | | $ | 49 | |
Developed software | 2 | - | 5 years | | 601 | | | (579) | | | 22 | |
Trade names | 7 | - | 10 years | | 54 | | | (30) | | | 24 | |
Other | 1 | - | 15 years | | 19 | | | (16) | | | 3 | |
Total definite-lived intangible assets | | | | | $ | 1,828 | | | $ | (1,730) | | | $ | 98 | |
| | | | | | | | | |
Acquired indefinite-lived intangible assets: | | | | | | | | | |
Activision trademark | Indefinite | | | | | | 386 | |
Acquired trade names | Indefinite | | | | | | 47 | |
Total indefinite-lived intangible assets | | | | | | | | | $ | 433 | |
Total intangible assets, net | | | | | | | | | $ | 531 | |
Amortization expense of our intangible assets was $16 million and $62 million for the three and nine months ended September 30, 2020, respectively. Amortization expense of our intangible assets was $50 million and $152 million for the three and nine months ended September 30, 2019, respectively. Amortization expense of our intangible assets was $84 million and $280 million for the three and nine months ended September 30, 2018, respectively.
At September 30, 2019,2020, future amortization of definite-lived intangible assets is estimated as follows (amounts in millions):
| | | | | |
For the years ending December 31, | |
2020 (remaining three months) | $ | 17 | |
2021 | 10 | |
2022 | 7 | |
2023 | 1 | |
2024 | 0 | |
Thereafter | 1 | |
Total | $ | 36 | |
|
| | | |
For the years ending December 31, | |
2019 (remaining three months) | $ | 52 |
|
2020 | 74 |
|
2021 | 12 |
|
2022 | 7 |
|
2023 | 2 |
|
Thereafter | 3 |
|
Total | $ | 150 |
|
7.5. Goodwill
The changes in the carrying amount of goodwill by reportable segment areat both September 30, 2020 and December 31, 2019 was as follows (amounts in millions):
|
| | | | | | | | | | | | | | | |
| Activision | | Blizzard | | King | | Total |
Balance at December 31, 2018 | $ | 6,897 |
| | $ | 190 |
| | $ | 2,675 |
| | $ | 9,762 |
|
Other | 1 |
| | — |
| | 1 |
| | 2 |
|
Balance at September 30, 2019 | $ | 6,898 |
| | $ | 190 |
| | $ | 2,676 |
| | $ | 9,764 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Activision | | Blizzard | | King | | Total |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Goodwill | $ | 6,898 | | | $ | 190 | | | $ | 2,676 | | | $ | 9,764 | |
8.
6. 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 September 30, 2019 Using | | |
| 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 | $ | 4,616 |
| | $ | 4,616 |
| | $ | — |
| | $ | — |
| | Cash and cash equivalents |
Foreign government treasury bills | 36 |
| | 36 |
| | — |
| | — |
| | Cash and cash equivalents |
Foreign currency forward contracts designated as hedges | 23 |
| | — |
| | 23 |
| | — |
| | Other current assets |
Foreign currency forward contracts not designated as hedges | 8 |
| | — |
| | 8 |
| | — |
| | Other current assets |
Total recurring fair value measurements | $ | 4,683 |
| | $ | 4,652 |
| | $ | 31 |
| | $ | — |
| | |
| | | | | | | | | |
Financial Liabilities: | | | | | | | | | |
Foreign currency forward contracts not designated as hedges | $ | (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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at September 30, 2020 Using | | |
| As of September 30, 2020 | | 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 | $ | 7,121 | | | $ | 7,121 | | | $ | 0 | | | $ | 0 | | | Cash and cash equivalents |
Foreign government treasury bills | 33 | | | 33 | | | 0 | | | 0 | | | Cash and cash equivalents |
U.S. treasuries and government agency securities | 187 | | | 187 | | | 0 | | | 0 | | | Other current assets |
| | | | | | | | | |
| | | | | | | | | |
Total recurring fair value measurements | $ | 7,341 | | | $ | 7,341 | | | $ | 0 | | | $ | 0 | | | |
| | | | | | | | | |
Financial Liabilities: | | | | | | | | | |
Foreign currency forward contracts not designated as hedges | $ | (1) | | | $ | 0 | | | $ | (1) | | | $ | 0 | | | Accrued expenses and other liabilities |
Foreign currency forward contracts designated as hedges | $ | (18) | | | $ | 0 | | | $ | (18) | | | $ | 0 | | | Accrued expenses and other liabilities |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2019 Using | | |
| As of December 31, 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 | $ | 5,320 | | | $ | 5,320 | | | $ | 0 | | | $ | 0 | | | Cash and cash equivalents |
Foreign government treasury bills | 37 | | | 37 | | | 0 | | | 0 | | | Cash and cash equivalents |
U.S. treasuries and government agency securities | 65 | | | 65 | | | 0 | | | 0 | | | Other current assets |
| | | | | | | | | |
| | | | | | | | | |
Total recurring fair value measurements | $ | 5,422 | | | $ | 5,422 | | | $ | 0 | | | $ | 0 | | | |
| | | | | | | | | |
Financial Liabilities: | | | | | | | | | |
Foreign currency forward contracts not designated as hedges | $ | (2) | | | $ | 0 | | | $ | (2) | | | $ | 0 | | | Accrued expenses and other liabilities |
Foreign currency forward contracts designated as hedges | $ | (2) | | | $ | 0 | | | $ | (2) | | | $ | 0 | | | 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, all of which have remaining maturities of 13 months or less as of September 30, 2020, are as follows (amounts in millions):
|
| | | | | | | | | | | | | |
| As of September 30, 2019 | | As of December 31, 2018 |
| Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
Foreign Currency: | | | | | |
Buy USD, Sell Euro | $ | 310 |
| $ | 23 |
| | $ | 723 |
| $ | 12 |
|
| | | | | | | | | | | | | | | | | |
| As of September 30, 2020 | | As of December 31, 2019 |
| Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
Foreign Currency: | | | | | |
Buy USD, Sell Euro | $ | 608 | | $ | (18) | | | $ | 350 | | $ | (2) | |
At September 30, 2019, our Cash Flow Hedges have remaining maturities of three months or less. Additionally, $2 million of net realized but unrecognized gains are recorded within “Accumulated other comprehensive income (loss)” at 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 September 30, | | For the Nine Months Ended September 30, | | Statement of Operations Classification |
| 2019 | 2018 | | 2019 | 2018 | |
Cash Flow Hedges | $ | 7 |
| $ | 3 |
| | $ | 24 |
| $ | (11 | ) | | Net revenues |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | Statement of Operations Classification |
| 2020 | 2019 | | 2020 | 2019 | |
Cash Flow Hedges | $ | (5) | | $ | 7 | | | $ | 7 | | $ | 24 | | | 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 September 30, 2019 | | As of December 31, 2018 |
| Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
Foreign Currency: |
|
| |
|
|
Buy USD, Sell EUR | $ | 81 |
| $ | 5 |
| | $ | — |
| $ | — |
|
Buy EUR, Sell USD | 79 |
| (3 | ) | | — |
| — |
|
Buy USD, Sell SEK | 46 |
| 2 |
| | — |
| — |
|
Buy SEK, Sell USD | 45 |
| (1 | ) | | — |
| — |
|
Buy USD, Sell GBP | 13 |
| 1 |
| | 55 |
| 1 |
|
Buy GBP, Sell USD | 13 |
| — |
| | — |
| — |
|
| | | | | | | | | | | | | | | | | |
| As of September 30, 2020 | | As of December 31, 2019 |
| Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
Foreign Currency: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Buy USD, Sell GBP | $ | 61 | | $ | (1) | | | $ | 25 | | $ | (2) | |
| | | | | |
For the three and nine months ended September 30, 20192020 and 2018,2019, 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 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 nine months ended September 30, 2019 and 2018, there were no impairment charges related to assets that are measured on a non-recurring basis.
9.7. 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 balanceaggregate of the current and non-current balances of deferred revenues as of January 1,December 31, 2019 and the ending balance as of September 30, 2019,2020, were $1.6$1.4 billion and $0.8$1.1 billion, respectively, including our current and non-current balances.respectively. For the nine months ended September 30, 2019,2020, 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, bothall of which were in the ordinary course of business. During the three and nine months ended September 30, 2020, $54 million and $1.3 billion of revenues, respectively, were recognized that were included in the deferred revenues balance at December 31, 2019. During the three and nine months ended September 30, 2019, $0.1 billion and $1.4 billion of revenues, respectively, were recognized that were included in the deferred revenues balance at December 31, 2018. During the three and nine months ended September 30, 2018, $0.1 billion and $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 September 30, 2019,2020, the aggregate amount of contracted revenues allocated to our unsatisfied performance obligations is $2.5was $1.9 billion, which includesincluded our deferred revenues balances and amounts to be invoiced and recognized as revenue in future periods. We expect to recognize approximately $1.4 billion over the next 12 months, $0.4 billion in the subsequent 12-month period, and the remainder thereafter. This balance doesdid not include an estimate for variable consideration arising from sales-based royalty license revenue in excess of the contractual minimum guarantee.guarantee or any estimated amounts of variable consideration that are subject to constraint in accordance with the new revenue standard.
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 September 30, 2019 | | Nine Months Ended September 30, 2019 |
Operating leases | | | |
Operating lease costs | $ | 19 |
| | $ | 58 |
|
Variable lease costs | 6 |
| | 16 |
|
Supplemental information related to our operating leases is as follows (amounts in millions):
|
| | | | |
| | Nine Months Ended September 30, 2019 |
Supplemental Operating Cash Flows Information | | |
Cash paid for amounts included in the measurement of lease liabilities | | $ | 61 |
|
ROU assets obtained in exchange for new lease obligations | | 55 |
|
| | |
| | At September 30, 2019 |
Weighted Average Lease terms and discount rates | | |
Remaining lease term | | 5.15 years |
|
Discount rate | | 4.09 | % |
Future undiscounted lease payments for our operating lease liabilities, and a reconciliation of these payments to our operating lease liabilities at September 30, 2019, are as follows (amounts in millions):
|
| | | |
For the years ending December 31, | |
|
2019 (remaining three months) | $ | 14 |
|
2020 | 74 |
|
2021 | 56 |
|
2022 | 48 |
|
2023 | 42 |
|
Thereafter | 74 |
|
Total future lease payments | $ | 308 |
|
Less imputed interest | (32 | ) |
Total lease liabilities | $ | 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 September 30, 2019, were as follows (amounts in millions):
|
| | | | | |
| At September 30, 2019 | | Balance Sheet Classification |
ROU assets | $ | 238 |
| | Other assets |
| | | |
Current lease liabilities | $ | 61 |
| | Accrued expenses and other current liabilities |
Non-current lease liabilities | 215 |
| | Other 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 |
|
11.8. Debt
Credit Facilities
As of September 30, 20192020 and December 31, 2018,2019, 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 not0t drawn on the Revolver and we were in compliance with the terms of the Credit Agreement as of September 30, 2019.2020.
Refer to Note 13 contained in our Annual Report on Form 10-K for the year ended December 31, 20182019 for further details regarding the Credit Agreement, its key terms, and previous amendments made to it.
Unsecured Senior Notes
AtAs of September 30, 20192020 and December 31, 2018,2019, we had the following$3.7 billion and $2.7 billion, respectively, of gross unsecured senior notes outstanding:
$650 millionoutstanding. A summary of 2.3%our outstanding unsecured senior notes due September 2021 (the “2021 Notes”);is as follows (amounts in millions):
$400 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | At September 30, 2020 | | At December 31, 2019 |
Unsecured Senior Notes | | Interest Rate | | Semi-Annual Interest Payments Due On | | Maturity | | Principal | | Fair Value (Level 2) | | Principal | | Fair Value (Level 2) |
2021 Notes | | 2.30% | | Mar. 15 & Sept. 15 | | Sept. 2021 | | $ | — | | | — | | | $ | 650 | | | $ | 653 | |
2022 Notes | | 2.60% | | Jun. 15 & Dec. 15 | | Jun. 2022 | | — | | | — | | | 400 | | | 405 | |
2026 Notes | | 3.40% | | Mar. 15 & Sept. 15 | | Sept. 2026 | | 850 | | | 968 | | | 850 | | | 893 | |
2027 Notes | | 3.40% | | Jun. 15 & Dec. 15 | | Jun. 2027 | | 400 | | | 453 | | | 400 | | | 417 | |
2030 Notes | | 1.35% | | Mar. 15 & Sept. 15 | | Sept. 2030 | | 500 | | | 488 | | | — | | | — | |
2047 Notes | | 4.50% | | Jun. 15 & Dec. 15 | | Jun. 2047 | | 400 | | | 508 | | | 400 | | | 456 | |
2050 Notes | | 2.50% | | Mar. 15 & Sept. 15 | | Sept. 2050 | | 1,500 | | | 1,386 | | | — | | | — | |
Total gross long-term debt | | $ | 3,650 | | | | | $ | 2,700 | | | |
Unamortized discount and deferred financing costs | | (46) | | | | | (25) | | | |
Total net carrying amount | | $ | 3,604 | | | | | $ | 2,675 | | | |
On August 5, 2020, we issued the 2030 Notes and 2050 Notes in a public underwritten offering, for an aggregate principal amount of $2.0 billion in new debt. In connection with the issuance, we incurred approximately $26 million of 2.6% unsecured senior notes due Junedebt discount and financing costs that were capitalized and recorded within "Long-term debt, net" in our condensed consolidated balance sheet.
On September 4, 2020, we redeemed all of our outstanding 2021 Notes and 2022 (the “2022 Notes”);
$850Notes at a redemption price equal to 100% of their respective principal amounts plus (1) a “make-whole” premium of $28 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 million of 4.5% unsecured senior notes due June 2047 (the “2047 Notes”, and together with(2) accrued and unpaid interest to the redemption date. The redemption of the 2021 Notes theand 2022 Notes resulted in a “Loss on extinguishment of debt” recorded in the condensed consolidated statement of operations of $31 million.
We may redeem some or all of the 2030 Notes and 2050 Notes, in whole or in part, at any time on or after June 15, 2030 and March 15, 2050, respectively, in each case at 100% of the aggregate principal amount thereof plus accrued and unpaid interest. In addition, we may redeem some or all of the 2030 Notes and the 2050 Notes prior to June 15, 2030 and March 15, 2050, respectively, in each case at a price equal to 100% of the aggregate principal amount thereof plus a “make-whole” premium and accrued and unpaid interest. The other terms and covenants associated with the 2030 Notes and the 2050 Notes are generally consistent with those associated with the 2026 Notes, and the 2027 Notes the “Notes”).
and 2047 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 Notesnotes outstanding as of 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.2020. As of September 30, 2019 and December 31, 2018,2020, we had accrued interest payablehave no contractual principal repayments of $14 million and $15 million, respectively, related toour long-term debt within the Notes.next five years.
Refer to Note 13 contained in our Annual Report on Form 10-K for the year ended December 31, 20182019 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 nine months ended September 30, 2019, interest expense was $21 million and $64 million, respectively, and amortization of the debt discount and deferred financing costs was $1 million and $3 million, respectively. For the three and nine months ended September 30, 2018, interest expense was $32 million and $113 million, respectively, and amortization of the debt discount and deferred financing costs was $1 million and $5 million, respectively.
A summary of our outstanding debt is as follows (amounts in millions):
|
| | | | | | | | | | | |
| At September 30, 2019 |
| Gross Carrying Amount | | Unamortized Discount and Deferred Financing Costs | | Net Carrying Amount |
2021 Notes | $ | 650 |
| | $ | (2 | ) | | $ | 648 |
|
2022 Notes | 400 |
| | (2 | ) | | 398 |
|
2026 Notes | 850 |
| | (8 | ) | | 842 |
|
2027 Notes | 400 |
| | (5 | ) | | 395 |
|
2047 Notes | 400 |
| | (9 | ) | | 391 |
|
Total long-term debt | $ | 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 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 three months) | $ | — |
|
2020 | — |
|
2021 | 650 |
|
2022 | 400 |
|
2023 | — |
|
Thereafter | 1,650 |
|
Total | $ | 2,700 |
|
With the exception of the 2047 Notes, using Level 2 inputs (i.e., observable market prices in less-than-active markets) at 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 September 30, 2019, based on Level 2 inputs, the fair value of the 2047 Notes was $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.
9. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) were as follows (amounts in millions):
|
| | | | | | | | | | | | | | | |
| 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 |
Balance at December 31, 2018 | $ | (629 | ) | | $ | 23 |
| | $ | 5 |
| | $ | (601 | ) |
Other comprehensive income (loss) before reclassifications | (5 | ) | | 28 |
| | 3 |
| | 26 |
|
Amounts reclassified from accumulated other comprehensive income (loss) into earnings | — |
| | (24 | ) | | (8 | ) | | (32 | ) |
Balance at September 30, 2019 | $ | (634 | ) | | $ | 27 |
| | $ | — |
| | $ | (607 | ) |
|
| | | | | | | | | | | | | | | |
| 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 |
Balance at December 31, 2017 | $ | (623 | ) | | $ | (15 | ) | | $ | — |
| | $ | (638 | ) |
Cumulative impact from adoption of new revenue accounting standard | 3 |
| | — |
| | — |
| | 3 |
|
Other comprehensive income (loss) before reclassifications | (7 | ) | | 14 |
| | 4 |
| | 11 |
|
Amounts reclassified from accumulated other comprehensive income (loss) into earnings | — |
| | 11 |
| | — |
| | 11 |
|
Balance at September 30, 2018 | $ | (627 | ) | | $ | 10 |
| | $ | 4 |
| | $ | (613 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2020 |
| Foreign currency translation adjustments | | Unrealized gain (loss) on forward contracts | | Unrealized gain (loss) on available-for-sale securities | | Total |
Balance at December 31, 2019 | $ | (624) | | | $ | 8 | | | $ | (3) | | | $ | (619) | |
Other comprehensive income (loss) before reclassifications | 13 | | | (19) | | | 0 | | | (6) | |
Amounts reclassified from accumulated other comprehensive income (loss) into earnings | (2) | | | (7) | | | 1 | | | (8) | |
Balance at September 30, 2020 | $ | (613) | | | $ | (18) | | | $ | (2) | | | $ | (633) | |
13.
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
Balance at December 31, 2018 | $ | (629) | | | $ | 23 | | | $ | 5 | | | $ | (601) | |
Other comprehensive income (loss) before reclassifications | (5) | | | 28 | | | 3 | | | 26 | |
Amounts reclassified from accumulated other comprehensive income (loss) into earnings | 0 | | | (24) | | | (8) | | | (32) | |
Balance at September 30, 2019 | $ | (634) | | | $ | 27 | | | $ | 0 | | | $ | (607) | |
10. Operating Segments and Geographic Region
Currently, weWe have 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 September 30, 20192020 and 2018,2019, are presented below (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | |
Net revenues from external customers | $ | 773 | | | $ | 393 | | | $ | 536 | | | $ | 1,702 | |
Intersegment net revenues (1) | 0 | | | 18 | | | 0 | | | 18 | |
Segment net revenues | $ | 773 | | | $ | 411 | | | $ | 536 | | | $ | 1,720 | |
| | | | | | | |
Segment operating income | $ | 345 | | | $ | 133 | | | $ | 248 | | | $ | 726 | |
| | | | | | | |
| Three Months Ended September 30, 2019 |
| Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | |
Net revenues from external customers | $ | 209 | | | $ | 392 | | | $ | 500 | | | $ | 1,101 | |
Intersegment net revenues (1) | 0 | | | 2 | | | 0 | | | 2 | |
Segment net revenues | $ | 209 | | | $ | 394 | | | $ | 500 | | | $ | 1,103 | |
| | | | | | | |
Segment operating income | $ | 26 | | | $ | 74 | | | $ | 194 | | | $ | 294 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | |
Net revenues from external customers | $ | 209 |
| | $ | 392 |
| | $ | 500 |
| | $ | 1,101 |
|
Intersegment net revenues (1) | — |
| | 2 |
| | — |
| | 2 |
|
Segment net revenues | $ | 209 |
| | $ | 394 |
| | $ | 500 |
| | $ | 1,103 |
|
| | | | | | | |
Segment operating income | $ | 26 |
| | $ | 74 |
| | $ | 194 |
| | $ | 294 |
|
| | | | | | | |
| Three Months Ended September 30, 2018 |
| Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | |
Net revenues from external customers | $ | 397 |
| | $ | 627 |
| | $ | 506 |
| | $ | 1,530 |
|
Intersegment net revenues (1) | — |
| | 8 |
| | — |
| | 8 |
|
Segment net revenues | $ | 397 |
| | $ | 635 |
| | $ | 506 |
| | $ | 1,538 |
|
| | | | | | | |
Segment operating income | $ | 112 |
| | $ | 189 |
| | $ | 184 |
| | $ | 485 |
|
Information on reportable segment net revenues and operating income for the nine months ended September 30, 20192020 and 2018,2019, are presented below (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | |
Net revenues from external customers | $ | 2,285 | | | $ | 1,264 | | | $ | 1,587 | | | $ | 5,136 | |
Intersegment net revenues (1) | 0 | | | 62 | | | 0 | | | 62 | |
Segment net revenues | $ | 2,285 | | | $ | 1,326 | | | $ | 1,587 | | | $ | 5,198 | |
| | | | | | | |
Segment operating income | $ | 1,088 | | | $ | 533 | | | $ | 615 | | | $ | 2,236 | |
| | | | | | | |
| Nine Months Ended September 30, 2019 |
| Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | |
Net revenues from external customers | $ | 794 | | | $ | 1,113 | | | $ | 1,527 | | | $ | 3,434 | |
Intersegment net revenues (1) | 0 | | | 9 | | | 0 | | | 9 | |
Segment net revenues | $ | 794 | | | $ | 1,122 | | | $ | 1,527 | | | $ | 3,443 | |
| | | | | | | |
Segment operating income | $ | 153 | | | $ | 204 | | | $ | 543 | | | $ | 900 | |
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | |
Net revenues from external customers | $ | 794 |
| | $ | 1,113 |
| | $ | 1,527 |
| | $ | 3,434 |
|
Intersegment net revenues (1) | — |
| | 9 |
| | — |
| | 9 |
|
Segment net revenues | $ | 794 |
| | $ | 1,122 |
| | $ | 1,527 |
| | $ | 3,443 |
|
| | | | | | | |
Segment operating income | $ | 153 |
| | $ | 204 |
| | $ | 543 |
| | $ | 900 |
|
| | | | | | | |
| Nine Months Ended September 30, 2018 |
| Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | |
Net revenues from external customers | $ | 1,047 |
| | $ | 1,592 |
| | $ | 1,542 |
| | $ | 4,181 |
|
Intersegment net revenues (1) | — |
| | 14 |
| | — |
| | 14 |
|
Segment net revenues | $ | 1,047 |
| | $ | 1,606 |
| | $ | 1,542 |
| | $ | 4,195 |
|
| | | | | | | |
Segment operating income | $ | 288 |
| | $ | 444 |
| | $ | 543 |
| | $ | 1,275 |
|
(1) Intersegment revenues reflect licensing and service fees charged between segments.
| |
(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 September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Reconciliation to consolidated net revenues: | | | | | | | |
Segment net revenues | $ | 1,720 | | | $ | 1,103 | | | $ | 5,198 | | | $ | 3,443 | |
Revenues from non-reportable segments (1) | 65 | | | 113 | | | 232 | | | 245 | |
Net effect from recognition (deferral) of deferred net revenues (2) | 187 | | | 68 | | | 306 | | | 824 | |
Elimination of intersegment revenues (3) | (18) | | | (2) | | | (62) | | | (9) | |
Consolidated net revenues | $ | 1,954 | | | $ | 1,282 | | | $ | 5,674 | | | $ | 4,503 | |
| | | | | | | |
Reconciliation to consolidated income before income tax expense: | | | | | | | |
Segment operating income | $ | 726 | | | $ | 294 | | | $ | 2,236 | | | $ | 900 | |
Operating income (loss) from non-reportable segments (1) | (20) | | | 5 | | | (27) | | | 10 | |
Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (2) | 150 | | | 53 | | | 169 | | | 629 | |
Share-based compensation expense | (53) | | | (27) | | | (138) | | | (127) | |
Amortization of intangible assets | (16) | | | (50) | | | (62) | | | (151) | |
| | | | | | | |
Restructuring and related costs (4) | (9) | | | (28) | | | (39) | | | (108) | |
| | | | | | | |
| | | | | | | |
Consolidated operating income | 778 | | | 247 | | | 2,139 | | | 1,153 | |
Interest and other expense (income), net | 25 | | | (2) | | | 55 | | | (33) | |
Loss on extinguishment of debt | 31 | | | 0 | | | 31 | | | 0 | |
Consolidated income before income tax expense | $ | 722 | | | $ | 249 | | | $ | 2,053 | | | $ | 1,186 | |
|
| | | | | | | | | | | | | | | |
| 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 Distribution business. Also includes unallocated corporate income and expenses.
| |
(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. |
(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. |
(3)Intersegment revenues reflect licensing and service fees charged between segments.
| |
(4) | Reflects restructuring initiatives, primarily severance and other restructuring-related costs. |
(4)Reflects restructuring initiatives, which include 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 September 30, 20192020 and 2018,2019, were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by distribution channel: | | | | | | | | | | | |
Digital online channels (1) | $ | 826 | | | $ | 405 | | | $ | 540 | | | $ | 0 | | | $ | (18) | | | $ | 1,753 | |
Retail channels | 110 | | | 7 | | | 0 | | | 0 | | | 0 | | | 117 | |
Other (2) | 8 | | | 11 | | | 0 | | | 65 | | | 0 | | | 84 | |
Total consolidated net revenues | $ | 944 | | | $ | 423 | | | $ | 540 | | | $ | 65 | | | $ | (18) | | | $ | 1,954 | |
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | (130) | | | $ | (14) | | | $ | (4) | | | $ | 0 | | | $ | 0 | | | $ | (148) | |
Retail channels | (41) | | | 2 | | | 0 | | | 0 | | | 0 | | | (39) | |
Other (2) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total change in deferred revenues | $ | (171) | | | $ | (12) | | | $ | (4) | | | $ | 0 | | | $ | 0 | | | $ | (187) | |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | 696 | | | $ | 391 | | | $ | 536 | | | $ | 0 | | | $ | (18) | | | $ | 1,605 | |
Retail channels | 69 | | | 9 | | | 0 | | | 0 | | | 0 | | | 78 | |
Other (2) | 8 | | | 11 | | | 0 | | | 65 | | | 0 | | | 84 | |
Total segment net revenues | $ | 773 | | | $ | 411 | | | $ | 536 | | | $ | 65 | | | $ | (18) | | | $ | 1,767 | |
| | | Three Months Ended September 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: | | | | | | | | | | | | Net revenues by distribution channel: | | | | | | | | | | | |
Digital online channels (1) | $ | 179 |
| | $ | 335 |
| | $ | 502 |
| | $ | — |
| | $ | (2 | ) | | $ | 1,014 |
| Digital online channels (1) | $ | 179 | | | $ | 335 | | | $ | 502 | | | $ | 0 | | | $ | (2) | | | $ | 1,014 | |
Retail channels | 73 |
| | 20 |
| | — |
| | — |
| | — |
| | 93 |
| Retail channels | 73 | | | 20 | | | 0 | | | 0 | | | 0 | | | 93 | |
Other (2) | — |
| | 62 |
| | — |
| | 113 |
| | — |
| | 175 |
| Other (2) | 0 | | | 62 | | | 0 | | | 113 | | | 0 | | | 175 | |
Total consolidated net revenues | $ | 252 |
| | $ | 417 |
| | $ | 502 |
| | $ | 113 |
| | $ | (2 | ) | | $ | 1,282 |
| Total consolidated net revenues | $ | 252 | | | $ | 417 | | | $ | 502 | | | $ | 113 | | | $ | (2) | | | $ | 1,282 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | | Change in deferred revenues: | |
Digital online channels (1) | $ | (16 | ) | | $ | (21 | ) | | $ | (2 | ) | | $ | — |
| | $ | — |
| | $ | (39 | ) | Digital online channels (1) | $ | (16) | | | $ | (21) | | | $ | (2) | | | $ | 0 | | | $ | 0 | | | $ | (39) | |
Retail channels | (27 | ) | | (2 | ) | | — |
| | — |
| | — |
| | (29 | ) | Retail channels | (27) | | | (2) | | | 0 | | | 0 | | | 0 | | | (29) | |
Other (2) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Other (2) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total change in deferred revenues | $ | (43 | ) | | $ | (23 | ) | | $ | (2 | ) | | $ | — |
| | $ | — |
| | $ | (68 | ) | Total change in deferred revenues | $ | (43) | | | $ | (23) | | | $ | (2) | | | $ | 0 | | | $ | 0 | | | $ | (68) | |
| | | | | | | | | | | | | | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | | Segment net revenues: | |
Digital online channels (1) | $ | 163 |
| | $ | 314 |
| | $ | 500 |
| | $ | — |
| | $ | (2 | ) | | $ | 975 |
| Digital online channels (1) | $ | 163 | | | $ | 314 | | | $ | 500 | | | $ | 0 | | | $ | (2) | | | $ | 975 | |
Retail channels | 46 |
| | 18 |
| | — |
| | — |
| | — |
| | 64 |
| Retail channels | 46 | | | 18 | | | 0 | | | 0 | | | 0 | | | 64 | |
Other (2) | — |
| | 62 |
| | — |
| | 113 |
| | — |
| | 175 |
| Other (2) | 0 | | | 62 | | | 0 | | | 113 | | | 0 | | | 175 | |
Total segment net revenues | $ | 209 |
| | $ | 394 |
| | $ | 500 |
| | $ | 113 |
| | $ | (2 | ) | | $ | 1,214 |
| Total segment net revenues | $ | 209 | | | $ | 394 | | | $ | 500 | | | $ | 113 | | | $ | (2) | | | $ | 1,214 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by distribution channel: | | | | | | | | | | | |
Digital online channels (1) | $ | 299 |
| | $ | 480 |
| | $ | 505 |
| | $ | — |
| | $ | (8 | ) | | $ | 1,276 |
|
Retail channels | 53 |
| | 23 |
| | — |
| | — |
| | — |
| | 76 |
|
Other (2) | — |
| | 35 |
| | — |
| | 125 |
| | — |
| | 160 |
|
Total consolidated net revenues | $ | 352 |
| | $ | 538 |
| | $ | 505 |
| | $ | 125 |
| | $ | (8 | ) | | $ | 1,512 |
|
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | 57 |
| | $ | 101 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 159 |
|
Retail channels | (12 | ) | | (2 | ) | | — |
| | — |
| | — |
| | (14 | ) |
Other (2) | — |
| | (2 | ) | | — |
| | 3 |
| | — |
| | 1 |
|
Total change in deferred revenues | $ | 45 |
| | $ | 97 |
| | $ | 1 |
| | $ | 3 |
| | $ | — |
| | $ | 146 |
|
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | 356 |
| | $ | 581 |
| | $ | 506 |
| | $ | — |
| | $ | (8 | ) | | $ | 1,435 |
|
Retail channels | 41 |
| | 21 |
| | — |
| | — |
| | — |
| | 62 |
|
Other (2) | — |
| | 33 |
| | — |
| | 128 |
| | — |
| | 161 |
|
Total segment net revenues | $ | 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 nine months ended September 30, 20192020 and 2018,2019, were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by distribution channel: | | | | | | | | | | | |
Digital online channels (1) | $ | 2,054 | | | $ | 1,203 | | | $ | 1,587 | | | $ | 0 | | | $ | (62) | | | $ | 4,782 | |
Retail channels | 485 | | | 23 | | | 1 | | | 0 | | | 0 | | | 509 | |
Other (2) | 55 | | | 87 | | | 0 | | | 241 | | | 0 | | | 383 | |
Total consolidated net revenues | $ | 2,594 | | | $ | 1,313 | | | $ | 1,588 | | | $ | 241 | | | $ | (62) | | | $ | 5,674 | |
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | (16) | | | $ | 16 | | | $ | (1) | | | $ | 0 | | | $ | 0 | | | $ | (1) | |
Retail channels | (293) | | | (2) | | | 0 | | | 0 | | | 0 | | | (295) | |
Other (2) | 0 | | | (1) | | | 0 | | | (9) | | | 0 | | | (10) | |
Total change in deferred revenues | $ | (309) | | | $ | 13 | | | $ | (1) | | | $ | (9) | | | $ | 0 | | | $ | (306) | |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | 2,038 | | | $ | 1,219 | | | $ | 1,586 | | | $ | 0 | | | $ | (62) | | | $ | 4,781 | |
Retail channels | 192 | | | 21 | | | 1 | | | 0 | | | 0 | | | 214 | |
Other (2) | 55 | | | 86 | | | 0 | | | 232 | | | 0 | | | 373 | |
Total segment net revenues | $ | 2,285 | | | $ | 1,326 | | | $ | 1,587 | | | $ | 232 | | | $ | (62) | | | $ | 5,368 | |
| | | Nine Months Ended September 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: | | | | | | | | | | | | Net revenues by distribution channel: | | | | | | | | | | | |
Digital online channels (1) | $ | 894 |
| | $ | 1,081 |
| | $ | 1,527 |
| | $ | — |
| | $ | (9 | ) | | $ | 3,493 |
| Digital online channels (1) | $ | 894 | | | $ | 1,081 | | | $ | 1,527 | | | $ | 0 | | | $ | (9) | | | $ | 3,493 | |
Retail channels | 548 |
| | 51 |
| | — |
| | — |
| | — |
| | 599 |
| Retail channels | 548 | | | 51 | | | 0 | | | 0 | | | 0 | | | 599 | |
Other (2) | — |
| | 157 |
| | — |
| | 254 |
| | — |
| | 411 |
| Other (2) | 0 | | | 157 | | | 0 | | | 254 | | | 0 | | | 411 | |
Total consolidated net revenues | $ | 1,442 |
| | $ | 1,289 |
| | $ | 1,527 |
| | $ | 254 |
| | $ | (9 | ) | | $ | 4,503 |
| Total consolidated net revenues | $ | 1,442 | | | $ | 1,289 | | | $ | 1,527 | | | $ | 254 | | | $ | (9) | | | $ | 4,503 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | | Change in deferred revenues: | |
Digital online channels (1) | $ | (285 | ) | | $ | (159 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (444 | ) | Digital online channels (1) | $ | (285) | | | $ | (159) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (444) | |
Retail channels | (363 | ) | | (10 | ) | | — |
| | — |
| | — |
| | (373 | ) | Retail channels | (363) | | | (10) | | | 0 | | | 0 | | | 0 | | | (373) | |
Other (2) | — |
| | 2 |
| | — |
| | (9 | ) | | — |
| | (7 | ) | Other (2) | 0 | | | 2 | | | 0 | | | (9) | | | 0 | | | (7) | |
Total change in deferred revenues | $ | (648 | ) | | $ | (167 | ) | | $ | — |
| | $ | (9 | ) | | $ | — |
| | $ | (824 | ) | Total change in deferred revenues | $ | (648) | | | $ | (167) | | | $ | 0 | | | $ | (9) | | | $ | 0 | | | $ | (824) | |
| | | | | | | | | | | | | | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | | Segment net revenues: | |
Digital online channels (1) | $ | 609 |
| | $ | 922 |
| | $ | 1,527 |
| | $ | — |
| | $ | (9 | ) | | $ | 3,049 |
| Digital online channels (1) | $ | 609 | | | $ | 922 | | | $ | 1,527 | | | $ | 0 | | | $ | (9) | | | $ | 3,049 | |
Retail channels | 185 |
| | 41 |
| | — |
| | — |
| | — |
| | 226 |
| Retail channels | 185 | | | 41 | | | 0 | | | 0 | | | 0 | | | 226 | |
Other (2) | — |
| | 159 |
| | — |
| | 245 |
| | — |
| | 404 |
| Other (2) | 0 | | | 159 | | | 0 | | | 245 | | | 0 | | | 404 | |
Total segment net revenues | $ | 794 |
| | $ | 1,122 |
| | $ | 1,527 |
| | $ | 245 |
| | $ | (9 | ) | | $ | 3,679 |
| Total segment net revenues | $ | 794 | | | $ | 1,122 | | | $ | 1,527 | | | $ | 245 | | | $ | (9) | | | $ | 3,679 | |
(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 Distribution business, the Overwatch League, and the Call of Duty League.
(3) Intersegment revenues reflect licensing and service fees charged between segments.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by distribution channel: | | | | | | | | | | | |
Digital online channels (1) | $ | 1,110 |
| | $ | 1,355 |
| | $ | 1,547 |
| | $ | — |
| | $ | (14 | ) | | $ | 3,998 |
|
Retail channels | 707 |
| | 57 |
| | — |
| | — |
| | — |
| | 764 |
|
Other (2) | — |
| | 124 |
| | — |
| | 233 |
| | — |
| | 357 |
|
Total consolidated net revenues | $ | 1,817 |
| | $ | 1,536 |
| | $ | 1,547 |
| | $ | 233 |
| | $ | (14 | ) | | $ | 5,119 |
|
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | (234 | ) | | $ | 79 |
| | $ | (5 | ) | | $ | — |
| | $ | — |
| | $ | (160 | ) |
Retail channels | (536 | ) | | (10 | ) | | — |
| | — |
| | — |
| | (546 | ) |
Other (2) | — |
| | 1 |
| | — |
| | 13 |
| | — |
| | 14 |
|
Total change in deferred revenues | $ | (770 | ) | | $ | 70 |
| | $ | (5 | ) | | $ | 13 |
| | $ | — |
| | $ | (692 | ) |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | 876 |
| | $ | 1,434 |
| | $ | 1,542 |
| | $ | — |
| | $ | (14 | ) | | $ | 3,838 |
|
Retail channels | 171 |
| | 47 |
| | — |
| | — |
| | — |
| | 218 |
|
Other (2) | — |
| | 125 |
| | — |
| | 246 |
| | — |
| | 371 |
|
Total segment net revenues | $ | 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 September 30, 20192020 and 2018,2019, were as follows (amounts in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total |
Net revenues by geographic region: | | | | | | | | | | | |
Americas | $ | 141 |
| | $ | 204 |
| | $ | 311 |
| | $ | — |
| | $ | (1 | ) | | $ | 655 |
|
EMEA (1) | 79 |
| | 124 |
| | 137 |
| | 113 |
| | (1 | ) | | 452 |
|
Asia Pacific | 32 |
| | 89 |
| | 54 |
| | — |
| | — |
| | 175 |
|
Total consolidated net revenues | $ | 252 |
| | $ | 417 |
| | $ | 502 |
| | $ | 113 |
| | $ | (2 | ) | | $ | 1,282 |
|
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Americas | $ | (20 | ) | | $ | (11 | ) | | $ | (2 | ) | | $ | — |
| | $ | — |
| | $ | (33 | ) |
EMEA (1) | (16 | ) | | (10 | ) | | — |
| | — |
| | — |
| | (26 | ) |
Asia Pacific | (7 | ) | | (2 | ) | | — |
| | — |
| | — |
| | (9 | ) |
Total change in deferred revenues | $ | (43 | ) | | $ | (23 | ) | | $ | (2 | ) | | $ | — |
| | $ | — |
| | $ | (68 | ) |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Americas | $ | 121 |
| | $ | 193 |
| | $ | 309 |
| | $ | — |
| | $ | (1 | ) | | $ | 622 |
|
EMEA (1) | 63 |
| | 114 |
| | 137 |
| | 113 |
| | (1 | ) | | 426 |
|
Asia Pacific | 25 |
| | 87 |
| | 54 |
| | — |
| | — |
| | 166 |
|
Total segment net revenues | $ | 209 |
| | $ | 394 |
| | $ | 500 |
| | $ | 113 |
| | $ | (2 | ) | | $ | 1,214 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total |
Net revenues by geographic region: | | | | | | | | | | | |
Americas | $ | 214 |
| | $ | 242 |
| | $ | 309 |
| | $ | 13 |
| | $ | (4 | ) | | $ | 774 |
|
EMEA (1) | 109 |
| | 172 |
| | 143 |
| | 112 |
| | (2 | ) | | 534 |
|
Asia Pacific | 29 |
| | 124 |
| | 53 |
| | — |
| | (2 | ) | | 204 |
|
Total consolidated net revenues | $ | 352 |
| | $ | 538 |
| | $ | 505 |
| | $ | 125 |
| | $ | (8 | ) | | $ | 1,512 |
|
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Americas | $ | 33 |
| | $ | 43 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 76 |
|
EMEA (1) | 8 |
| | 48 |
| | 1 |
| | 3 |
| | — |
| | 60 |
|
Asia Pacific | 4 |
| | 6 |
| | — |
| | — |
| | — |
| | 10 |
|
Total change in deferred revenues | $ | 45 |
| | $ | 97 |
| | $ | 1 |
| | $ | 3 |
| | $ | — |
| | $ | 146 |
|
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Americas | $ | 247 |
| | $ | 285 |
| | $ | 309 |
| | $ | 13 |
| | $ | (4 | ) | | $ | 850 |
|
EMEA (1) | 117 |
| | 220 |
| | 144 |
| | 115 |
| | (2 | ) | | 594 |
|
Asia Pacific | 33 |
| | 130 |
| | 53 |
| | — |
| | (2 | ) | | 214 |
|
Total segment net revenues | $ | 397 |
| | $ | 635 |
| | $ | 506 |
| | $ | 128 |
| | $ | (8 | ) | | $ | 1,658 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total |
Net revenues by geographic region: | | | | | | | | | | | |
Americas | $ | 595 | | | $ | 192 | | | $ | 350 | | | $ | 0 | | | $ | (10) | | | $ | 1,127 | |
EMEA (1) | 263 | | | 131 | | | 136 | | | 65 | | | (6) | | | 589 | |
Asia Pacific | 86 | | | 100 | | | 54 | | | 0 | | | (2) | | | 238 | |
Total consolidated net revenues | $ | 944 | | | $ | 423 | | | $ | 540 | | | $ | 65 | | | $ | (18) | | | $ | 1,954 | |
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Americas | $ | (77) | | | $ | (4) | | | $ | (4) | | | $ | 0 | | | $ | (1) | | | $ | (86) | |
EMEA (1) | (68) | | | (8) | | | 0 | | | 0 | | | 1 | | | (75) | |
Asia Pacific | (26) | | | 0 | | | 0 | | | 0 | | | 0 | | | (26) | |
Total change in deferred revenues | $ | (171) | | | $ | (12) | | | $ | (4) | | | $ | 0 | | | $ | 0 | | | $ | (187) | |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Americas | $ | 518 | | | $ | 188 | | | $ | 346 | | | $ | 0 | | | $ | (11) | | | $ | 1,041 | |
EMEA (1) | 195 | | | 123 | | | 136 | | | 65 | | | (5) | | | 514 | |
Asia Pacific | 60 | | | 100 | | | 54 | | | 0 | | | (2) | | | 212 | |
Total segment net revenues | $ | 773 | | | $ | 411 | | | $ | 536 | | | $ | 65 | | | $ | (18) | | | $ | 1,767 | |
Geographic information presented below is based on the location | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total |
Net revenues by geographic region: | | | | | | | | | | | |
Americas | $ | 141 | | | $ | 204 | | | $ | 311 | | | $ | 0 | | | $ | (1) | | | $ | 655 | |
EMEA (1) | 79 | | | 124 | | | 137 | | | 113 | | | (1) | | | 452 | |
Asia Pacific | 32 | | | 89 | | | 54 | | | 0 | | | 0 | | | 175 | |
Total consolidated net revenues | $ | 252 | | | $ | 417 | | | $ | 502 | | | $ | 113 | | | $ | (2) | | | $ | 1,282 | |
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Americas | $ | (20) | | | $ | (11) | | | $ | (2) | | | $ | 0 | | | $ | 0 | | | $ | (33) | |
EMEA (1) | (16) | | | (10) | | | 0 | | | 0 | | | 0 | | | (26) | |
Asia Pacific | (7) | | | (2) | | | 0 | | | 0 | | | 0 | | | (9) | |
Total change in deferred revenues | $ | (43) | | | $ | (23) | | | $ | (2) | | | $ | 0 | | | $ | 0 | | | $ | (68) | |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Americas | $ | 121 | | | $ | 193 | | | $ | 309 | | | $ | 0 | | | $ | (1) | | | $ | 622 | |
EMEA (1) | 63 | | | 114 | | | 137 | | | 113 | | | (1) | | | 426 | |
Asia Pacific | 25 | | | 87 | | | 54 | | | 0 | | | 0 | | | 166 | |
Total segment net revenues | $ | 209 | | | $ | 394 | | | $ | 500 | | | $ | 113 | | | $ | (2) | | | $ | 1,214 | |
Net revenues by geographic region, including a reconciliation to each of our reportable segment’s net revenues, for the nine months ended September 30, 20192020 and 2018,2019, were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total |
Net revenues by geographic region: | | | | | | | | | | | |
Americas | $ | 1,615 | | | $ | 580 | | | $ | 1,024 | | | $ | 0 | | | $ | (31) | | | $ | 3,188 | |
EMEA (1) | 750 | | | 393 | | | 407 | | | 241 | | | (21) | | | 1,770 | |
Asia Pacific | 229 | | | 340 | | | 157 | | | 0 | | | (10) | | | 716 | |
Total consolidated net revenues | $ | 2,594 | | | $ | 1,313 | | | $ | 1,588 | | | $ | 241 | | | $ | (62) | | | $ | 5,674 | |
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Americas | $ | (124) | | | $ | 18 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (106) | |
EMEA (1) | (146) | | | (3) | | | (1) | | | (9) | | | 0 | | | (159) | |
Asia Pacific | (39) | | | (2) | | | 0 | | | 0 | | | 0 | | | (41) | |
Total change in deferred revenues | $ | (309) | | | $ | 13 | | | $ | (1) | | | $ | (9) | | | $ | 0 | | | $ | (306) | |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Americas | $ | 1,491 | | | $ | 598 | | | $ | 1,024 | | | $ | 0 | | | $ | (31) | | | $ | 3,082 | |
EMEA (1) | 604 | | | 390 | | | 406 | | | 232 | | | (21) | | | 1,611 | |
Asia Pacific | 190 | | | 338 | | | 157 | | | 0 | | | (10) | | | 675 | |
Total segment net revenues | $ | 2,285 | | | $ | 1,326 | | | $ | 1,587 | | | $ | 232 | | | $ | (62) | | | $ | 5,368 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total |
Net revenues by geographic region: | | | | | | | | | | | |
Americas | $ | 852 | | | $ | 613 | | | $ | 946 | | | $ | 0 | | | $ | (5) | | | $ | 2,406 | |
EMEA (1) | 457 | | | 400 | | | 417 | | | 254 | | | (3) | | | 1,525 | |
Asia Pacific | 133 | | | 276 | | | 164 | | | 0 | | | (1) | | | 572 | |
Total consolidated net revenues | $ | 1,442 | | | $ | 1,289 | | | $ | 1,527 | | | $ | 254 | | | $ | (9) | | | $ | 4,503 | |
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Americas | $ | (390) | | | $ | (80) | | | $ | 1 | | | $ | 0 | | | $ | 0 | | | $ | (469) | |
EMEA (1) | (205) | | | (71) | | | 0 | | | (9) | | | 0 | | | (285) | |
Asia Pacific | (53) | | | (16) | | | (1) | | | 0 | | | 0 | | | (70) | |
Total change in deferred revenues | $ | (648) | | | $ | (167) | | | $ | 0 | | | $ | (9) | | | $ | 0 | | | $ | (824) | |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Americas | $ | 462 | | | $ | 533 | | | $ | 947 | | | $ | 0 | | | $ | (5) | | | $ | 1,937 | |
EMEA (1) | 252 | | | 329 | | | 417 | | | 245 | | | (3) | | | 1,240 | |
Asia Pacific | 80 | | | 260 | | | 163 | | | 0 | | | (1) | | | 502 | |
Total segment net revenues | $ | 794 | | | $ | 1,122 | | | $ | 1,527 | | | $ | 245 | | | $ | (9) | | | $ | 3,679 | |
(1) “EMEA” consists of the Europe, Middle East, and Africa geographic regions.
(2) Intersegment revenues reflect licensing and service fees charged between segments.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total |
Net revenues by geographic region: | | | | | | | | | | | |
Americas | $ | 852 |
| | $ | 613 |
| | $ | 946 |
| | $ | — |
| | $ | (5 | ) | | $ | 2,406 |
|
EMEA (1) | 457 |
| | 400 |
| | 417 |
| | 254 |
| | (3 | ) | | 1,525 |
|
Asia Pacific | 133 |
| | 276 |
| | 164 |
| | — |
| | (1 | ) | | 572 |
|
Total consolidated net revenues | $ | 1,442 |
| | $ | 1,289 |
| | $ | 1,527 |
| | $ | 254 |
| | $ | (9 | ) | | $ | 4,503 |
|
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Americas | $ | (390 | ) | | $ | (80 | ) | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | (469 | ) |
EMEA (1) | (205 | ) | | (71 | ) | | — |
| | (9 | ) | | — |
| | (285 | ) |
Asia Pacific | (53 | ) | | (16 | ) | | (1 | ) | | — |
| | — |
| | (70 | ) |
Total change in deferred revenues | $ | (648 | ) | | $ | (167 | ) | | $ | — |
| | $ | (9 | ) | | $ | — |
| | $ | (824 | ) |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Americas | $ | 462 |
| | $ | 533 |
| | $ | 947 |
| | $ | — |
| | $ | (5 | ) | | $ | 1,937 |
|
EMEA (1) | 252 |
| | 329 |
| | 417 |
| | 245 |
| | (3 | ) | | 1,240 |
|
Asia Pacific | 80 |
| | 260 |
| | 163 |
| | — |
| | (1 | ) | | 502 |
|
Total segment net revenues | $ | 794 |
| | $ | 1,122 |
| | $ | 1,527 |
| | $ | 245 |
| | $ | (9 | ) | | $ | 3,679 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total |
Net revenues by geographic region: | | | | | | | | | | | |
Americas | $ | 1,074 |
| | $ | 716 |
| | $ | 945 |
| | $ | 13 |
| | $ | (8 | ) | | $ | 2,740 |
|
EMEA (1) | 613 |
| | 497 |
| | 448 |
| | 220 |
| | (4 | ) | | 1,774 |
|
Asia Pacific | 130 |
| | 323 |
| | 154 |
| | — |
| | (2 | ) | | 605 |
|
Total consolidated net revenues | $ | 1,817 |
| | $ | 1,536 |
| | $ | 1,547 |
| | $ | 233 |
| | $ | (14 | ) | | $ | 5,119 |
|
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Americas | $ | (439 | ) | | $ | 43 |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | (399 | ) |
EMEA (1) | (287 | ) | | 34 |
| | (2 | ) | | 13 |
| | — |
| | (242 | ) |
Asia Pacific | (44 | ) | | (7 | ) | | — |
| | — |
| | — |
| | (51 | ) |
Total change in deferred revenues | $ | (770 | ) | | $ | 70 |
| | $ | (5 | ) | | $ | 13 |
| | $ | — |
| | $ | (692 | ) |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Americas | $ | 635 |
| | $ | 759 |
| | $ | 942 |
| | $ | 13 |
| | $ | (8 | ) | | $ | 2,341 |
|
EMEA (1) | 326 |
| | 531 |
| | 446 |
| | 233 |
| | (4 | ) | | 1,532 |
|
Asia Pacific | 86 |
| | 316 |
| | 154 |
| | — |
| | (2 | ) | | 554 |
|
Total segment net revenues | $ | 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 50% and 46% of consolidated net revenues for both the three months ended September 30, 2020 and 2019, and 2018.respectively. The Company’s net revenues in the U.K.United Kingdom (the “U.K.”) were 9% and 13% of consolidated net revenues for both the three months ended September 30, 2020 and 2019, and 2018.respectively. No other country’s net revenues exceeded 10% of consolidated net revenues for either the three months ended September 30, 20192020 or 2018.2019.
The Company’s net revenues in the U.S. were 48%50% and 47%48% of consolidated net revenues for the nine months ended September 30, 20192020 and 2018,2019, respectively. The Company’s net revenues in the U.K. were 10% and 11% of consolidated net revenues for both the nine months ended September 30, 20192020 and 2018, respectively.2019. No other country’s net revenues exceeded 10% of consolidated net revenues for either the nine months ended September 30, 20192020 or 2018.2019.
Net revenues by platform, including a reconciliation to each of our reportable segment’s net revenues, for the three months ended September 30, 20192020 and 2018,2019, were as follows (amounts in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by platform: | | | | | | | | | | | |
Console | $ | 214 |
| | $ | 27 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 241 |
|
PC | 29 |
| | 286 |
| | 28 |
| | — |
| | (2 | ) | | 341 |
|
Mobile and ancillary (1) | 9 |
| | 42 |
| | 474 |
| | — |
| | — |
| | 525 |
|
Other (2) | — |
| | 62 |
| | — |
| | 113 |
| | — |
| | 175 |
|
Total consolidated net revenues | $ | 252 |
| | $ | 417 |
| | $ | 502 |
| | $ | 113 |
| | $ | (2 | ) | | $ | 1,282 |
|
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Console | $ | (36 | ) | | $ | (9 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (45 | ) |
PC | (7 | ) | | (14 | ) | | — |
| | — |
| | — |
| | (21 | ) |
Mobile and ancillary (1) | — |
| | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) |
Other (2) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total change in deferred revenues | $ | (43 | ) | | $ | (23 | ) | | $ | (2 | ) | | $ | — |
| | $ | — |
| | $ | (68 | ) |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Console | $ | 178 |
| | $ | 18 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 196 |
|
PC | 22 |
| | 272 |
| | 28 |
| | — |
| | (2 | ) | | 320 |
|
Mobile and ancillary (1) | 9 |
| | 42 |
| | 472 |
| | — |
| | — |
| | 523 |
|
Other (2) | — |
| | 62 |
| | — |
| | 113 |
| | — |
| | 175 |
|
Total segment net revenues | $ | 209 |
| | $ | 394 |
| | $ | 500 |
| | $ | 113 |
| | $ | (2 | ) | | $ | 1,214 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by platform: | | | | | | | | | | | |
Console | $ | 307 |
| | $ | 40 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 347 |
|
PC | 40 |
| | 414 |
| | 36 |
| | — |
| | (8 | ) | | 482 |
|
Mobile and ancillary (1) | 5 |
| | 49 |
| | 469 |
| | — |
| | — |
| | 523 |
|
Other (2) | — |
| | 35 |
| | — |
| | 125 |
| | — |
| | 160 |
|
Total consolidated net revenues | $ | 352 |
| | $ | 538 |
| | $ | 505 |
| | $ | 125 |
| | $ | (8 | ) | | $ | 1,512 |
|
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Console | $ | 29 |
| | $ | (9 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 20 |
|
PC | 16 |
| | 101 |
| | — |
| | — |
| | — |
| | 117 |
|
Mobile and ancillary (1) | — |
| | 7 |
| | 1 |
| | — |
| | — |
| | 8 |
|
Other (2) | — |
| | (2 | ) | | — |
| | 3 |
| | — |
| | 1 |
|
Total change in deferred revenues | $ | 45 |
| | $ | 97 |
| | $ | 1 |
| | $ | 3 |
| | $ | — |
| | $ | 146 |
|
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Console | $ | 336 |
| | $ | 31 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 367 |
|
PC | 56 |
| | 515 |
| | 36 |
| | — |
| | (8 | ) | | 599 |
|
Mobile and ancillary (1) | 5 |
| | 56 |
| | 470 |
| | — |
| | — |
| | 531 |
|
Other (2) | — |
| | 33 |
| | — |
| | 128 |
| | — |
| | 161 |
|
Total segment net revenues | $ | 397 |
| | $ | 635 |
| | $ | 506 |
| | $ | 128 |
| | $ | (8 | ) | | $ | 1,658 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by platform: | | | | | | | | | | | |
Console | $ | 664 | | | $ | 31 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 695 | |
PC | 152 | | | 357 | | | 23 | | | 0 | | | (18) | | | 514 | |
Mobile and ancillary (1) | 120 | | | 24 | | | 517 | | | 0 | | | 0 | | | 661 | |
Other (2) | 8 | | | 11 | | | 0 | | | 65 | | | 0 | | | 84 | |
Total consolidated net revenues | $ | 944 | | | $ | 423 | | | $ | 540 | | | $ | 65 | | | $ | (18) | | | $ | 1,954 | |
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Console | $ | (125) | | | $ | (4) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (129) | |
PC | (35) | | | (9) | | | (1) | | | 0 | | | 0 | | | (45) | |
Mobile and ancillary (1) | (11) | | | 1 | | | (3) | | | 0 | | | 0 | | | (13) | |
Other (2) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total change in deferred revenues | $ | (171) | | | $ | (12) | | | $ | (4) | | | $ | 0 | | | $ | 0 | | | $ | (187) | |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Console | $ | 539 | | | $ | 27 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 566 | |
PC | 117 | | | 348 | | | 22 | | | 0 | | | (18) | | | 469 | |
Mobile and ancillary (1) | 109 | | | 25 | | | 514 | | | 0 | | | 0 | | | 648 | |
Other (2) | 8 | | | 11 | | | 0 | | | 65 | | | 0 | | | 84 | |
Total segment net revenues | $ | 773 | | | $ | 411 | | | $ | 536 | | | $ | 65 | | | $ | (18) | | | $ | 1,767 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by platform: | | | | | | | | | | | |
Console | $ | 214 | | | $ | 27 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 241 | |
PC | 29 | | | 286 | | | 28 | | | 0 | | | (2) | | | 341 | |
Mobile and ancillary (1) | 9 | | | 42 | | | 474 | | | 0 | | | 0 | | | 525 | |
Other (2) | 0 | | | 62 | | | 0 | | | 113 | | | 0 | | | 175 | |
Total consolidated net revenues | $ | 252 | | | $ | 417 | | | $ | 502 | | | $ | 113 | | | $ | (2) | | | $ | 1,282 | |
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Console | $ | (36) | | | $ | (9) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (45) | |
PC | (7) | | | (14) | | | 0 | | | 0 | | | 0 | | | (21) | |
Mobile and ancillary (1) | 0 | | | 0 | | | (2) | | | 0 | | | 0 | | | (2) | |
Other (2) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total change in deferred revenues | $ | (43) | | | $ | (23) | | | $ | (2) | | | $ | 0 | | | $ | 0 | | | $ | (68) | |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Console | $ | 178 | | | $ | 18 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 196 | |
PC | 22 | | | 272 | | | 28 | | | 0 | | | (2) | | | 320 | |
Mobile and ancillary (1) | 9 | | | 42 | | | 472 | | | 0 | | | 0 | | | 523 | |
Other (2) | 0 | | | 62 | | | 0 | | | 113 | | | 0 | | | 175 | |
Total segment net revenues | $ | 209 | | | $ | 394 | | | $ | 500 | | | $ | 113 | | | $ | (2) | | | $ | 1,214 | |
Net revenues by platform, including a reconciliation to each of our reportable segment’s net revenues, for the nine months ended September 30, 20192020 and 2018,2019, were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by platform: | | | | | | | | | | | |
Console | $ | 1,855 | | | $ | 89 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,944 | |
PC | 423 | | | 1,060 | | | 73 | | | 0 | | | (62) | | | 1,494 | |
Mobile and ancillary (1) | 261 | | | 77 | | | 1,515 | | | 0 | | | 0 | | | 1,853 | |
Other (2) | 55 | | | 87 | | | 0 | | | 241 | | | 0 | | | 383 | |
Total consolidated net revenues | $ | 2,594 | | | $ | 1,313 | | | $ | 1,588 | | | $ | 241 | | | $ | (62) | | | $ | 5,674 | |
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Console | $ | (295) | | | $ | (6) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (301) | |
PC | (50) | | | 24 | | | (1) | | | 0 | | | 0 | | | (27) | |
Mobile and ancillary (1) | 36 | | | (4) | | | 0 | | | 0 | | | 0 | | | 32 | |
Other (2) | 0 | | | (1) | | | 0 | | | (9) | | | 0 | | | (10) | |
Total change in deferred revenues | $ | (309) | | | $ | 13 | | | $ | (1) | | | $ | (9) | | | $ | 0 | | | $ | (306) | |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Console | $ | 1,560 | | | $ | 83 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,643 | |
PC | 373 | | | 1,084 | | | 72 | | | 0 | | | (62) | | | 1,467 | |
Mobile and ancillary (1) | 297 | | | 73 | | | 1,515 | | | 0 | | | 0 | | | 1,885 | |
Other (2) | 55 | | | 86 | | | 0 | | | 232 | | | 0 | | | 373 | |
Total segment net revenues | $ | 2,285 | | | $ | 1,326 | | | $ | 1,587 | | | $ | 232 | | | $ | (62) | | | $ | 5,368 | |
| | | Nine Months Ended September 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: | | | | | | | | | | | | Net revenues by platform: | | | | | | | | | | | |
Console | $ | 1,222 |
| | $ | 102 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,324 |
| Console | $ | 1,222 | | | $ | 102 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,324 | |
PC | 204 |
| | 909 |
| | 92 |
| | — |
| | (9 | ) | | 1,196 |
| PC | 204 | | | 909 | | | 92 | | | 0 | | | (9) | | | 1,196 | |
Mobile and ancillary (1) | 16 |
| | 121 |
| | 1,435 |
| | — |
| | — |
| | 1,572 |
| Mobile and ancillary (1) | 16 | | | 121 | | | 1,435 | | | 0 | | | 0 | | | 1,572 | |
Other (2) | — |
| | 157 |
| | — |
| | 254 |
| | — |
| | 411 |
| Other (2) | 0 | | | 157 | | | 0 | | | 254 | | | 0 | | | 411 | |
Total consolidated net revenues | $ | 1,442 |
| | $ | 1,289 |
| | $ | 1,527 |
| | $ | 254 |
| | $ | (9 | ) | | $ | 4,503 |
| Total consolidated net revenues | $ | 1,442 | | | $ | 1,289 | | | $ | 1,527 | | | $ | 254 | | | $ | (9) | | | $ | 4,503 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | | Change in deferred revenues: | |
Console | $ | (563 | ) | | $ | (26 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (589 | ) | Console | $ | (563) | | | $ | (26) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (589) | |
PC | (84 | ) | | (133 | ) | | (1 | ) | | — |
| | — |
| | (218 | ) | PC | (84) | | | (133) | | | (1) | | | 0 | | | 0 | | | (218) | |
Mobile and ancillary (1) | (1 | ) | | (10 | ) | | 1 |
| | — |
| | — |
| | (10 | ) | Mobile and ancillary (1) | (1) | | | (10) | | | 1 | | | 0 | | | 0 | | | (10) | |
Other (2) | — |
| | 2 |
| | — |
| | (9 | ) | | — |
| | (7 | ) | Other (2) | 0 | | | 2 | | | 0 | | | (9) | | | 0 | | | (7) | |
Total change in deferred revenues | $ | (648 | ) | | $ | (167 | ) | | $ | — |
| | $ | (9 | ) | | $ | — |
| | $ | (824 | ) | Total change in deferred revenues | $ | (648) | | | $ | (167) | | | $ | 0 | | | $ | (9) | | | $ | 0 | | | $ | (824) | |
| | | | | | | | | | | | | | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | | Segment net revenues: | |
Console | $ | 659 |
| | $ | 76 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 735 |
| Console | $ | 659 | | | $ | 76 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 735 | |
PC | 120 |
| | 776 |
| | 91 |
| | — |
| | (9 | ) | | 978 |
| PC | 120 | | | 776 | | | 91 | | | 0 | | | (9) | | | 978 | |
Mobile and ancillary (1) | 15 |
| | 111 |
| | 1,436 |
| | — |
| | — |
| | 1,562 |
| Mobile and ancillary (1) | 15 | | | 111 | | | 1,436 | | | 0 | | | 0 | | | 1,562 | |
Other (2) | — |
| | 159 |
| | — |
| | 245 |
| | — |
| | 404 |
| Other (2) | 0 | | | 159 | | | 0 | | | 245 | | | 0 | | | 404 | |
Total segment net revenues | $ | 794 |
| | $ | 1,122 |
| | $ | 1,527 |
| | $ | 245 |
| | $ | (9 | ) | | $ | 3,679 |
| Total segment net revenues | $ | 794 | | | $ | 1,122 | | | $ | 1,527 | | | $ | 245 | | | $ | (9) | | | $ | 3,679 | |
(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.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by platform: | | | | | | | | | | | |
Console | $ | 1,597 |
| | $ | 133 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,730 |
|
PC | 208 |
| | 1,140 |
| | 118 |
| | — |
| | (14 | ) | | 1,452 |
|
Mobile and ancillary (1) | 12 |
| | 139 |
| | 1,429 |
| | — |
| | — |
| | 1,580 |
|
Other (2) | — |
| | 124 |
| | — |
| | 233 |
| | — |
| | 357 |
|
Total consolidated net revenues | $ | 1,817 |
| | $ | 1,536 |
| | $ | 1,547 |
| | $ | 233 |
| | $ | (14 | ) | | $ | 5,119 |
|
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Console | $ | (695 | ) | | $ | (25 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (720 | ) |
PC | (76 | ) | | 96 |
| | — |
| | — |
| | — |
| | 20 |
|
Mobile and ancillary (1) | 1 |
| | (2 | ) | | (5 | ) | | — |
| | — |
| | (6 | ) |
Other (2) | — |
| | 1 |
| | — |
| | 13 |
| | — |
| | 14 |
|
Total change in deferred revenues | $ | (770 | ) | | $ | 70 |
| | $ | (5 | ) | | $ | 13 |
| | $ | — |
| | $ | (692 | ) |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Console | $ | 902 |
| | $ | 108 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,010 |
|
PC | 132 |
| | 1,236 |
| | 118 |
| | — |
| | (14 | ) | | 1,472 |
|
Mobile and ancillary (1) | 13 |
| | 137 |
| | 1,424 |
| | — |
| | — |
| | 1,574 |
|
Other (2) | — |
| | 125 |
| | — |
| | 246 |
| | — |
| | 371 |
|
Total segment net revenues | $ | 1,047 |
| | $ | 1,606 |
| | $ | 1,542 |
| | $ | 246 |
| | $ | (14 | ) | | $ | 4,427 |
|
(2) Net revenues from “Other” include revenues from our Distribution business, the Overwatch League, and the Call of Duty League.
| |
(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. |
(3) Intersegment revenues reflect licensing and service fees charged between segments.
| |
(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 September 30, 2019 | | At December 31, 2018 |
Long-lived assets (1) by geographic region: | |
| | |
|
Americas | $ | 179 |
| | $ | 203 |
|
EMEA | 58 |
| | 62 |
|
Asia Pacific | 12 |
| | 17 |
|
Total long-lived assets by geographic region | $ | 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. |
| | | | | | | | | | | |
| At September 30, 2020 | | At December 31, 2019 |
Long-lived assets (1) by geographic region: | | | |
Americas | $ | 269 | | | $ | 322 | |
EMEA | 174 | | | 142 | |
Asia Pacific | 16 | | | 21 | |
Total long-lived assets by geographic region | $ | 459 | | | $ | 485 | |
14.
(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, and our lease right-of-use assets; all other long-term assets are not allocated by location.
11. Restructuring
On February 12,During 2019, the Company committed towe began implementing a Board-authorized restructuring plan under which the Company aims to refocus itsaimed at refocusing our resources on itsour largest opportunities and to removeremoving unnecessary levels of complexity and duplication from certain parts of theour business. We have been, and will continue:been:
•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 areremain in processprogress as we continue to focus on these goals and are largely expected to be completed by the end of 2019, although the timing of cash payments may continue into 2020.execute against our plan.
The following table summarizes accrued restructuring and related costs included in “Accrued expenses and other liabilities” in our condensed consolidated balance sheet and the cumulative charges incurred (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Severance and employee-related costs | | Facilities and related costs | | Other costs | | Total |
Balance at December 31, 2019 | $ | 32 | | | $ | 0 | | | $ | 3 | | | $ | 35 | |
Costs charged to expense | 23 | | | 0 | | | 0 | | | 23 | |
Cash payments | (6) | | | 0 | | | (2) | | | (8) | |
| | | | | | | |
Balance at March 31, 2020 | $ | 49 | | | $ | 0 | | | $ | 1 | | | $ | 50 | |
Costs charged to expense | 3 | | | 0 | | | 1 | | | 4 | |
Cash payments | (3) | | | 0 | | | (2) | | | (5) | |
| | | | | | | |
Balance at June 30, 2020 | $ | 49 | | | $ | 0 | | | $ | 0 | | | $ | 49 | |
Costs charged to expense | 6 | | | 3 | | | 0 | | | 9 | |
Cash payments | (7) | | | 0 | | | 0 | | | (7) | |
Non-cash charge adjustment (1) | 0 | | | (3) | | | 0 | | | (3) | |
Balance at September 30, 2020 | $ | 48 | | | $ | 0 | | | $ | 0 | | | $ | 48 | |
| | | | | | | |
Cumulative charges incurred through September 30, 2020 | $ | 108 | | | $ | 32 | | | $ | 33 | | | $ | 173 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| Severance and employee related costs | | Facilities and related costs | | Other costs | | Total |
Balance at December 31, 2018 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Costs charged to expense | 43 |
| | — |
| | 14 |
| | 57 |
|
Cash payments | (11 | ) | | — |
| | (1 | ) | | (12 | ) |
Non-cash charge adjustment (1) | — |
| | — |
| | (11 | ) | | (11 | ) |
Balance at March 31, 2019 | $ | 32 |
| | $ | — |
| | $ | 2 |
| | $ | 34 |
|
Costs charged to expense | 9 |
| | 9 |
| | 4 |
| | 22 |
|
Cash payments | (15 | ) | | — |
| | (5 | ) | | (20 | ) |
Non-cash charge adjustment (1) | — |
| | (9 | ) | | — |
| | (9 | ) |
Balance at June 30, 2019 | $ | 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. |
(1) Adjustments relate to non-cash charges included in “Costs charged to expense” for the write-down of assets for our lease facilities that were vacated.
Total restructuring and related costs by segment are (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
Activision | | | $ | 1 | | | $ | 1 | | | $ | 5 | | | $ | 12 | |
Blizzard | | | 7 | | | 12 | | | 30 | | | 52 | |
King | | | 1 | | | 4 | | | (1) | | | 17 | |
Other segments (1) | | | 0 | | | 7 | | | 2 | | | 23 | |
Total | | | $ | 9 | | | $ | 24 | | | $ | 36 | | | $ | 104 | |
(1) Includes charges related to operating segments managed outside the reportable segments, including our Distribution business. Also includes restructuring charges for our corporate and administrative functions.
|
| | | | | | | |
| Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
Activision | $ | 1 |
| | $ | 12 |
|
Blizzard | 12 |
| | 52 |
|
King | 4 |
| | 17 |
|
Other segments (1) | 7 |
| | 23 |
|
Total | $ | 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 threenine months ended September 30, 2019,2020 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-taxincurred additional restructuring charges of approximately $150 millionthat are not included in 2019 associated with the restructuring plan which includes the inventory write-down discussed above. Such amounts were not material.
As of September 30, 2020, we had board approval to incur up to $190 million of pre-tax charges under our restructuring plan. These charges will primarilywere expected to relate to severance and employee-related costs (approximately 55%60% of the aggregate charge), including, in many cases, amounts above those that are legally required, facilities and related costs (approximately 20% of the aggregate charge), and other asset write-downs and costs (approximately 25%20% of the aggregate charge)., including charges for restructuring related fees and the write-down of assets. A majority of the total pre-tax charge associated with the restructuring willthese charges were expected be paid in cash using amounts on hand and thesuch outlays arewere largely expected to be largelycompleted by the end of 2021.
The total charges incurred throughout 2019, with the remainder continuing into 2020.
Thethrough September 30, 2020 and total expected pre-tax restructuring charges related to the $190 million restructuring plan, by segment, inclusive of amounts already incurred, are presented below (amounts in millions):
| | | | | | | | | | | |
| Total Charges Incurred Through September 30, 2020 | | Total Charges Expected as of September 30, 2020 |
Activision | $ | 24 | | | $ | 25 | |
Blizzard | 103 | | | 105 | |
King | 19 | | | 20 | |
Other segments (1) | 27 | | | 40 | |
Total | $ | 173 | | | $ | 190 | |
(1) Includes charges related to operating segments managed outside the reportable segments, including our Distribution business. Also includes restructuring charges for our corporate and administrative functions.
On October 27, 2020, our Board of Directors approved an expansion to the scope of certain actions within our restructuring plan that are aimed at integrating our global and regional functions to allow continued focus on investing in our largest, internally-owned franchises and to provide us with the ability to better leverage our scale across the organization. As a result, subsequent to the end of the third quarter, we now expect to incur total aggregate pre-tax restructuring charges of approximately $310 million associated with the restructuring plan, of which the remaining charges that have not yet been incurred are expected to largely be incurred within the next 12 months. The charges associated with the restructuring plan are expected to relate to severance and employee-related costs (approximately 60% of the aggregate charge), facilities and related costs (approximately 20% of the aggregate charge), and other costs (approximately 20% of the aggregate charge), including charges for restructuring related fees and the write-down of assets. A substantial majority (approximately 70%) of the total pre-tax charge associated with the restructuring is expected to be paid in cash using amounts on hand, and such cash outlays are largely expected to be completed by the end of 2021.
12. Interest and Other Expense (Income), Net
|
| | | |
| Year Ending December 31, 2019 |
Activision | $ | 15 |
|
Blizzard | 66 |
|
King | 27 |
|
Other segments (1) | 42 |
|
Total | $ | 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 September 30, | | For the Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Interest income | | $ | (20 | ) | | $ | (17 | ) | | $ | (61 | ) | | $ | (50 | ) |
Interest expense from debt and amortization of debt discount and deferred financing costs | | 23 |
| | 33 |
| | 68 |
| | 118 |
|
Unrealized gain on equity investment | | — |
| | — |
| | (38 | ) | | — |
|
Other expense (income), net | | (5 | ) | | (3 | ) | | (2 | ) | | (1 | ) |
Interest and other expense (income), net | | $ | (2 | ) | | $ | 13 |
| | $ | (33 | ) | | $ | 67 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Interest income | | $ | (1) | | | $ | (20) | | | $ | (20) | | | $ | (61) | |
Interest expense from debt and amortization of debt discount and deferred financing costs | | 27 | | | 23 | | | 72 | | | 68 | |
Unrealized gain on equity investment | | (3) | | | 0 | | | (3) | | | (38) | |
Other expense (income), net | | 2 | | | (5) | | | 6 | | | (2) | |
Interest and other expense (income), net | | $ | 25 | | | $ | (2) | | | $ | 55 | | | $ | (33) | |
16.
13. 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 $45$118 million for the three months ended September 30, 2019,2020, reflects an effective tax rate of 16%, which is lower than the effective tax rate of 18% for the three months ended September 30, 2019. This decrease is primarily due to discrete tax benefits recognized in the current quarter for the remeasurement of deferred tax assets, partially offset by an increase in taxes on foreign earnings.
The income tax expense of $365 million for the nine months ended September 30, 2020, reflects, an effective tax rate of 18%, which is higher than thecomparable to effective tax rate of (23)% for the three months ended September 30, 2018. The increase is primarily due to a discrete tax benefit recognized in the prior year in connection with 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 million18% for the nine months ended September 30, 2019, reflects an effective2019. Discrete 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 benefitbenefits recognized in the priorcurrent year in connection with an audit settlement withfor the Internal Revenue Service (“IRS”), a discreteremeasurement of deferred 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 partiallyassets were offset by a valuation allowance recordedan increase in the prior year with regard to California research and development credit carryforwards (“CA R&D Credits”).taxes on foreign earnings.
The effective tax raterates of 16% and 18% for both the three and nine months ended September 30, 2019, is2020, are lower than the U.S. statutory rate of 21%, primarily due to foreign earnings taxed at lower statutory rates as compared to domestic earnings, which is partially offset by U.S.discrete tax on foreign earnings,benefits recognized for the remeasurement of deferred tax assets and the recognition of federal researchexcess tax benefits from share-based payments.
During the quarter ended September 30, 2020, the U.S. Treasury Department issued tax regulations under various provisions of the 2017 Tax Cuts and development credits.Jobs Act, including the global intangible low-taxed income high tax exclusion. While these regulations did not result in a material impact to our financial statements in the current quarter, we will continue to assess their impact on future periods.
Activision Blizzard’s 2009 through 2018 tax years after 2008 remain open to examination by certain major taxing jurisdictions to which we are subject. The IRSInternal Revenue Service 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 audit discussed below.pending. In addition, we are currently seekingKing’s pre-acquisition tax returns remain open in various jurisdictions, primarily as a result of transfer pricing matters. We anticipate resolving King’s transfer pricing for both pre- and post-acquisition tax years through a collaborative multilateral agreement amongprocess with 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.which include the U.K. and Sweden. While the outcome of any discussions aimed at such an agreementthis process remains uncertain, theyit 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 $359$386 million), primarily concerning an alleged intercompany asset transfer. On June 17, 2019, we received a reassessment from the STA (“Reassessment”(the “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 $625$666 million). We disagreeIn December 2019, the Company reached a settlement with the proposed assessment and continue to vigorously contest it. We believe our tax provisions at September 30, 2019, 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 taxFTA for the 2011 through 20132018 tax years, 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 subsidiariesresulting 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$54 million of tax assetexpense 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 endingperiod ended 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 flows2019, and a tax payment of €161 million (approximately $188 million), including interest and penalties, in 2019.January 2020.
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.
17.14. 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 September 30, | | For the Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Numerator: | |
| | |
| | | | |
Consolidated net income | $ | 204 |
| | $ | 260 |
| | $ | 978 |
| | $ | 1,162 |
|
Denominator: | |
| | |
| | |
| | |
|
Denominator for basic earnings per common share—weighted-average common shares outstanding | 767 |
| | 763 |
| | 766 |
| | 761 |
|
Effect of potential dilutive common shares under the treasury stock method—employee stock options and awards | 4 |
| | 8 |
| | 4 |
| | 10 |
|
Denominator for basic earnings per common share—weighted-average dilutive common shares outstanding | 771 |
| | 771 |
| | 770 |
| | 771 |
|
| | | | | | | |
Basic earnings per common share | $ | 0.27 |
| | $ | 0.34 |
| | $ | 1.28 |
| | $ | 1.53 |
|
Diluted earnings per common share | $ | 0.26 |
| | $ | 0.34 |
| | $ | 1.27 |
| | $ | 1.51 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Numerator: | | | | | | | |
Consolidated net income | $ | 604 | | | $ | 204 | | | $ | 1,688 | | | $ | 978 | |
Denominator: | | | | | | | |
Denominator for basic earnings per common share—weighted-average common shares outstanding | 772 | | | 767 | | | 771 | | | 766 | |
Effect of potential dilutive common shares under the treasury stock method—employee stock options and awards | 7 | | | 4 | | | 6 | | | 4 | |
Denominator for basic earnings per common share—weighted-average dilutive common shares outstanding | 779 | | | 771 | | | 777 | | | 770 | |
| | | | | | | |
Basic earnings per common share | $ | 0.78 | | | $ | 0.27 | | | $ | 2.19 | | | $ | 1.28 | |
Diluted earnings per common share | $ | 0.78 | | | $ | 0.26 | | | $ | 2.17 | | | $ | 1.27 | |
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 September 30, | | For the Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Restricted stock units and options with performance measures not yet met | 4 |
| | 6 |
| | 3 |
| | 6 |
|
Anti-dilutive employee stock options | 6 |
| | 1 |
| | 6 |
| | 2 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Restricted stock units and options with performance measures not yet met | 3 | | | 4 | | | 2 | | | 3 | |
Anti-dilutive employee stock options | 0 | | | 6 | | | 1 | | | 6 | |
18.
15. 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 September 30, 2019,2020, we have not0t repurchased any shares under this program.
Dividends
On February 6, 2020, our Board of Directors declared a cash dividend of $0.41 per common share. On May 6, 2020, we made an aggregate cash dividend payment of $316 million to shareholders of record at the close of business on April 15, 2020.
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.
19.16. Commitments and Contingencies
Legal Proceedings
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
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 onoffer digital advertising within our intellectual property.content. 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.pursuant to which we acquired Blizzard Entertainment, Inc. (“Blizzard”), we were renamed Activision Blizzard, Inc. On February 23, 2016, we acquired King Digital Entertainment plc ("King") by purchasing all of its outstanding shares.
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 also includes the activities of the Call of Duty LeagueTM, a global professional esports league with city-based teams.
Activision’s key product franchise is Call of Duty®, a first-person shooteraction title for the console, PC, and PCmobile 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 tothe 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 LeagueTM, the first majora 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.teams.
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 shooteraction title 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, particularly for the mobile platform, including for Google’s Android and Apple’s iOS.platform. 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 offranchise is Candy CrushTM, which arefeatures “match three” games 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.platforms.
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
|
including 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.
Impacts of the Global COVID-19 Pandemic
In December 2019, a novel strain of coronavirus (“COVID-19”) emerged and has since extensively impacted global health and the economic environment. On February 28, 2020, the World Health Organization (“WHO”) raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. In an effort to contain the spread of COVID-19, domestic and international governments around the world enacted various measures, including orders to close all businesses not deemed “essential,” quarantine orders for individuals to stay in their homes or places of residence, and to practice social distancing when engaging in essential activities. We anticipate that these actions and the global health crisis caused by COVID-19 will continue to negatively impact many business activities and financial markets across the globe.
The full extent of the impact of the COVID-19 pandemic on our business, reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, or stock price will depend on numerous evolving factors that we are not able to fully predict at this time. However, we believe that given our strong balance sheet, with cash and cash equivalents and short-term investments of $7.6 billion as of September 30, 2020, and the fact that our business has increasingly shifted to digital channels, we have substantial flexibility as we navigate through the uncertain environment and near-term implications of the COVID-19 pandemic.
During the COVID-19 pandemic, our business has experienced an increase in demand for certain of our products and services as a result of the stay-at-home orders enacted in various regions as players have more time to engage with our games. These trends contributed to strong full game and in-game content sales for Call of Duty: Modern Warfare®, which also benefited from the launch of Call of Duty: WarzoneTM in March. In addition, we saw further demand for World of Warcraft, including its in-game content, which also continued to benefit from the release of World of Warcraft Classic in August 2019. Beginning in the month of March, our business also experienced an increase in monthly active users for certain franchises. We have, however, seen a moderation in these trends since the stay-at-home orders were originally enacted earlier in the year.
As a result of the COVID-19 pandemic and stay-at-home orders enacted in various regions, both the Overwatch League and the Call of Duty League pivoted all matches from their originally planned local homestand formats to online play and remote production for the remainder of the regular and postseason in order to keep players and fans safe while still delivering premium esports content to a global audience. Additionally, to support our Overwatch League and Call of Duty League team owners and ecosystems amid a challenging environment, which includes losing the ability to have live fan-attended home venue events, we have taken certain actions to support their short-term cash flow needs, adjusted our league operations to reduce operating costs and improve franchise terms, and made certain investments which have impacted our operating results in the third quarter of 2020. This impact was primarily in the Blizzard segment.
The sustainability of these trends and long-term implications to our business is dependent on future developments, including the duration of the COVID-19 pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time. See Item 1A “Risk Factors” within Part II of this Quarterly Report on Form 10-Q for additional details on risks and uncertainties regarding the impacts of the global COVID-19 pandemic on our business, reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, and stock price.
In an effort to protect the health and safety of our employees, the majority of our workforce is currently working from home and we have placed restrictions on non-essential business travel. We have implemented business continuity plans and have increased support and resources to enable our employees to work remotely and, thus far, our business has been able to operate with minimal disruption to our game titles’ published release dates. The global COVID-19 pandemic remains a rapidly evolving situation. We will continue to actively monitor the developments of the COVID-19 pandemic and may take further actions that could alter our business operations as may be required by federal, state, local, or foreign authorities, or that we determine are in the best interests of our employees, customers, partners and shareholders. It is not clear what effects any such potential actions may have on our business, including the effects on our employees, players and consumers, customers, partners, game development and content pipelines, or on our reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, or stock price.
Business Results and Highlights
Financial Results
For the three months ended September 30, 2019:2020:
•consolidated net revenues decreased 15%increased 52% to $1.28$1.95 billion, andwhile consolidated operating income decreased 7%increased 215% to $247$778 million, as compared to consolidated net revenues of $1.51$1.28 billion and consolidated operating income of $265$247 million for the three months ended September 30, 2018;2019;
•revenues from digital online channels were $1.01$1.75 billion, or 79%90% of consolidated net revenues, as compared to $1.28$1.01 billion, or 84%79% of consolidated net revenues, for the three months ended September 30, 2018;2019;
•operating margin was 19.3%39.8%, which includes $28$9 million in restructuring and related costs, as compared to 17.5%19.3%, for the three months ended September 30, 2018;2019, which included $28 million in restructuring and related costs;
•consolidated net income decreased 22%increased 196% to $204$604 million, as compared to $260$204 million for the three months ended September 30, 2018; net income for the 2018 period included $72 million of net tax benefits from discrete tax items primarily related to updates to our accounting for the Tax Cuts2019; and Jobs Act (see “Consolidated Results” discussion below for additional details); and
•diluted earnings per common share decreased 24%increased 200% to $0.26,$0.78, as compared to $0.34$0.26 for the three months ended September 30, 2018.2019.
For the nine months ended September 30, 2019:2020:
•consolidated net revenues decreased 12%increased 26% to $4.50$5.67 billion, andwhile consolidated operating income decreased 11%increased 86% to $1.15$2.14 billion, as compared to consolidated net revenues of $5.12$4.50 billion and consolidated operating income of $1.29$1.15 billion for the nine months ended September 30, 2018;2019;
•revenues from digital online channels were $3.49$4.78 billion, or 78%84% of consolidated net revenues, as compared to $4.00$3.49 billion, or 78% of consolidated net revenues, for the nine months ended September 30, 2018;2019;
•operating margin was 25.6%37.7%, which includes $108$39 million in restructuring and related costs, as compared to 25.3%25.6%, for the nine months ended September 30, 2018;2019, which included $108 million in restructuring and related costs;
cash flows from operating activities were $913 million, an increase of 15%,•consolidated net income increased 73% to $1.69 billion, as compared to $791$978 million for the nine months ended September 30, 2018;2019;
consolidated net income decreased 16%•diluted earnings per common share increased 71% to $978 million,$2.17, as compared to $1.16 billion$1.27 for the nine months ended September 30, 2018; net income for the 2018 period included $97 million2019; and
•cash flows from operating activities were $1.11 billion, an increase of net tax benefits from several discrete tax items (see “Consolidated Results” discussion below for additional details); and
diluted earnings per common share decreased 16% to $1.27,22%, as compared to $1.51$913 million for the nine months ended September 30, 2018.2019.
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 September 30, 2019,2020, include a net effect of $68$187 million and $53$150 million, respectively, from the recognition of deferred net revenues and related cost of revenues. Net revenues and operating income for the nine months ended September 30, 2019,2020, include a net effect of $824$306 million and $629$169 million, respectively, from the recognition of deferred net revenues and related cost of revenues.
Additionally, for the three months ended September 30, 2020 and 2019, 12% and 14%, respectively, of total net revenues recognized were from revenue sources that were recognized at a “point-in-time,” while “over-time and other” revenues were the remaining 88% and 86%, respectively, of total net revenues. For the nine months ended September 30, 2020 and 2019, 12% and 13%, respectively, of total net revenues recognized were from revenue sources that were recognized at a “point-in-time,” while “over-time and other” revenues were the remaining 88% and 87%, respectively, of total net revenues. Revenues recognized at a “point-in-time” are primarily comprised of the portion of revenue from software products that is recognized when the customer takes control of the product (i.e., upon delivery of the software product) and revenues from our Distribution business. “Over-time and other revenues” are primarily comprised of revenue associated with the online functionality of our games, in-game purchases, and subscriptions.
Content Release and Event Highlights
DuringGames and other major content releases during the three months ended September 30, 2019, Activision released2020, include Activision’s SpyroTony Hawk’sTM Reignited TrilogyPro SkaterTM on Nintendo Switch1 and PC,2and Blizzard released World of Warcraft® Classic, , a re-creationremaster of the pre-expansion version offirst two titles in the Tony Hawk video game and the latest expansions to Hearthstone—Saviors of UldumTMand Tombs of TerrorTM .franchise.
Operating Metrics
The following operating metrics are key performance indicators that we use to evaluate our business. The key drivers of changes in our operating metrics are presented in the order of significance.
Net bookings and In-game net bookings
We monitor net bookings as a key operating metric in evaluating the performance of our business.business because it enables an analysis of performance based on the timing of actual transactions with our customers and provides more timely indications of trends in our operating results. 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 and in-game net bookings were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2020 | | 2019 | | Increase (Decrease) | | 2020 | | 2019 | | Increase (Decrease) |
Net bookings | $ | 1,767 | | | $ | 1,214 | | | $ | 553 | | | $ | 5,368 | | | $ | 3,679 | | | $ | 1,689 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
In-game net bookings | $ | 1,200 | | | $ | 709 | | | $ | 491 | | | $ | 3,529 | | | $ | 2,281 | | | $ | 1,248 | |
| | | | | | | | | | | |
|
| | | | | | | | | | | |
| September 30, 2019 | | September 30, 2018 | | Increase (Decrease) |
Net bookings | | | | | |
Three Months Ended | $ | 1,214 |
| | $ | 1,658 |
| | $ | (444 | ) |
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 | ) |
Net bookings
Q3 20192020 vs. Q3 20182019
The decreaseincrease in net bookings for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to:
| |
• | a decrease in Blizzard net bookings of $241 million driven by (1) overall lower net bookings from World of Warcraft expansion and in-game content sales, 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), and (2) lower net bookings from Hearthstone, primarily due to lower net bookings from the Saviors of Uldum expansion, which was released in August 2019, as compared to the Boomsday™ expansion, which was released in August 2018; and
|
•a decrease$564 million increase in Activision net bookings of $188 million driven by higher net bookings from (1)Call of Duty: Modern Warfare (which was released in October 2019, and when referred to herein, is inclusive of Call of Duty: Warzone,which was released in March 2020), as compared to Call of Duty: Black Ops 4,which was released in October 2018, (2) Call of Duty: Mobile, which was released in October 2019, and (3) Tony Hawk’s Pro Skater 1 and 2, which was released in September 2020; and
•a $17 million increase in Blizzard net bookings driven by higher net bookings from World of Warcraft,primarily from higher in-game and subscription net bookings, partially offset by lower net bookings from the Destiny franchise (reflecting our saleOverwatch League.
YTD Q3 20192020 vs. YTD Q3 20182019
The decreaseincrease in net bookings for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, 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 launch of World of Warcraft: Battle for Azeroth, and (2) lower net bookings from Overwatch; and
|
| |
• | a decrease in Activision net bookings of $253 million driven by (1) lower net bookings from the Destiny franchise and (2) lower net bookings from the Call of Duty franchise catalog titles, partially offset by net bookings from SekiroTM: Shadows Die Twice,which was released in March 2019.
|
•a $1.49 billion increase in Activision net bookings, driven by higher net bookings from (1) Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4, (2) Call of Duty: Mobile, and (3) the Call of Duty franchise catalog titles, partially offset by lower net bookings from SekiroTM: Shadows Die Twice,which was released in March 2019; and
•a $204 million increase in Blizzard net bookings, driven by higher net bookings from World of Warcraft,primarily from higher subscription and in-game net bookings.
In-game net bookings
Q3 20192020 vs. Q3 20182019
The decreaseincrease in in-game net bookings for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to to:
•a decrease$432 million increase in Blizzard and Activision in-game net bookings, of $183 million and $113 million, respectively, due to the same drivers discussed fordriven by higher in-game net bookings above.from (1) Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4 and (2) Call of Duty: Mobile; and
•a $40 million increase in Blizzard in-game net bookings, driven by World of Warcraft.
YTD Q3 20192020 vs. YTD Q3 20182019
The decreaseincrease in in-game net bookings for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, 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$1.15 billion increase in Activision in-game net bookings of $254and an $88 million driven by (1) lowerincrease in Blizzard 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.the same factors as noted for the three-month period above.
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. In certain instances, we rely on third parties to publish our games. In these instances, MAU data is based on information provided to us by those third parties, or, if final data is not available, reasonable estimates of MAUs for these third-party published games.
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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | |
Activision | 111 | | | 125 | | | 102 | | | 128 | | | 36 | | |
Blizzard | 30 | | | 32 | | | 32 | | | 32 | | | 33 | | |
King | 249 | | | 271 | | | 273 | | | 249 | | | 247 | | |
Total | 390 | | | 428 | | | 407 | | | 409 | | | 316 | | |
|
| | | | | | | | | | | | | | | | | |
| September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | | June 30, 2018 |
Activision | 36 |
| | 37 |
| | 41 |
| | 53 |
| | 46 |
| | 45 |
|
Blizzard | 33 |
| | 32 |
| | 32 |
| | 35 |
| | 37 |
| | 37 |
|
King | 247 |
| | 258 |
| | 272 |
| | 268 |
| | 262 |
| | 270 |
|
Total | 316 |
| | 327 |
| | 345 |
| | 356 |
| | 345 |
| | 352 |
|
Average MAUs decreased by 1138 million, or 3%9%, for the three months ended September 30, 2019,2020, as compared to the three months ended June 30, 2019,2020, primarily due to:
•a decrease in average MAUs for King, driven by a decrease in average MAUs for King. The decrease in King’s average MAUs is primarily due to decreases from the Candy Crush franchise. The slight increasefranchise; and
•a decrease in Blizzard’s average MAUs is due to an increasefor Activision, driven by a decrease in average MAUs for WorldCall of WarcraftDuty: Modern Warfare, largely offset by lower average MAUs for Hearthstone.which was released in October 2019.
Average MAUs decreasedincreased by 2974 million, or 8%23%, for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018. The year-over-year decrease2019, primarily due to:
•an increase in Activision’s average MAUs, driven by an increase in average MAUs is due to:for Call of Duty: Mobile, which launched in October 2019, and Call of Duty: Modern Warfare, which benefited from the launch of Call of Duty: Warzone in March 2020; and
| |
• | decreases across King’s various franchises, other than Candy Crush, primarily from less engaged users leaving the network, partially offset•a slight increase in King’s average MAUs driven by an increase in average MAUs for the Candy Crush franchise, primarily driven by the launch of Candy Crush Friends SagaTM in the fourth quarter of 2018; |
lower average MAUs for Activision, primarily due to the absence of Destiny MAUsCandy Crush franchise, partially offset by decreases in our operating metric and lower average MAUs from the Call of Duty franchise; andvarious other franchises.
| |
• | lower average MAUs for Blizzard, primarily due to lower average MAUs for Hearthstone and Overwatch.
|
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,grew, on average, 18%13% annually from 20152016 to 2018.2019. 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.
TheFurther, wide adoption of smart phonessmartphones 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 fromin our franchises, such as thefranchises. The October 2019 launch of Call of Duty: Mobile. is an example of these efforts.
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, we have sold rights for 20 teams that are participating in the Overwatch League, which recently completed its second season. Additionally, we have sold the first 12 teams for the Call of Duty 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%33% of the retail sales in the U.S. interactive entertainment industry in 2018.2019. 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 also been responsible for a disproportionately high percentage of our profits. For example, in 2019, the Call of Duty, Candy Crush, and World of Warcraft franchises, collectively, accounted for 58%67% of our consolidated net revenues—and a significantly higher percentage of our operating income—for 2018.income.
In addition to investing in, and developing sequels and content for, our top franchises, with the aim of releasing content more frequently, we are continually exploring additional ways to expand those franchises. Further, while there is no guaranteefranchises, such as our March 2020 release of success, we invest in new properties in an effort to develop future top franchises. For example, in 2014, we releasedActivision’s HearthstoneCall of Duty: Warzone, a free-to-play experience from the world of Call of Duty: Modern Warfarefor the console and in 2016, we released Overwatch. Additionally,PC platforms. We also have been focusing on expanding our franchises 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’s and Blizzard’s intellectual property, such as demonstrated by the recently releasedrelease of Call of Duty: Mobile and previously announcedin the fourth quarter of 2019, as well as our plans for Diablo ImmortalTM. and recently announced Crash Bandicoot: On the Run!™, which are both currently in development.
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 September 30, | | For the Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Net revenues | | | | | | | | | | | |
Product sales | $ | 408 | | 21 | % | | $ | 260 | | 20 | % | | $ | 1,484 | | 26 | % | | $ | 1,276 | | 28 | % |
Subscription, licensing, and other revenues | 1,546 | | 79 | | | 1,022 | | 80 | | | 4,190 | | 74 | | | 3,227 | | 72 | |
Total net revenues | 1,954 | | 100 | | | 1,282 | | 100 | | | 5,674 | | 100 | | | 4,503 | | 100 | |
| | | | | | | | | | | |
Costs and expenses | | | | | | | | | | | |
Cost of revenues—product sales: | | | | | | | | | | | |
Product costs | 101 | | 25 | | | 137 | | 53 | | | 357 | | 24 | | | 388 | | 30 | |
Software royalties, amortization, and intellectual property licenses | 37 | | 9 | | | 9 | | 3 | | | 152 | | 10 | | | 171 | | 13 | |
Cost of revenues—subscription, licensing, and other revenues: | | | | | | | | | | | |
Game operations and distribution costs | 290 | | 19 | | | 246 | | 24 | | | 819 | | 20 | | | 714 | | 22 | |
Software royalties, amortization, and intellectual property licenses | 41 | | 3 | | | 50 | | 5 | | | 115 | | 3 | | | 164 | | 5 | |
Product development | 274 | | 14 | | | 210 | | 16 | | | 802 | | 14 | | | 702 | | 16 | |
Sales and marketing | 238 | | 12 | | | 182 | | 14 | | | 722 | | 13 | | | 580 | | 13 | |
General and administrative | 186 | | 10 | | | 177 | | 14 | | | 529 | | 9 | | | 527 | | 12 | |
Restructuring and related costs | 9 | | — | | | 24 | | 2 | | | 39 | | 1 | | | 104 | | 2 | |
Total costs and expenses | 1,176 | | 60 | | | 1,035 | | 81 | | | 3,535 | | 62 | | | 3,350 | | 74 | |
| | | | | | | | | | | |
Operating income | 778 | | 40 | | | 247 | | 19 | | | 2,139 | | 38 | | | 1,153 | | 26 | |
Interest and other expense (income), net | 25 | | 1 | | | (2) | | — | | | 55 | | 1 | | | (33) | | (1) | |
Loss on extinguishment of debt (1) | 31 | | 2 | | | — | | — | | | 31 | | 1 | | | — | | — | |
Income before income tax expense | 722 | | 37 | | | 249 | | 19 | | | 2,053 | | 36 | | | 1,186 | | 26 | |
Income tax expense | 118 | | 6 | | | 45 | | 4 | | | 365 | | 6 | | | 208 | | 5 | |
Net income | $ | 604 | | 31 | % | | $ | 204 | | 16 | % | | $ | 1,688 | | 30 | % | | $ | 978 | | 22 | % |
(1) Represents the loss on extinguishment of debt we recognized in connection with our debt financing activities during the three months ended September 30, 2020. 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 for further disclosures regarding our debt obligations.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net revenues | |
| |
| | |
| |
| | |
| |
| | |
| |
|
Product sales | $ | 260 |
| 20 | % | | $ | 263 |
| 17 | % | | $ | 1,276 |
| 28 | % | | $ | 1,447 |
| 28 | % |
Subscription, licensing, and other revenues | 1,022 |
| 80 |
| | 1,249 |
| 83 |
| | 3,227 |
| 72 |
| | 3,672 |
| 72 |
|
Total net revenues | 1,282 |
| 100 |
| | 1,512 |
| 100 |
| | 4,503 |
| 100 |
| | 5,119 |
| 100 |
|
| | | | | | | | | | | |
Costs and expenses | |
| |
| | |
| |
| | | |
| | |
| |
|
Cost of revenues—product sales: | | | | | | | | | | | |
Product costs | 137 |
| 53 |
| | 127 |
| 48 |
| | 388 |
| 30 |
| | 416 |
| 29 |
|
Software royalties, amortization, and intellectual property licenses | 9 |
| 3 |
| | 20 |
| 8 |
| | 171 |
| 13 |
| | 214 |
| 15 |
|
Cost of revenues—subscription, licensing, and other revenues: | | | | | | | | | | | |
Game operations and distribution costs | 246 |
| 24 |
| | 257 |
| 21 |
| | 714 |
| 22 |
| | 777 |
| 21 |
|
Software royalties, amortization, and intellectual property licenses | 50 |
| 5 |
| | 109 |
| 9 |
| | 164 |
| 5 |
| | 278 |
| 8 |
|
Product development | 210 |
| 16 |
| | 263 |
| 17 |
| | 702 |
| 16 |
| | 776 |
| 15 |
|
Sales and marketing | 182 |
| 14 |
| | 263 |
| 17 |
| | 580 |
| 13 |
| | 741 |
| 14 |
|
General and administrative | 177 |
| 14 |
| | 208 |
| 14 |
| | 527 |
| 12 |
| | 623 |
| 12 |
|
Restructuring and related costs | 24 |
| 2 |
| | — |
| — |
| | 104 |
| 2 |
| | — |
| — |
|
Total costs and expenses | 1,035 |
| 81 |
| | 1,247 |
| 82 |
| | 3,350 |
| 74 |
| | 3,825 |
| 75 |
|
| | | | | | | | | | | |
Operating income | 247 |
| 19 |
| | 265 |
| 18 |
| | 1,153 |
| 26 |
| | 1,294 |
| 25 |
|
Interest and other expense (income), net | (2 | ) | — |
| | 13 |
| 1 |
| | (33 | ) | (1 | ) | | 67 |
| 1 |
|
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 | $ | 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 key drivers of changes in our consolidated net revenues, operating segment results, consolidated results, and sources of liquidity are presented in the order of significance.
The following table summarizes our consolidated net revenues, in-game net revenues, and increase (decrease) in deferred net revenues recognized (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2020 | | 2019 | | Increase (Decrease) | | % Change | | 2020 | | 2019 | | Increase (Decrease) | | % Change |
Consolidated net revenues | $ | 1,954 | | | $ | 1,282 | | | $ | 672 | | | 52 | % | | $ | 5,674 | | | $ | 4,503 | | | $ | 1,171 | | | 26 | % |
Net effect from recognition (deferral) of deferred net revenues | 187 | | | 68 | | | 119 | | | | | 306 | | | 824 | | | (518) | | | |
| | | | | | | | | | | | | | | |
In-game net revenues (1) | 1,283 | | | 734 | | | 549 | | | 75 | % | | 3,331 | | | 2,479 | | | 852 | | | 34 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2019 | | 2018 | | Increase (Decrease) | | % Change | | 2019 | | 2018 | | Increase (Decrease) | | % Change |
Consolidated net revenues | $ | 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 | 68 |
| | (146 | ) | | 214 |
| | | | 824 |
| | 692 |
| | 132 |
| | |
| |
(1) | (1) In-game net revenues primarily includes the net amount of revenue recognized for downloadable content and microtransactions during the period. |
Consolidated Net Revenues
Q3 20192020 vs. Q3 20182019
The decreaseincrease in consolidated net revenues and in-game net revenues for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to:
| |
• | a decrease in Blizzard revenues recognized of $121driven by an increase in revenues of $752 million primarily due to lower revenues recognized from World of Warcraft; and
|
a decrease in Activision revenues recognized of $100 million, primarily due to lowerhigher revenues recognizedfrom:
•Call of Duty: Modern Warfare, which was released in October 2019, as compared to Call of Duty: Black Ops 4,which was released in October 2018;
•Call of Duty: Mobile, which was released in October 2019;
•Tony Hawk’s Pro Skater 1 and 2, which was released in September 2020;
•World of Warcraft, primarily from higher revenues associated with in-game content and subscriptions; and
•the DestinyCall of Duty franchise (reflecting our salecatalog titles.
This increase was partially offset by a net decrease of the publishing rights for Destiny to Bungie in December 2018).$80 million, driven by various other franchises and titles.
YTD Q3 20192020 vs. YTD Q3 20182019
The decreaseincrease in consolidated net revenues and in-game net revenues for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily driven by an increase in revenues of $1.23 billion due to:
| |
• | a decrease in Activision revenues recognized 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 in Blizzard revenues recognized of $247 million, primarily due to lower revenues recognized from Overwatch.
|
In-game Net Revenues
to higher revenues from:
Q3 2019 vs. Q3 2018
The decrease in in-game net revenues for the three months ended September 30, 2019,•Call of Duty: Modern Warfare, as compared to the three months ended September 30, 2018,Call of Duty: Black Ops 4;
•Call of Duty: Mobile;
•World of Warcraft, primarily from higher subscription revenues; and
•Tony Hawk’s Pro Skater 1 and 2.
This increase was primarily due topartially offset by a decrease in Blizzard and Activision in-game revenues recognized of $121$102 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.Sekiro: Shadows Die Twice,which was released in March 2019.
The remaining net increase of $44 million was driven by various other franchises and titles.
Change in Deferred Revenues Recognized
Q3 20192020 vs. Q3 20182019
The increase in net deferred revenues recognized for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to (1)driven by an increase of $120 million in net deferred revenues recognized from Blizzard, primarily due to the prior year period including a net deferral of 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$128 million in net deferred revenues recognized from Activision, primarily due to lowerhigher net deferraldeferred revenues recognized from Call of revenues from the Destiny franchise (reflecting our saleDuty: Modern Warfare, which was released in October 2019, as compared to Call of the publishing rights for Destiny to BungieDuty: Black Ops 4, which was released in December 2018).October 2018.
YTD Q3 20192020 vs. YTD Q3 20182019
The increasedecrease in net deferred revenues recognized for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to an increase of $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(1) a decrease of $122$339 million in net deferred revenues recognized from Activision, primarily due to lower net deferred revenues recognized from Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4, and (2) a decrease of $180 million in net deferred revenues recognized from Blizzard, primarily due to lower net deferred revenues recognized from World of Warcraft, as the Destiny franchise.prior year included the recognition of deferred revenues from the August 2018 release of World of Warcraft: Battle for Azeroth®, with no comparable recognition of deferred revenues in the current period given the lack of a comparable release in 2019.
In-game Net Revenues
Q3 2020 vs. Q3 2019
The increase in in-game net revenues for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily driven by an increase in in-game net revenues of $528 million due to higher in-game revenues from:
•Call of Duty: Modern Warfare, which was released in October 2019, as compared to Call of Duty: Black Ops 4, which was released in October 2018;
•Call of Duty: Mobile,which was released in October 2019;
•World of Warcraft; and
•the Call of Duty franchise catalog titles.
The remaining net increase of $21 million was driven by various other franchises and titles.
YTD Q3 2020 vs. YTD Q3 2019
The increase in in-game net revenues for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was primarily driven by an increase in in-game net revenues of $843 million due to higher in-game revenues from:
•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4; and
•Call of Duty: Mobile.
The remaining net increase of $9 million was driven by various other franchises and titles.
Foreign Exchange Impact
Changes in foreign exchange rates had a negativepositive impact of $27$37 million and $133$9 million on our consolidated net revenues for the three and nine months ended September 30, 2019,2020, respectively, as compared to the same periodperiods 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, weWe 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.
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 and nine months ended September 30, 20192020 and 2018,2019, are presented below (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 | | $ Increase / (Decrease) |
| Activision | | Blizzard | | King | | Total | | Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | | | | | | | | | |
Net revenues from external customers | $ | 773 | | | $ | 393 | | | $ | 536 | | | $ | 1,702 | | | $ | 564 | | | $ | 1 | | | $ | 36 | | | $ | 601 | |
Intersegment net revenues (1) | — | | | 18 | | | — | | | 18 | | | — | | | 16 | | | — | | | 16 | |
Segment net revenues | $ | 773 | | | $ | 411 | | | $ | 536 | | | $ | 1,720 | | | $ | 564 | | | $ | 17 | | | $ | 36 | | | $ | 617 | |
| | | | | | | | | | | | | | | |
Segment operating income | $ | 345 | | | $ | 133 | | | $ | 248 | | | $ | 726 | | | $ | 319 | | | $ | 59 | | | $ | 54 | | | $ | 432 | |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | | | | | | | |
| Activision | | Blizzard | | King | | Total | | | | | | | | |
Segment Net Revenues | | | | | | | | | | | | | | | |
Net revenues from external customers | $ | 209 | | | $ | 392 | | | $ | 500 | | | $ | 1,101 | | | | | | | | | |
Intersegment net revenues (1) | — | | | 2 | | | — | | | 2 | | | | | | | | | |
Segment net revenues | $ | 209 | | | $ | 394 | | | $ | 500 | | | $ | 1,103 | | | | | | | | | |
| | | | | | | | | | | | | | | |
Segment operating income | $ | 26 | | | $ | 74 | | | $ | 194 | | | $ | 294 | | | | | | | | | |
| | | Three Months Ended September 30, 2019 | | $ Increase / (Decrease) | | Nine Months Ended September 30, 2020 | | Increase / (Decrease) |
| Activision | | Blizzard | | King | | Total | | Activision | | Blizzard | | King | | Total | | Activision | | Blizzard | | King | | Total | | Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | | | | | | | | | | Segment Net Revenues | | | | | | | | | | | | | | | |
Net revenues from external customers | $ | 209 |
| | $ | 392 |
| | $ | 500 |
| | $ | 1,101 |
| | $ | (188 | ) | | $ | (235 | ) | | $ | (6 | ) | | $ | (429 | ) | Net revenues from external customers | $ | 2,285 | | | $ | 1,264 | | | $ | 1,587 | | | $ | 5,136 | | | $ | 1,491 | | | $ | 151 | | | $ | 60 | | | $ | 1,702 | |
Intersegment net revenues (1) | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | (6 | ) | | — |
| | (6 | ) | Intersegment net revenues (1) | — | | | 62 | | | — | | | 62 | | | — | | | 53 | | | — | | | 53 | |
Segment net revenues | $ | 209 |
| | $ | 394 |
| | $ | 500 |
| | $ | 1,103 |
| | $ | (188 | ) | | $ | (241 | ) | | $ | (6 | ) | | $ | (435 | ) | Segment net revenues | $ | 2,285 | | | $ | 1,326 | | | $ | 1,587 | | | $ | 5,198 | | | $ | 1,491 | | | $ | 204 | | | $ | 60 | | | $ | 1,755 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Segment operating income | $ | 26 |
| | $ | 74 |
| | $ | 194 |
| | $ | 294 |
| | $ | (86 | ) | | $ | (115 | ) | | $ | 10 |
| | $ | (191 | ) | Segment operating income | $ | 1,088 | | | $ | 533 | | | $ | 615 | | | $ | 2,236 | | | $ | 935 | | | $ | 329 | | | $ | 72 | | | $ | 1,336 | |
| | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 | | | | | | | | | | Nine Months Ended September 30, 2019 | |
| Activision | | Blizzard | | King | | Total | | | | | | | | | | Activision | | Blizzard | | King | | Total | |
Segment Net Revenues | | | | | | | | | | | | | | | | Segment Net Revenues | | | | | | | | |
Net revenues from external customers | $ | 397 |
| | $ | 627 |
| | $ | 506 |
| | $ | 1,530 |
| | | | | | | | | Net revenues from external customers | $ | 794 | | | $ | 1,113 | | | $ | 1,527 | | | $ | 3,434 | | |
Intersegment net revenues (1) | — |
| | 8 |
| | — |
| | 8 |
| | | | | | | | | Intersegment net revenues (1) | — | | | 9 | | | — | | | 9 | | |
Segment net revenues | $ | 397 |
| | $ | 635 |
| | $ | 506 |
| | $ | 1,538 |
| | | | | | | | | Segment net revenues | $ | 794 | | | $ | 1,122 | | | $ | 1,527 | | | $ | 3,443 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Segment operating income | $ | 112 |
| | $ | 189 |
| | $ | 184 |
| | $ | 485 |
| | | | | | | | | Segment operating income | $ | 153 | | | $ | 204 | | | $ | 543 | | | $ | 900 | | |
(1) Intersegment revenues reflect licensing and service fees charged between segments. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 | | $ Increase / (Decrease) |
| Activision | | Blizzard | | King | | Total | | Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | | | | | | | | | |
Net revenues from external customers | $ | 794 |
| | $ | 1,113 |
| | $ | 1,527 |
| | $ | 3,434 |
| | $ | (253 | ) | | $ | (479 | ) | | $ | (15 | ) | | $ | (747 | ) |
Intersegment net revenues (1) | — |
| | 9 |
| | — |
| | 9 |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
Segment net revenues | $ | 794 |
| | $ | 1,122 |
| | $ | 1,527 |
| | $ | 3,443 |
| | $ | (253 | ) | | $ | (484 | ) | | $ | (15 | ) | | $ | (752 | ) |
| | | | | | | | | | | | | | | |
Segment operating income | $ | 153 |
| | $ | 204 |
| | $ | 543 |
| | $ | 900 |
| | $ | (135 | ) | | $ | (240 | ) | | $ | — |
| | $ | (375 | ) |
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 | | | | | | | | |
| Activision | | Blizzard | | King | | Total | | | | | | | | |
Segment Net Revenues | | | | | | | | | | | | | | | |
Net revenues from external customers | $ | 1,047 |
| | $ | 1,592 |
| | $ | 1,542 |
| | $ | 4,181 |
| | | | | | | | |
Intersegment net revenues (1) | — |
| | 14 |
| | — |
| | 14 |
| | | | | | | | |
Segment net revenues | $ | 1,047 |
| | $ | 1,606 |
| | $ | 1,542 |
| | $ | 4,195 |
| | | | | | | | |
| | | | | | | | | | | | | | | |
Segment operating income | $ | 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):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Reconciliation to consolidated net revenues: | | | | | | | |
Segment net revenues | $ | 1,720 | | | $ | 1,103 | | | $ | 5,198 | | | $ | 3,443 | |
Revenues from non-reportable segments (1) | 65 | | | 113 | | | 232 | | | 245 | |
Net effect from recognition (deferral) of deferred net revenues (2) | 187 | | | 68 | | | 306 | | | 824 | |
Elimination of intersegment revenues (3) | (18) | | | (2) | | | (62) | | | (9) | |
Consolidated net revenues | $ | 1,954 | | | $ | 1,282 | | | $ | 5,674 | | | $ | 4,503 | |
| | | | | | | |
Reconciliation to consolidated income before income tax expense: | | | | | | | |
Segment operating income | $ | 726 | | | $ | 294 | | | $ | 2,236 | | | $ | 900 | |
Operating income (loss) from non-reportable segments (1) | (20) | | | 5 | | | (27) | | | 10 | |
Net effect from recognition (deferral) of deferred net revenues and related cost of revenues | 150 | | | 53 | | | 169 | | | 629 | |
Share-based compensation expense | (53) | | | (27) | | | (138) | | | (127) | |
Amortization of intangible assets | (16) | | | (50) | | | (62) | | | (151) | |
| | | | | | | |
Restructuring and related costs (4) | (9) | | | (28) | | | (39) | | | (108) | |
| | | | | | | |
| | | | | | | |
Consolidated operating income | 778 | | | 247 | | | 2,139 | | | 1,153 | |
Interest and other expense (income), net | 25 | | | (2) | | | 55 | | | (33) | |
Loss on extinguishment of debt | 31 | | | — | | | 31 | | | — | |
Consolidated income before income tax expense | $ | 722 | | | $ | 249 | | | $ | 2,053 | | | $ | 1,186 | |
(1)Includes other income and expenses from operating segments managed outside the reportable segments, including our Distribution business. Also includes unallocated corporate income and expenses.
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the 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 | 68 |
| | (146 | ) | | 824 |
| | 692 |
|
Elimination of intersegment revenues (2) | (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 | 53 |
| | (89 | ) | | 629 |
| | 468 |
|
Share-based compensation expense | (27 | ) | | (55 | ) | | (127 | ) | | (166 | ) |
Amortization of intangible assets | (50 | ) | | (83 | ) | | (151 | ) | | (279 | ) |
Restructuring and related costs (3) | (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 |
|
(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. | |
(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. |
(3)Intersegment revenues reflect licensing and service fees charged between segments.
(4)Reflects restructuring initiatives, which include severance and other restructuring-related costs.
Segment Net Revenues
Activision
Q3 20192020 vs. Q3 20182019
The decreaseincrease in Activision’s segment net revenues for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to:to higher revenues from:
lower revenues from the Destiny franchise (reflecting our sale•Call of the publishing rights for DestinyDuty: Modern Warfare, which was released in October 2019, as compared to BungieCall of Duty: Black Ops 4, which was released in December 2018);October 2018;
lower revenues from •Call of Duty: Mobile, which was released in October 2019;
•Tony Hawk’s Pro Skater 1 and 2, which was released in September 2020; and
•the Call of Duty franchise catalog titles; andtitles.
| |
• | lower revenues from Crash Bandicoot™ N. Sane Trilogy,which was released on the Xbox One, PC, and Nintendo Switch in June 2018.
|
The decreaseincrease was partially offset by:by lower revenues from CrashTM Team Racing Nitro-Fueled, which was released in June 2019.
| |
• | revenues from Crash Team Racing Nitro-Fueled,which was released in June 2019; and
|
| |
• | 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 20192020 vs. YTD Q3 20182019
The decreaseincrease in Activision’s segment net revenues for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to:to higher revenues from:
lower revenues from the Destiny franchise;•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4;
lower revenues from•Call of Duty: Mobile;
•the 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 Crash Bandicoot N. Sane Trilogy.
|
•Tony Hawk’s Pro Skater 1 and 2;
•the Call of Duty League, which began its first season in January 2020; and
•Call of Duty:Modern Warfare 2 Campaign Remastered, which was first released on March 31, 2020.
The decreaseincrease was partially offset by lower revenues from from:
•Sekiro: Shadows Die Twice, which was released in March 2019,2019;
and •Crash Team Racing Nitro-Fueled.; and
Blizzard
Q3 2019 vs. Q3 2018
The decrease in Blizzard’s net revenues for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, was primarily due to:
| |
• | overall lower revenues 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 (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 due to lower revenues from the Saviors of Uldum expansion, which was released in August 2019, as compared to the Boomsday™ expansion, which was released in August 2018; and
|
| |
• | lower revenues from Overwatch.
|
The decrease was partially offset by higher revenues from the Overwatch League.
YTD Q3 2019 vs. YTD Q3 2018
The decrease in Blizzard’s net revenues for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was primarily due to:
| |
• | lower revenues from World of Warcraft,primarily due to World of Warcraft: Battle for Azeroth;
|
| |
• | lower revenues from Overwatch; and
|
| |
• | lower revenues from Hearthstone.
|
King
Q3 2019 vs. Q3 2018
King’s net revenues for the three months ended September 30, 2019, were roughly equal to net revenues for the three months ended September 30, 2018, as lower in-game revenues from player purchases were largely offset by an increase in advertising revenues.
YTD Q3 2019 vs. YTD Q3 2018
King’s net revenues for the nine months ended September 30, 2019, were roughly equal to net revenues for the nine months ended September 30, 2018 due to the same driver and offsetting factor discussed above.
Segment Income from Operations
Activision
Q3 2019 vs. Q3 2018
The decrease in Activision’s operating income for the three months ended September 30, 2019, as compared to the three months ended 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 for Destiny to Bungie in December 2018).
Blizzard
Q3 2020 vs. Q3 2019
The increase in Blizzard’s segment net revenues for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily due to higher revenues from World of Warcraft, primarily from higher revenues associated with in-game content and subscriptions, partially offset by lower revenues from the Overwatch League.
YTD Q3 20192020 vs. YTD Q3 20182019
The decreaseincrease in Blizzard’s segment net revenues for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was primarily due to the same factors as noted for the three-month period above.
King
Q3 2020 vs. Q3 2019
The increase in King’s segment net revenues for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily due to higher revenues from player purchases and advertising in the Candy Crush franchise.
YTD Q3 2020 vs. YTD Q3 2019
The increase in King’s segment net revenues for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was primarily due to higher advertising revenues in the Candy Crush franchise.
Segment Income from Operations
Activision
Q3 2020 vs. Q3 2019
The increase in Activision’s segment operating income for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily due to higher segment net revenues.
This increase was partially offset by:
•higher cost of revenues and marketing costs for Call of Duty: Mobile;
•higher product development costs driven by higher personnel bonuses as a result of strong business performance;
•higher cost of revenues and marketing costs for Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4; and
•cost of revenues and marketing costs associated with the release of Tony Hawk’s Pro Skater 1 and 2 in the current quarter.
YTD Q3 2020 vs. YTD Q3 2019
The increase in Activision’s segment operating income for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to:
lower revenues, as discussed above; and
an increase in bad debt provisions.
to higher segment net revenues.
The decrease
This increase was partially offset by lowerby:
•higher cost of revenues and operatingmarketing costs primarily associated with the Destiny franchise, which were partially offsetfor Call of Duty: Mobile;
•higher product development costs driven by costs related to the current year releaseshigher personnel bonuses as a result of Sekiro: Shadows Die Twice strong business performance; and Crash Team Racing Nitro-Fueled in March and June 2019, respectively.
•higher cost of revenues and marketing costs for Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4.
Blizzard
Q3 20192020 vs. Q3 20182019
The decreaseincrease in Blizzard’s segment operating income for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to higher segment net revenues and lower revenues, as discussed above. The decrease isesport production and marketing costs, partially offset by:by costs associated with the Overwatch League to support team owners during the COVID-19 pandemic.
| |
• | lower spending on sales and marketing, primarily driven by lower marketing for esports initiatives and World of Warcraft;
|
| |
• | 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
|
higher capitalization of software development costs due to the timing of game development cycles.
YTD Q3 20192020 vs. YTD Q3 20182019
The decreaseincrease in Blizzard’s segment operating income for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to to:
•higher segment net revenues;
•lower revenues, as discussed above. The decrease is partially offset by:product development costs, despite an increase in personnel costs, driven by higher capitalization of software development costs from the timing of game development cycles; and
| |
• | lower spending on sales and marketing, primarily driven by lower marketing for esports initiatives, Overwatch, and World of Warcraft;
|
•lower personnel costs;general and administrative costs.
| |
• | 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
Q3 20192020 vs. Q3 20182019
The increase in King’s segment operating income for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018, despite the slight decrease in revenues,2019, was primarily due to:
•higher segment net revenues; and
•lower service provider fees, primarily digital storefront fees (e.g. fees retained by Applegeneral and Google for our sales on their platforms); andadministrative costs.
lower product development costs.
YTD Q3 20192020 vs. YTD Q3 20182019
The increase in King’s segment operating income for the nine months ended September 30, 2019, was flat2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to:
•higher segment net revenues; and
•lower revenues, as discussed above;general and administrative costs.
| |
• | 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 wereThis increase was partially offset by:by higher sales and marketing costs for the Candy Crush franchise.
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 personnel costs.
Foreign Exchange Impact
Changes in foreign exchange rates had a positive impact of $28 million and a negative impact of $20 million and $92$13 million on reportable segment net revenues for the three and nine months ended September 30, 2019,2020, respectively, as compared to the same periodsperiod 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 September 30, | | For the Nine Months Ended September 30, |
| 2020 | | 2019 | | Increase (Decrease) | | 2020 | | 2019 | | Increase (Decrease) |
Net revenues by distribution channel: | | | | | | | | | | | |
Digital online channels (1) | $ | 1,753 | | | $ | 1,014 | | | $ | 739 | | | $ | 4,782 | | | $ | 3,493 | | | $ | 1,289 | |
Retail channels | 117 | | | 93 | | | 24 | | | 509 | | | 599 | | | (90) | |
Other (2) | 84 | | | 175 | | | (91) | | | 383 | | | 411 | | | (28) | |
Total consolidated net revenues | $ | 1,954 | | | $ | 1,282 | | | $ | 672 | | | $ | 5,674 | | | $ | 4,503 | | | $ | 1,171 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2019 | | 2018 | | Increase (Decrease) | | 2019 | | 2018 | | Increase (Decrease) |
Net revenues by distribution channel: | |
| | |
| | |
| | |
| | |
| | |
|
Digital online channels (1) | $ | 1,014 |
| | $ | 1,276 |
| | $ | (262 | ) | | $ | 3,493 |
| | $ | 3,998 |
| | $ | (505 | ) |
Retail channels | 93 |
| | 76 |
| | 17 |
| | 599 |
| | 764 |
| | (165 | ) |
Other (2) | 175 |
| | 160 |
| | 15 |
| | 411 |
| | 357 |
| | 54 |
|
Total consolidated net revenues | $ | 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.
| |
(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 Distribution business, the Overwatch League, and the Call of Duty League.
| |
(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
Q3 20192020 vs. Q3 20182019
The decreaseincrease in net revenues from digital online channels for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to:to higher revenues from:
lower•Call of Duty: Modern Warfare, which was released in October 2019, as compared to Call of Duty: Black Ops 4, which was released in October 2018;
•Call of Duty: Mobile, which was released in October 2019; and
•World of Warcraft, primarily from higher revenues recognized from the Destiny franchise (reflecting our sale of the publishing rights for Destiny to Bungie in December 2018);associated with in-game content and subscriptions.
| |
• | lower revenues recognized from World of Warcraft.
|
YTD Q3 20192020 vs. YTD Q3 20182019
The decreaseincrease in net revenues from digital online channels for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to:to higher revenues from:
lower•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4;
•Call of Duty: Mobile; and
•World of Warcraft, primarily from higher subscription revenues recognized from the Destiny franchise; and.
| |
• | lower revenues recognized from Overwatch.
|
Retail Channel Net Revenues
Q3 20192020 vs. Q3 20182019
The increase in net revenues from retail channels for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to:to higher revenues from:
| |
• | revenues recognized from Crash Team Racing Nitro-Fueled,which was released in June 2019; and
|
| |
• | 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.
|
•Tony Hawk’s Pro Skater 1 and 2, which was released in September 2020; and
•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4.
YTD Q3 20192020 vs. YTD Q3 20182019
The decrease in net revenues from retail channels for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, 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 recognized from the Destiny franchise (reflecting our sale of the publishing rights for Destiny to BungieSekiro: Shadows Die Twice, which was released in December 2018); 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 wasMarch 2019, partially offset by:by higher revenues from Tony Hawk’s Pro Skater 1 and 2.
| |
• | 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 September 30, | | For the Nine Months Ended September 30, |
| 2020 | | 2019 | | Increase (Decrease) | | 2020 | | 2019 | | Increase (Decrease) |
Net revenues by geographic region: | | | | | | | | | | | |
Americas | $ | 1,127 | | | $ | 655 | | | $ | 472 | | | $ | 3,188 | | | $ | 2,406 | | | $ | 782 | |
EMEA (1) | 589 | | | 452 | | | 137 | | | 1,770 | | | 1,525 | | | 245 | |
Asia Pacific | 238 | | | 175 | | | 63 | | | 716 | | | 572 | | | 144 | |
Consolidated net revenues | $ | 1,954 | | | $ | 1,282 | | | $ | 672 | | | $ | 5,674 | | | $ | 4,503 | | | $ | 1,171 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2019 | | 2018 | | Increase (Decrease) | | 2019 | | 2018 | | Increase (Decrease) |
Net revenues by geographic region: | |
| | |
| | |
| | |
| | |
| | |
|
Americas | $ | 655 |
| | $ | 774 |
| | $ | (119 | ) | | $ | 2,406 |
| | $ | 2,740 |
| | $ | (334 | ) |
EMEA (1) | 452 |
| | 534 |
| | (82 | ) | | 1,525 |
| | 1,774 |
| | (249 | ) |
Asia Pacific | 175 |
| | 204 |
| | (29 | ) | | 572 |
| | 605 |
| | (33 | ) |
Consolidated net revenues | $ | 1,282 |
| | $ | 1,512 |
| | $ | (230 | ) | | $ | 4,503 |
| | $ | 5,119 |
| | $ | (616 | ) |
(1) “EMEA” consists of the Europe, Middle East, and Africa geographic regions.
| |
(1) | “EMEA” consists of the Europe, Middle East, and Africa geographic regions. |
Americas
Q3 20192020 vs. Q3 20182019
The decreaseincrease in net revenues fromin the Americas region for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to higher revenues from:
•Call of Duty: Modern Warfare, which was released in October 2019, as compared to Call of Duty: Black Ops 4, which was released in October 2018;
•Call of Duty: Mobile, which was released in October 2019;
•Tony Hawk’s Pro Skater 1 and 2, which was released in September 2020; and
•the Call of Duty franchise catalog titles.
The increase was partially offset by lower revenues recognized from the Destiny franchise (reflecting our sale of the publishing rights for Destiny to Bungie in December 2018).professional esport leagues.
YTD Q3 20192020 vs. YTD Q3 20182019
The decreaseincrease in net revenues fromin the Americas region for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to lowerhigher revenues recognized from the Destiny franchise.from:
•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4; and
•Call of Duty: Mobile.
EMEA
Q3 20192020 vs. Q3 20182019
The decreaseincrease in net revenues fromin the EMEA region for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to:to higher revenues from:
•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4; and
•Call of Duty: Mobile.
The increase was partially offset by lower revenues recognized from the Destiny franchise; andour Distribution business.
| |
• | lower revenues recognized from
World of Warcraft.
|
YTD Q3 20192020 vs. YTD Q3 20182019
The decreaseincrease in net revenues fromin the EMEA region for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to:to higher revenues from Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4.
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.
|
Asia Pacific
Q3 20192020 vs. Q3 2018
2019
The decreaseincrease in net revenues fromin the Asia Pacific region for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to lowerhigher revenues recognizedfrom:
•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4;
•World of Warcraft, primarily from Hearthstone.higher revenues associated with subscriptions and in-game content; and
•Call of Duty: Mobile.
YTD Q3 20192020 vs. YTD Q3 20182019
The decreaseincrease in net revenues fromin the Asia Pacific region for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to lowerhigher revenues recognizedfrom:
•World of Warcraft, primarily from the Destiny franchise.higher subscription revenues;
•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4; and
•Call of Duty: Mobile.
Net Revenues by Platform
The following table details our consolidated net revenues by platform (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2020 | | 2019 | | Increase (Decrease) | | 2020 | | 2019 | | Increase (Decrease) |
Net revenues by platform: | | | | | | | | | | | |
Console | $ | 695 | | | $ | 241 | | | $ | 454 | | | $ | 1,944 | | | $ | 1,324 | | | $ | 620 | |
PC | 514 | | | 341 | | | 173 | | | 1,494 | | | 1,196 | | | 298 | |
Mobile and ancillary (1) | 661 | | | 525 | | | 136 | | | 1,853 | | | 1,572 | | | 281 | |
Other (2) | 84 | | | 175 | | | (91) | | | 383 | | | 411 | | | (28) | |
Total consolidated net revenues | $ | 1,954 | | | $ | 1,282 | | | $ | 672 | | | $ | 5,674 | | | $ | 4,503 | | | $ | 1,171 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2019 | | 2018 | | Increase (Decrease) | | 2019 | | 2018 | | Increase (Decrease) |
Net revenues by platform: | |
| | |
| | |
| | | | | | |
Console | $ | 241 |
| | $ | 347 |
| | $ | (106 | ) | | $ | 1,324 |
| | $ | 1,730 |
| | $ | (406 | ) |
PC | 341 |
| | 482 |
| | (141 | ) | | 1,196 |
| | 1,452 |
| | (256 | ) |
Mobile and ancillary (1) | 525 |
| | 523 |
| | 2 |
| | 1,572 |
| | 1,580 |
| | (8 | ) |
Other (2) | 175 |
| | 160 |
| | 15 |
| | 411 |
| | 357 |
| | 54 |
|
Total consolidated net revenues | $ | 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.
| |
(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 Distribution business, the Overwatch League, and the Call of Duty League.
| |
(2) | Net revenues from “Other” include revenues from our Studios and Distribution businesses, as well as revenues from MLG and the Overwatch League. |
Console
Q3 20192020 vs. Q3 20182019
The decreaseincrease in net revenues from the console platform for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to:to higher revenues from:
lower revenues recognized from the Destiny franchise (reflecting our sale•Call of the publishing rights for DestinyDuty: Modern Warfare, which was released in October 2019, as compared to BungieCall of Duty: Black Ops 4, which was released in December 2018);October 2018;
•Tony Hawk’s Pro Skater 1 and 2, which was released in September 2020; and
lower revenues recognized from
•the Call of Duty franchise catalog titles;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 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 recognized from Crash Team Racing Nitro-Fueled,which was released in June 2019; and
|
| |
• | 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 20192020 vs. YTD Q3 20182019
The decreaseincrease in net revenues from the console platform for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to:to higher revenues from:
lower revenues recognized from the Destiny franchise;
lower revenues recognized from •Call of Duty franchise catalog titles;Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4; and
| |
• | lower revenues recognized from •Tony Hawk’s Pro Skater 1 and 2.
Call of Duty: Black Ops 4, as compared to Call of Duty: WWII.
|
The decreaseincrease was partially offset by lower revenues from Sekiro: Shadows Die Twice,which was released in March 2019.
PC
Q3 20192020 vs. Q3 20182019
The decreaseincrease in net revenues from the PC platform for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to:to higher revenues from:
| |
• | lower revenues recognized from World of Warcraft•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4; and
•World of Warcraft, primarily from higher revenues associated with in-game content and subscriptions.
|
| |
• | lower revenues recognized from Hearthstone;
|
| |
• | lower revenues recognized from Overwatch;and
|
lower revenues recognized from the Destiny franchise.
YTD Q3 20192020 vs. YTD Q3 20182019
The decreaseincrease in net revenues from the PC platform for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to:to higher revenues from:
lower revenues recognized•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4; and
•World of Warcraft, primarily from the Destiny franchise;higher subscription revenues.
| |
• | lower revenues recognized from Overwatch; and
|
| |
• | lower revenues recognized from Hearthstone.
|
Mobile and Ancillary
Q3 20192020 vs. Q3 20182019
NetThe increase in net revenues from mobile and ancillary for the three months ended September 30, 2019, were roughly flat2020, as compared to net revenues for the three months ended September 30, 2018.2019, was primarily due to higher revenues from:
•Call of Duty: Mobile; and
•the Candy Crush franchise, driven by higher revenues from player purchases and advertising.
YTD Q3 20192020 vs. YTD Q3 20182019
NetThe increase in net revenues from mobile and ancillary for the nine months ended September 30, 2019, were roughly flat2020, as compared to net revenues for the nine months ended September 30, 2018.2019, was primarily due to higher revenues from Call of Duty: Mobile.
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 September 30, 2020 | | % of associated net revenues | | Three Months Ended September 30, 2019 | | % of associated net revenues | | Increase (Decrease) |
Cost of revenues—product sales: | | | | | | | | | |
Product costs | $ | 101 | | | 25 | % | | $ | 137 | | | 53 | % | | $ | (36) | |
Software royalties, amortization, and intellectual property licenses | 37 | | | 9 | | | 9 | | | 3 | | | 28 | |
Cost of revenues—subscription, licensing, and other revenues: | | | | | | | | | |
Game operations and distribution costs | 290 | | | 19 | | | 246 | | | 24 | | | 44 | |
Software royalties, amortization, and intellectual property licenses | 41 | | | 3 | | | 50 | | | 5 | | | (9) | |
Total cost of revenues | $ | 469 | | | 24 | % | | $ | 442 | | | 34 | % | | $ | 27 | |
| | | | | | | | | |
| Nine Months Ended September 30, 2020 | | % of associated net revenues | | Nine Months Ended September 30, 2019 | | % of associated net revenues | | Increase (Decrease) |
Cost of revenues—product sales: | | | | | | | | | |
Product costs | $ | 357 | | | 24 | % | | $ | 388 | | | 30 | % | | $ | (31) | |
Software royalties, amortization, and intellectual property licenses | 152 | | | 10 | | | 171 | | | 13 | | | (19) | |
Cost of revenues—subscription, licensing, and other revenues: | | | | | | | | | |
Game operations and distribution costs | 819 | | | 20 | | | 714 | | | 22 | | | 105 | |
Software royalties, amortization, and intellectual property licenses | 115 | | | 3 | | | 164 | | | 5 | | | (49) | |
Total cost of revenues | $ | 1,443 | | | 25 | % | | $ | 1,437 | | | 32 | % | | $ | 6 | |
|
| | | | | | | | | | | | | | | | | |
| 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 | $ | 137 |
| | 53 | % | | $ | 127 |
| | 48 | % | | $ | 10 |
|
Software royalties, amortization, and intellectual property licenses | 9 |
| | 3 |
| | 20 |
| | 8 |
| | (11 | ) |
Cost of revenues—subscription, licensing, and other revenues: | | | | | | | | | |
Game operations and distribution costs | 246 |
| | 24 |
| | 257 |
| | 21 |
| | (11 | ) |
Software royalties, amortization, and intellectual property licenses | 50 |
| | 5 |
| | 109 |
| | 9 |
| | (59 | ) |
Total cost of revenues | $ | 442 |
| | 34 | % | | $ | 513 |
| | 34 | % | | $ | (71 | ) |
| | | | | | | | | |
| 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 | $ | 388 |
| | 30 | % | | $ | 416 |
| | 29 | % | | $ | (28 | ) |
Software royalties, amortization, and intellectual property licenses | 171 |
| | 13 |
| | 214 |
| | 15 |
| | (43 | ) |
Cost of revenues—subscription, licensing, and other revenues: | | | | | | | | | |
Game operations and distribution costs | 714 |
| | 22 |
| | 777 |
| | 21 |
| | (63 | ) |
Software royalties, amortization, and intellectual property licenses | 164 |
| | 5 |
| | 278 |
| | 8 |
| | (114 | ) |
Total cost of revenues | $ | 1,437 |
| | 32 | % | | $ | 1,685 |
| | 33 | % | | $ | (248 | ) |
Cost of Revenues—Product Sales:
Q3 20192020 vs. Q3 20182019
The increasedecrease in product costs for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to a $34 million decrease in line with the increase in retailproduct costs for our Distribution business as a result of lower revenues.
The decreaseincrease in software royalties, amortization, and intellectual property licenses related to product sales for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to a decrease of $8$25 million increase in software amortization and royalties from Activision, driven by the Destiny franchise (reflecting our saleamortization and royalties from Tony Hawk’s Pro Skater 1 and 2, which was released in September 2020.
YTD Q3 20192020 vs. YTD Q3 20182019
The decrease in product costs for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was in line with theprimarily due to a $19 million decrease in product sales.costs from Sekiro: Shadows Die Twice, which was released in March 2019.
The decrease in software royalties, amortization, and intellectual property licenses related to product sales for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to to:
•a $12 million decrease in software amortization and royalties from Blizzard, driven by lower software amortization and royalties from World of $56Warcraft, as the prior year included software amortization expense from the August 2018 release of World of Warcraft: Battle for Azeroth with no comparable amortization in the current year; and
•a $6 million decrease in software amortization and royalties from Activision, driven by the Destiny franchise. This decrease 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 $12 million inlower software amortization and royalties from Blizzard, driven by the release(1) Sekiro: Shadows Die Twice and (2) Call of World of Warcraft: Battle for AzerothDuty: Modern Warfare, which was released in AugustOctober 2019, as compared to Call of Duty: Black Ops 4, which was released in October 2018, with no comparable release in 2017.partially offset by software amortization and royalties from (1) Tony Hawk’s Pro Skater 1 and 2, and (2) Call of Duty:Modern Warfare 2 Campaign Remastered, which was first released on March 31, 2020.
Cost of Revenues—Subscription, Licensing, and Other Revenues:
Q3 20192020 vs. Q3 20182019
The decreaseincrease in game operations and distribution costs for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to a decrease(1) an increase of $18$43 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.fees, as a result of higher revenues, and (2) an increase of $14 million associated with our professional esports leagues.
The decrease in software royalties, amortization, and intellectual property licenses related to subscription, licensing, and other revenues for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to:
to a decrease of $34$36 million in amortization of internally-developed franchise and developed software intangible assets acquired as part of our acquisition of King;
lowerKing. The decrease was partially offset by an increase in software amortization and royalties from Activision of $14$24 million, driven by the Destiny franchise; andCall of Duty: Mobile, which was released in October 2019.
| |
• | 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 Q3 20192020 vs. YTD Q3 20182019
The decreaseincrease in game operations and distribution costs for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to a decrease of $50$93 million increase 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.fees, as a result of higher revenues.
The decrease in software royalties, amortization, and intellectual property licenses related to subscription, licensing, and other revenues for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to:
to a decrease of $83$92 million in amortization of internally-developed franchise and developed software intangible assets acquired as part of our acquisition of King;
lowerKing. The decrease was partially offset by an increase in software amortization and royalties from Activision of $22$39 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, Call of Duty: Mobile.Skylanders Academy, in September 2018, with no comparable release in 2019.
|
Product Development (amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | % of consolidated net revenues | | September 30, 2019 | | % of consolidated net revenues | | Increase (Decrease) |
Three Months Ended | $ | 274 | | | 14 | % | | $ | 210 | | | 16 | % | | $ | 64 | |
Nine Months Ended | $ | 802 | | | 14 | % | | $ | 702 | | | 16 | % | | $ | 100 | |
|
| | | | | | | | | | | | | | | | | |
| September 30, 2019 | | % of consolidated net revenues | | September 30, 2018 | | % of consolidated net revenues | | Increase (Decrease) |
Three Months Ended | $ | 210 |
| | 16 | % | | $ | 263 |
| | 17 | % | | $ | (53 | ) |
Nine Months Ended | $ | 702 |
| | 16 | % | | $ | 776 |
| | 15 | % | | $ | (74 | ) |
Q3 20192020 vs. Q3 20182019
The decreaseincrease in product development costs for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to:
lower productto higher development costs for existing and upcoming title releases of $33$92 million, primarily due to lowerdriven by higher personnel costs; and
lower productbonuses as a result of strong business performance. The increase was partially offset by a $29 million increase in capitalization of development costs, fromdriven by the Destiny franchise (reflecting our saletiming of the publishing rights for Destiny to Bungie in December 2018).Blizzard’s game development cycles.
YTD Q3 20192020 vs. YTD Q3 20182019
The decreaseincrease in product development costs for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to:
lower productto higher development costs for existing and upcoming title releases of $66$219 million, primarily due to lowerdriven by higher personnel costs; and
lower productbonuses as a result of strong business performance. The increase was partially offset by a $120 million increase in capitalization of development costs, fromdriven by the Destiny franchise.timing of Blizzard’s game development cycles.
Sales and Marketing (amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | % of consolidated net revenues | | September 30, 2019 | | % of consolidated net revenues | | Increase (Decrease) |
Three Months Ended | $ | 238 | | | 12 | % | | $ | 182 | | | 14 | % | | $ | 56 | |
Nine Months Ended | $ | 722 | | | 13 | % | | $ | 580 | | | 13 | % | | $ | 142 | |
|
| | | | | | | | | | | | | | | | | |
| September 30, 2019 | | % of consolidated net revenues | | September 30, 2018 | | % of consolidated net revenues | | Increase (Decrease) |
Three Months Ended | $ | 182 |
| | 14 | % | | $ | 263 |
| | 17 | % | | $ | (81 | ) |
Nine Months Ended | $ | 580 |
| | 13 | % | | $ | 741 |
| | 14 | % | | $ | (161 | ) |
Q3 20192020 vs. Q3 20182019
The decreaseincrease in sales and marketing expenses for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to a decreasean increase of $81$49 million in marketing spending, and personnel costs, primarily associated with lower marketing costs fordriven by the Destiny, World of Warcraft, and Call of Duty franchises, and esports initiatives.franchise.
YTD Q3 20192020 vs. YTD Q3 20182019
The decreaseincrease in sales and marketing expenses for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily due to:
| |
• | a decrease of $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 decreaseto an increase of $44$145 million in amortizationmarketing spending, driven by the Call of Duty franchise and 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.Candy Crush franchise.
General and Administrative (amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | % of consolidated net revenues | | September 30, 2019 | | % of consolidated net revenues | | Increase (Decrease) |
Three Months Ended | $ | 186 | | | 10 | % | | $ | 177 | | | 14 | % | | $ | 9 | |
Nine Months Ended | $ | 529 | | | 9 | % | | $ | 527 | | | 12 | % | | $ | 2 | |
|
| | | | | | | | | | | | | | | | | |
| September 30, 2019 | | % of consolidated net revenues | | September 30, 2018 | | % of consolidated net revenues | | Increase (Decrease) |
Three Months Ended | $ | 177 |
| | 14 | % | | $ | 208 |
| | 14 | % | | $ | (31 | ) |
Nine Months Ended | $ | 527 |
| | 12 | % | | $ | 623 |
| | 12 | % | | $ | (96 | ) |
Q3 20192020 vs. Q3 20182019
The decreaseincrease in general and administrative expenses for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to a $22an $18 million decreaseincrease in personnel costs.costs as a result of higher share-based compensation.
YTD Q3 20192020 vs. YTD Q3 20182019
The decrease in generalGeneral and administrative expenses for the nine months ended September 30, 2019, as compared2020, were comparable to expenses for the nine months ended September 30, 2018, was primarily due to a $69 million decrease in personnel costs.2019.
Restructuring and related costs (amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | % of consolidated net revenues | | September 30, 2019 | | % of consolidated net revenues | | Increase (Decrease) |
Three Months Ended | $ | 9 | | | — | % | | $ | 24 | | | 2 | % | | $ | (15) | |
Nine Months Ended | $ | 39 | | | 1 | % | | $ | 104 | | | 2 | % | | $ | (65) | |
|
| | | | | | | | | | | | | | | | | |
| September 30, 2019 | | % of consolidated net revenues | | September 30, 2018 | | % of consolidated net revenues | | Increase (Decrease) |
Three Months Ended | $ | 24 |
| | 2 | % | | $ | — |
| | — | % | | $ | 24 |
|
Nine Months Ended | $ | 104 |
| | 2 | % | | $ | — |
| | — | % | | $ | 104 |
|
On February 12,During 2019, the Company committed towe began implementing a Board-authorized restructuring plan under which the Company aims to refocus itsaimed at refocusing our resources on itsour largest opportunities and removeremoving unnecessary levels of complexity and duplication from certain parts of theour business. Since the roll out of the plan, we have been, and will continue, focusing on these goals.goals as we continue to execute against our plan. The restructuring and related costs incurred during the three and nine months ended September 30, 2019,2020, relate primarily to severance costs write-downs of lease facility assets, and the write-downs of other assets that will no longer be used.for actions under this plan being executed in 2020. Refer to Note 1411 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)
| | | September 30, 2019 | | % of consolidated net revenues | | September 30, 2018 | | % of consolidated net revenues | | Increase (Decrease) | | September 30, 2020 | | % of consolidated net revenues | | September 30, 2019 | | % of consolidated net revenues | | Increase (Decrease) |
Three Months Ended | $ | (2 | ) | | — | % | | $ | 13 |
| | 1 | % | | $ | (15 | ) | Three Months Ended | $ | 25 | | | 1 | % | | $ | (2) | | | — | % | | $ | 27 | |
Nine Months Ended | $ | (33 | ) | | (1 | )% | | $ | 67 |
| | 1 | % | | $ | (100 | ) | Nine Months Ended | $ | 55 | | | 1 | % | | $ | (33) | | | (1) | % | | $ | 88 | |
Q3 20192020 vs. Q3 20182019
The decreaseincrease in interest and other expense (income), net, for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily due to an $11a $19 million decrease in interest expense and amortization of deferred financing costs associated with our debt obligations,income due to a decrease inlower returns on our total debt outstandinginvestment portfolio as a result of our debt redemptions and repayment activities during 2018.interest rate cuts, reflecting actions by central banks around the world.
YTD Q3 20192020 vs. YTD Q3 20182019
The decreaseincrease in interest and other expense (income), net, for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019 was primarily due to:
•a $49$41 million decrease in interest expense and amortization of deferred financing costs associated withincome driven by lower returns on our debt obligations, reflecting a decrease in our total debt outstandinginvestment portfolio as a result of our debt redemptionsinterest rate cuts, reflecting actions by central banks around the world; and repayment activities during 2018;
•a $38 million gain recognized in the prior-year period as a result of adjusting a cost-method equity investment to fair value, with no comparable activityas compared to only a $3 million gain recorded in the prior period (refercurrent year.
As of September 30, 2020, based on the composition of our investment portfolio and recent actions by central banks around the world, including the interest rate cuts by the U.S. Federal Reserve, we anticipate investment yields may remain low, which would continue to negatively impact our future interest income. Such impact is not expected to be material to the Company’s liquidity.
Income Tax Expense (amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | % of pretax income | | September 30, 2019 | | % of pretax income | | Increase (Decrease) |
Three Months Ended | $ | 118 | | | 16 | % | | $ | 45 | | | 18 | % | | $ | 73 | |
Nine Months Ended | $ | 365 | | | 18 | % | | $ | 208 | | | 18 | % | | $ | 157 | |
The income tax expense of $118 million for the three months ended September 30, 2020 reflects an effective tax rate of 16%, which is lower than the effective tax rate of 18% for the three months ended September 30, 2019. This decrease is primarily due to discrete tax benefits recognized in the current quarter for the remeasurement of deferred tax assets, partially offset by an increase in taxes on foreign earnings.
The income tax expense of $365 million for the nine months ended September 30, 2020, reflects an effective tax rate of 18%, which is comparable to the effective tax rate of 18% for the nine months ended September 30, 2019. Discrete tax benefits recognized in the current year for the remeasurement of deferred tax assets were offset by an increase in taxes on foreign earnings.
The effective tax rates of 16% and 18% for the three and nine months ended September 30, 2020, are lower than the U.S. statutory rate of 21%, primarily due to discrete tax benefits recognized for the remeasurement of deferred tax assets and the recognition of excess tax benefits from share-based payments.
Further information about our income taxes is provided in Note 813 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q); and10-Q.
an $11 million increase in interest income due to our cash and cash equivalent balances earning interest at higher rates, along with an overall higher cash balance, in 2019 as compared to 2018.
Income Tax Expense (amounts in millions)
|
| | | | | | | | | | | | | | | | | |
| September 30, 2019 | | % of pretax income | | September 30, 2018 | | % of pretax income | | Increase (Decrease) |
Three Months Ended | $ | 45 |
| | 18 | % | | $ | (48 | ) | | (23 | )% | | $ | 93 |
|
Nine Months Ended | $ | 208 |
| | 18 | % | | $ | 25 |
| | 2 | % | | $ | 183 |
|
The income tax expense of $45 million for the three months ended September 30, 2019, reflects an effective tax rate of 18%, which is higher than the effective tax rate of (23)% for the three months ended September 30, 2018. The increase is primarily due to a discrete tax benefit recognized in the prior year in connection with 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”).
The effective tax rate of 18% for both the three and nine months ended September 30, 2019, is lower than the U.S. statutory rate of 21%, primarily due to foreign earnings taxed at lower statutory rates as compared to domestic earnings, which is partially offset by U.S. tax on foreign earnings, and the recognition of federal research and development credit.
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. InDespite the impacts of the COVID-19 pandemic on the global economy, 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 $4.9$7.6 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 potential dividend payments or share repurchases and scheduled debt maturities (the next of which is not until 2026), include our cash and cash equivalents, short-term investments, and cash flows provided by operating activities.
As of September 30, 2019,2020, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $2.3$1.9 billion, as compared to $1.4$2.8 billion as of December 31, 2018.2019. 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)
| | | September 30, 2019 | | December 31, 2018 | | Increase (Decrease) | | September 30, 2020 | | December 31, 2019 | | Increase (Decrease) |
Cash and cash equivalents | $ | 4,939 |
| | $ | 4,225 |
| | $ | 714 |
| Cash and cash equivalents | $ | 7,415 | | | $ | 5,794 | | | $ | 1,621 | |
Short-term investments | 7 |
| | 155 |
| | (148 | ) | Short-term investments | 188 | | | 69 | | | 119 | |
| $ | 4,946 |
| | $ | 4,380 |
| | $ | 566 |
| | $ | 7,603 | | | $ | 5,863 | | | $ | 1,740 | |
Percentage of total assets | 28 | % | | 24 | % | | |
| Percentage of total assets | 35 | % | | 30 | % | | |
| | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2020 | | 2019 | | Increase (Decrease) |
Net cash provided by operating activities | $ | 1,112 | | | $ | 913 | | | $ | 199 | |
Net cash provided by (used in) investing activities | (178) | | | 79 | | | (257) | |
Net cash provided by (used in) financing activities | 653 | | | (251) | | | 904 | |
Effect of foreign exchange rate changes | 32 | | | (24) | | | 56 | |
Net increase in cash and cash equivalents and restricted cash | $ | 1,619 | | | $ | 717 | | | $ | 902 | |
|
| | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2019 | | 2018 | | Increase (Decrease) |
Net cash provided by operating activities | $ | 913 |
| | $ | 791 |
| | $ | 122 |
|
Net cash provided by (used in) investing activities | 79 |
| | (160 | ) | | 239 |
|
Net cash used in financing activities | (251 | ) | | (2,020 | ) | | 1,769 |
|
Effect of foreign exchange rate changes | (24 | ) | | (15 | ) | | (9 | ) |
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 nine months ended September 30, 2019,2020, was $913 million,$1.11 billion, as compared to $791$913 million for the nine months ended September 30, 2018.2019. The increase was primarily due to higher net income partially offset by higher tax payments and 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 for Destiny to Bungie in December 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 nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018.payments.
Net Cash Provided by (Used in)Used in Investing Activities
The primary drivers of net cash flows associated with our investing activities typically include capital expenditures, purchases and sales of investments, changes in restricted cash balances, and cash used for acquisitions.
Net cash provided byused in investing activities for the nine months ended September 30, 2019,2020, was $79$178 million, as compared to net cash used inprovided by investing activities of $160 million for the nine months ended September 30, 2018. The increase was primarily due to $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 $79 million for the nine months ended September 30, 2019,2019. The change was primarily due to the net purchases of $122 million of available-for-sale investments in the nine months ended September 30, 2020, as compared to proceeds from maturities of available-for-sale investments of $153 million in the prior-year period. This was partially offset by capital expenditures of $56 million for the nine months ended September 30, 2020, which were lower than the capital expenditures of $97$79 million for the prior-year period.
Net Cash Used inprovided by Financing Activities
The primary drivers of net cash flows associated with our 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 inprovided by financing activities for the nine months ended September 30, 2019,2020, was $251$653 million, as compared to $2.0 billionnet cash used in financing activities of $251 million for the nine months ended September 30, 2018. The decrease was primarily due 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 of $283 million duringchange was primarily attributed to our debt financing activities—for the nine months ended September 30, 2019,2020, we had net debt proceeds of approximately $896 million resulting from the issuance of an aggregate principal amount of $2.0 billion of new notes and the early redemption of $1.05 billion of our previously outstanding notes, with no comparable activity for the prior year-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 for further discussion. The cash flows provided by our debt financing activities for the nine months ended September 30, 2020, were partially offset by higher dividends paid of $316 million, as compared to $259$283 million duringfor the prior-year period.
Effect of Foreign Exchange Rate Changes
Changes in foreign exchange rates had a negativepositive impact of $24$32 million on our cash and cash equivalents and restricted cash for the nine months ended September 30, 2019,2020, as compared to a negative impact of $15$24 million for the nine months ended September 30, 2018.2019. The change was primarily due to changes in the value of the U.S. dollar relative to the euro and the British pound.
Debt
On August 5, 2020, we issued $500 million of unsecured senior notes due 2030, (i.e., the 2030 Notes) and $1.5 billion of unsecured senior notes due 2050, (i.e., the 2050 Notes) in a public underwritten offering. In connection with the issuance, we incurred approximately $26 million of discounts and financing costs that were capitalized and recorded within "Long-term debt, net" in our condensed consolidated balance sheet. On September 4, 2020, we redeemed all of our outstanding 2021 Notes and 2022 Notes at a redemption price equal to 100% of their respective principal amounts plus (1) a “make-whole” premium of $28 million and (2) accrued and unpaid interest to the redemption date. The redemption of the 2021 Notes and 2022 Notes resulted in a “Loss on extinguishment of debt” recorded in the condensed consolidated statement of operations of $31 million.
At both September 30, 20192020 and December 31, 2018,2019, our total outstanding debt was $3.7 billion and $2.7 billion, respectively, bearing interest at a weighted average rate of 2.87% and 3.18%., respectively.
A summary of our outstanding debt is as follows (amounts in millions):
| | | | | | | | | | | | | | |
| | At September 30, 2020 | | At December 31, 2019 |
| | | | |
2021 Notes | | $ | — | | | $ | 650 | |
2022 Notes | | — | | | 400 | |
2026 Notes | | 850 | | | 850 | |
2027 Notes | | 400 | | | 400 | |
2030 Notes | | 500 | | | — | |
2047 Notes | | 400 | | | 400 | |
2050 Notes | | 1,500 | | | — | |
Total gross long-term debt | | $ | 3,650 | | | $ | 2,700 | |
Unamortized discount and deferred financing costs | | (46) | | | (25) | |
Total net carrying amount | | $ | 3,604 | | | $ | 2,675 | |
|
| | | | | | | | | | | |
| At September 30, 2019 |
| Gross Carrying Amount | | Unamortized Discount and Deferred Financing Costs | | Net Carrying Amount |
2021 Notes | $ | 650 |
| | $ | (2 | ) | | $ | 648 |
|
2022 Notes | 400 |
| | (2 | ) | | 398 |
|
2026 Notes | 850 |
| | (8 | ) | | 842 |
|
2027 Notes | 400 |
| | (5 | ) | | 395 |
|
2047 Notes | 400 |
| | (9 | ) | | 391 |
|
Total long-term debt | $ | 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 118 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
On February 12, 2019,6, 2020, our Board of Directors declared a cash dividend of $0.37$0.41 per common share. On May 9, 2019,6, 2020, we made an aggregate cash dividend payment of $283$316 million to shareholders of record at the close of business on March 28, 2019.April 15, 2020.
Capital Expenditures
For the year ending December 31, 2019,2020, we anticipate total capital expenditures of approximately $130$110 million, primarily for leasehold improvements, computer and network hardware and software purchases.leasehold improvements. During the nine months ended September 30, 2019,2020, capital expenditures were $79$56 million.
Off-Balance Sheet Arrangements
At each of September 30, 20192020 and December 31, 2018,2019, 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; and
•Fair Value Estimates (including Business Combinations and Assessment of Impairment of Assets); and.
•
Share-Based Payments.
During the nine months ended September 30, 2019,2020, there were no significant changes to the above critical accounting policies and estimates. Refer to Management’s“Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations” contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018,2019, 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 32 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
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.rates, with a heightened risk for volatility in the future due to potential impacts of COVID-19 on global financial markets. 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, all of which have remaining maturities of 13 months or less as of September 30, 2020, are as follows (amounts in millions):
|
| | | | | | | | | | | | | |
| As of September 30, 2019 | | As of December 31, 2018 |
| Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
Foreign Currency: | | | | | |
Buy USD, Sell Euro | $ | 310 |
| $ | 23 |
| | $ | 723 |
| $ | 12 |
|
| | | | | | | | | | | | | | | | | |
| As of September 30, 2020 | | As of December 31, 2019 |
| Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
Foreign Currency: | | | | | |
Buy USD, Sell Euro | $ | 608 | | $ | (18) | | | $ | 350 | | $ | (2) | |
At September 30, 2019, our Cash Flow Hedges have remaining maturities of three months or less. Additionally, $2 million of net realized but unrecognized gains are recorded within “Accumulated other comprehensive income (loss)” at 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 September 30, | | For the Nine Months Ended September 30, | | Statement of Operations Classification |
| 2020 | 2019 | | 2020 | 2019 | |
Cash Flow Hedges | $ | (5) | | $ | 7 | | | $ | 7 | | $ | 24 | | | Net revenues |
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | Statement of Operations Classification |
| 2019 | 2018 | | 2019 | 2018 | |
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 September 30, 2020 | | As of December 31, 2019 |
| Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
Foreign Currency: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Buy USD, Sell GBP | $ | 61 | | $ | (1) | | | $ | 25 | | $ | (2) | |
| | | | | |
|
| | | | | | | | | | | | | |
| As of September 30, 2019 | | As of December 31, 2018 |
| Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
Foreign Currency: |
|
| |
|
|
Buy USD, Sell EUR | $ | 81 |
| $ | 5 |
| | $ | — |
| $ | — |
|
Buy EUR, Sell USD | 79 |
| (3 | ) | | — |
| — |
|
Buy USD, Sell SEK | 46 |
| 2 |
| | — |
| — |
|
Buy SEK, Sell USD | 45 |
| (1 | ) | | — |
| — |
|
Buy USD, Sell GBP | 13 |
| 1 |
| | 55 |
| 1 |
|
Buy GBP, Sell USD | 13 |
| — |
| | — |
| — |
|
For the three and nine months ended September 30, 20192020 and 2018,2019, pre-tax net gains (losses) associated with these forward contracts were recorded in “General and administrative expenses” and were not material.
In the absence of hedging activities for the nine months ended September 30, 2019,2020, a hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in a theoretical decline of our net income of approximately $78 million.approximately $116 million. This sensitivity analysis assumes a parallel adverse shift of all foreign currency exchange rates against the U.S. dollar; however,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 September 30, 2019,2020, our cash and cash equivalents were comprised primarily of money market funds.
The Company has determined that,As of September 30, 2020, based on the composition of our investment portfolio as of September 30, 2019, there was no materialand recent actions by central banks around the world, including the interest rate risk exposurecuts by the U.S. Federal Reserve, we anticipate investment yields may remain low, which would continue to negatively impact our future interest income. Such impact is not expected to be material to the Company’s consolidated financial condition, results of operations, or liquidity as of that date.liquidity.
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;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 September 30, 2019,2020, the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at September 30, 2019,2020, 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)(1) recorded, processed, summarized, and reported on a timely basis and (ii)(2) 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 September 30, 2019.2020. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at September 30, 2019,2020, 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. Additionally, we have not experienced any material impact to our internal control over financial reporting or our disclosure controls and procedures despite the fact that most of our employees are working remotely for their health and safety during the COVID-19 pandemic. We are continually monitoring and assessing the potential impact of COVID-19 on our internal controls to minimize the impact on their design and operating effectiveness.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 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, 2018.2019 (the “2019 Form 10-K”), Part II, Item 1A, “Risk Factors,” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the “First Quarter 10-Q”), and Part II, Item 1A, “Risk Factors,” of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (the “Second Quarter 10-Q”).
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Risk Factors” in each of the 2019 Form 10-K, the First Quarter 10-Q, and the Second Quarter 10-Q, any of which could materially affect our business, reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, or stock price. The ongoing global COVID-19 pandemic has heightened, and in some cases manifested, certain of the risks we normally face in operating our business, including those disclosed in the 2019 Form 10-K, the First Quarter 10-Q, and the Second Quarter 10-Q, and the risk factor disclosure in the 2019 Form 10-K is qualified by the information relating to the ongoing global COVID-19 pandemic that is described in this Quarterly Report on Form 10-Q, the First Quarter 10-Q, and the Second Quarter 10-Q.
Item 5. Other Information
During 2019, we began implementing a restructuring plan aimed at refocusing our resources on our largest opportunities and removing unnecessary levels of complexity from certain parts of our business. On October 27, 2020, the Company’s Board of Directors approved an expansion to the scope of this restructuring plan that are aimed at integrating our global and regional functions to allow continued focus on investing in our franchises and to provide us with the ability to better leverage our scale.
As a result of the restructuring expansion approved on October 27, 2020, we now expect to incur total aggregate pre-tax restructuring charges of approximately $310 million associated with the restructuring plan, of which the remaining charges that have not yet been incurred are expected to largely be incurred within the next 12 months. The charges associated with the restructuring plan are expected to relate to severance and employee-related costs (approximately 60% of the aggregate charge), facilities and related costs (approximately 20% of the aggregate charge), and other costs (approximately 20% of the aggregate charge), including charges for restructuring-related fees and the write-down of assets. A substantial majority (approximately 70%) of the total pre-tax charge associated with the restructuring is expected to be paid in cash using amounts on hand, and such cash outlays are largely expected to be completed by the end of 2021.
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 | | |
| | |
3.2 | | |
| | |
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
32.2 | | |
| | |
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). |
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: November 7, 2019October 29, 2020
ACTIVISION BLIZZARD, INC.
| | | | | | | | |
|
/s/ DENNIS DURKIN | | /s/ JESSE YANG |
Dennis Durkin | | Jesse Yang |
Chief Financial Officer and Principal Financial Officer | | Chief Accounting Officer and |
Principal Accounting Officer |
of Activision Blizzard, Inc. | | of Activision Blizzard, Inc. |