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2019
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| 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 | |||
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(310)
| 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 | ||
| Large Accelerated Filer | ☒ | Non-accelerated Filer | ☐ | Accelerated Filer | ☐ | ||
| Smaller reporting company | ☐ | |||||
| Emerging growth company | ☐ | ||||||
2018. At September 30, At December 31, Assets Current assets: Cash and cash equivalents $ 3,308 $ 4,713 Accounts receivable, net of allowances of $119 and $279, at September 30, 2018 and December 31, 2017, respectively 641 918 Inventories, net 174 46 Software development 348 367 Other current assets 501 476 Total current assets 4,972 6,520 Software development 174 86 Property and equipment, net 281 294 Deferred income taxes, net 243 459 Other assets 454 440 Intangible assets, net 826 1,106 Goodwill 9,763 9,763 Total assets $ 16,713 $ 18,668 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 312 $ 323 Deferred revenues 1,017 1,929 Accrued expenses and other liabilities 1,053 1,411 Total current liabilities 2,382 3,663 Long-term debt, net 2,670 4,390 Deferred income taxes, net 11 21 Other liabilities 991 1,132 Total liabilities 6,054 9,206 Commitments and contingencies (Note 16) Shareholders’ equity: Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,191,665,508 and 1,186,181,666 shares issued at September 30, 2018 and December 31, 2017, respectively — — Additional paid-in capital 10,928 10,747 Less: Treasury stock, at cost, 428,676,471 shares at September 30, 2018 and December 31, 2017 (5,563) (5,563) Retained earnings 5,907 4,916 Accumulated other comprehensive loss (613) (638) Total shareholders’ equity 10,659 9,462 Total liabilities and shareholders’ equity $ 16,713 $ 18,668 For the Three Months Ended For the Nine Months Ended 2018 2017 2018 2017 Net revenues Product sales $ 263 $ 384 $ 1,447 $ 1,373 Subscription, licensing, and other revenues 1,249 1,234 3,672 3,601 Total net revenues (Note 2) 1,512 1,618 5,119 4,974 Costs and expenses Cost of revenues—product sales: Product costs 127 149 416 422 Software royalties, amortization, and intellectual property licenses 20 37 214 200 Cost of revenues—subscription, licensing, and other revenues: Game operations and distribution costs 257 249 777 717 Software royalties, amortization, and intellectual property licenses 109 117 278 359 Product development 263 273 776 750 Sales and marketing 263 345 741 899 General and administrative 208 191 623 539 Total costs and expenses 1,247 1,361 3,825 3,886 Operating income 265 257 1,294 1,088 Interest and other expense (income), net 13 37 67 109 Loss on extinguishment of debt 40 — 40 12 Income before income tax expense (benefit) 212 220 1,187 967 Income tax expense (benefit) (48) 32 25 109 Net income $ 260 $ 188 $ 1,162 $ 858 Earnings per common share Basic $ 0.34 $ 0.25 $ 1.53 $ 1.14 Diluted $ 0.34 $ 0.25 $ 1.51 $ 1.12 Weighted-average number of shares outstanding Basic 763 755 761 753 Diluted 771 766 771 764 For the Three Months Ended For the Nine Months Ended 2018 2017 2018 2017 Net income $ 260 $ 188 $ 1,162 $ 858 Other comprehensive income (loss): Foreign currency translation adjustment 3 9 (7) 36 Unrealized gains (losses) on forward contracts designated as hedges, net of tax (11) (8) 25 (45) Unrealized gains (losses) on investments, net of tax — (3) 4 (4) Total other comprehensive income (loss) $ (8) $ (2) $ 22 $ (13) Comprehensive income $ 252 $ 186 $ 1,184 $ 845 For the Nine Months Ended September 30, 2018 2017 Cash flows from operating activities: Net income $ 1,162 $ 858 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes 175 (138) Depreciation and amortization 385 670 Amortization of capitalized software development costs and intellectual property licenses (1) 238 202 Loss on extinguishment of debt (Note 10) 40 12 Amortization of debt discount and financing costs 5 10 Share-based compensation expense (2) 164 118 Other 15 24 Changes in operating assets and liabilities: Accounts receivable, net 290 (140) Inventories (127) (50) Software development and intellectual property licenses (305) (227) Other assets (15) (70) Deferred revenues (710) (320) Accounts payable (14) 78 Accrued expenses and other liabilities (512) 28 Net cash provided by operating activities 791 1,055 Cash flows from investing activities: Purchases of available-for-sale investments (59) (80) Capital expenditures (97) (86) Other investing activities (4) 3 Net cash used in investing activities (160) (163) Cash flows from financing activities: Proceeds from issuance of common stock to employees 91 150 Tax payment related to net share settlements on restricted stock units (85) (44) Dividends paid (259) (226) Proceeds from debt issuances, net of discounts — 3,741 Repayment of long-term debt (1,740) (4,251) Premium payment for early redemption of note (Note 10) (25) — Other financing activities (2) (10) Net cash used in financing activities (2,020) (640) Effect of foreign exchange rate changes on cash and cash equivalents (15) 72 Net increase (decrease) in cash and cash equivalents and restricted cash (1,404) 324 Cash and cash equivalents and restricted cash at beginning of period 4,720 3,262 Cash and cash equivalents and restricted cash at end of period $ 3,316 $ 3,586 2019 Common Stock Treasury Stock Additional Retained Accumulated Total Shares Amount Shares Amount Capital Earnings Income (Loss) Equity 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 (Note 3) — — — — — 88 3 91 Components of comprehensive income: Net income — — — — — 1,162 — 1,162 Other comprehensive income (loss) — — — — — — 22 22 Issuance of common stock pursuant to employee stock options 5 — — — 93 — — 93 Issuance of common stock pursuant to restricted stock units 2 — — — — — — — Restricted stock surrendered for employees’ tax liability (1) — — — (86) — — (86) Share-based compensation expense related to employee stock options and restricted stock units — — — — 174 — — 174 Dividends ($0.34 per common share) — — — — — (259) — (259) Balance at September 30, 2018 1,192 $ — (429) $ (5,563) $ 10,928 $ 5,907 $ (613) $ 10,659 Activision’s key product Apple Inc.’s (“Apple”) iOS. currency, and we continue to focus on in-game advertising as a growing source of additional revenue. 2018. amounts as follows (amounts in millions): (“ASC”) 842: Leases Condensed Consolidated Balance Sheet: Balance at Adjustments due Balance at Assets Accounts receivable, net $ 918 $ 3 $ 921 Software development 367 (20) 347 Other current assets 476 (35) 441 Deferred income taxes, net 459 (32) 427 Other assets 440 4 444 Liabilities and Shareholders’ Equity Deferred revenues $ 1,929 $ (194) $ 1,735 Other liabilities 1,132 23 1,155 Shareholders’ equity 9,462 91 9,553 For the Three Months Ended September 30, 2018 Condensed Consolidated Statement of Operations: Under new Under old Increase Net revenues Product sales $ 263 $ 269 $ (6) Subscription, licensing, and other revenues 1,249 1,226 23 Total net revenues 1,512 1,495 17 Costs and expenses Cost of revenues—product sales: Product costs 127 126 1 Software royalties, amortization, and intellectual property licenses 20 24 (4) Cost of revenues—subscription, licensing, and other revenues: Game operations and distribution costs 257 257 — Software royalties, amortization, and intellectual property licenses 109 109 — Product development 263 263 — Sales and marketing 263 263 — General and administrative 208 208 — Total costs and expenses 1,247 1,250 (3) Operating income 265 245 20 Interest and other expense (income), net 13 13 — Loss on extinguishment of debt 40 40 — Income before income tax expense (benefit) 212 192 20 Income tax expense (benefit) (48) (57) 9 Net income $ 260 $ 249 $ 11 Earnings per common share Basic $ 0.34 $ 0.33 $ 0.01 Diluted $ 0.34 $ 0.32 $ 0.02 For the Nine Months Ended September 30, 2018 Condensed Consolidated Statement of Operations: Under new Under old Increase Net revenues Product sales $ 1,447 $ 1,593 $ (146) Subscription, licensing, and other revenues 3,672 3,645 27 Total net revenues 5,119 5,238 (119) Costs and expenses Cost of revenues—product sales: Product costs 416 438 (22) Software royalties, amortization, and intellectual property licenses 214 232 (18) Cost of revenues—subscription, licensing, and other revenues: Game operations and distribution costs 777 777 — Software royalties, amortization, and intellectual property licenses 278 278 — Product development 776 776 — Sales and marketing 741 740 1 General and administrative 623 623 — Total costs and expenses 3,825 3,864 (39) Operating income 1,294 1,374 (80) Interest and other expense (income), net 67 67 — Loss on extinguishment of debt 40 40 — Income before income tax expense 1,187 1,267 (80) Income tax expense 25 41 (16) Net income $ 1,162 $ 1,226 $ (64) Earnings per common share Basic $ 1.53 $ 1.61 $ (0.08) Diluted $ 1.51 $ 1.59 $ (0.08) At September 30, 2018 Condensed Consolidated Balance Sheet: Under new Under old Increase Assets Accounts receivable, net $ 641 $ 637 $ 4 Software development 348 350 (2) Other current assets 501 519 (18) Deferred income taxes, net 243 262 (19) Other assets 454 469 (15) Liabilities and Shareholders’ Equity Deferred revenues $ 1,017 $ 1,077 $ (60) Accrued expenses and other liabilities 1,053 1,056 (3) Other liabilities 991 1,005 (14) Shareholders’ equity 10,659 10,632 27 cash flows. statements upon adoption. At September 30, 2018 At December 31, 2017 Finished goods $ 161 $ 45 Purchased parts and components 13 1 Inventories, net $ 174 $ 46 At September 30, 2018 At December 31, 2017 Internally-developed software costs $ 356 $ 270 Payments made to third-party software developers 166 183 Total software development costs $ 522 $ 453 For the Three Months Ended For the Nine Months Ended 2018 2017 2018 2017 Amortization of capitalized software development costs and intellectual property licenses $ 33 $ 34 $ 242 $ 206 At September 30, 2018 Estimated useful Gross carrying Accumulated Net carrying Acquired definite-lived intangible assets: Internally-developed franchises 3 - 11 years $ 1,154 $ (987) $ 167 Developed software 2 - 5 years 601 (413) 188 Customer base 2 years 617 (617) — Trade names 7 - 10 years 54 (21) 33 Other 1 - 15 years 19 (14) 5 Total definite-lived intangible assets $ 2,445 $ (2,052) $ 393 Acquired indefinite-lived intangible assets: Activision trademark Indefinite 386 Acquired trade names Indefinite 47 Total indefinite-lived intangible assets $ 433 Total intangible assets, net $ 826 At December 31, 2017 Estimated useful Gross carrying Accumulated Net carrying Acquired definite-lived intangible assets: Internally-developed franchises 3 - 11 years $ 1,154 $ (869) $ 285 Developed software 2 - 5 years 601 (301) 300 Customer base 2 years 617 (573) 44 Trade names 7 - 10 years 54 (16) 38 Other 1 - 15 years 19 (13) 6 Total definite-lived intangible assets $ 2,445 $ (1,772) $ 673 Acquired indefinite-lived intangible assets: Activision trademark Indefinite 386 Acquired trade names Indefinite 47 Total indefinite-lived intangible assets $ 433 Total intangible assets, net $ 1,106 2018 (remaining three months) $ 91 2019 210 2020 69 2021 11 2022 7 Thereafter 5 Total $ 393 Activision Blizzard King Total Goodwill $ 6,898 $ 190 $ 2,675 $ 9,763 Fair Value Measurements at As of Quoted Significant Significant Balance Sheet Classification Financial Assets: Recurring fair value measurements: Money market funds $ 3,087 $ 3,087 $ — $ — Cash and cash equivalents Foreign government treasury bills 35 35 — — Cash and cash equivalents U.S. treasuries and government agency securities 116 116 — — Other current assets Foreign currency forward contracts designated as hedges 11 — 11 — Other current assets Total recurring fair value measurements $ 3,249 $ 3,238 $ 11 $ — Financial liabilities: Foreign currency forward contracts not designated as hedges $ (5) $ — $ (5) $ — Accrued expenses and other liabilities Foreign currency forward contracts designated as hedges $ (4) $ — $ (4) $ — Accrued expenses and other liabilities Fair Value Measurements at December 31, 2017 As of Quoted Significant Significant Balance Sheet Classification Financial Assets: Recurring fair value measurements: Money market funds $ 4,405 $ 4,405 $ — $ — Cash and cash equivalents Foreign government treasury bills 39 39 — — Cash and cash equivalents U.S. treasuries and government agency securities 55 55 — — Other current assets Total recurring fair value measurements $ 4,499 $ 4,499 $ — $ — Financial liabilities: Foreign currency forward contracts designated as hedges $ (5) $ — $ (5) $ — Accrued expenses and other liabilities As of September 30, 2018 As of December 31, 2017 Notional amount Fair value gain (loss) Notional amount Fair value gain (loss) Foreign Currency: Buy USD, Sell Euro $ 843 $ 7 $ 521 $ (5) For the Three Months Ended For the Nine Months Ended 2018 2017 2018 2017 Statement of Operations Classification Cash Flow Hedges $ 3 $ (2) $ (11) $ 7 Net revenues As of September 30, 2018 As of December 31, 2017 Notional amount Fair value gain (loss) Notional amount Fair value gain (loss) Foreign Currency: Buy Euro, Sell USD $ 119 $ (5) $ — $ — new revenue standard in the prior year. 2019. . 2019. At September 30, 2018 Gross Carrying Unamortized Net Carrying 2021 Notes $ 650 $ (4) $ 646 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 $ (30) $ 2,670 At December 31, 2017 Gross Carrying Unamortized Net Carrying 2017 TLA $ 990 $ (8) $ 982 2021 Notes 650 (4) 646 2022 Notes 400 (4) 396 2023 Notes 750 (9) 741 2026 Notes 850 (9) 841 2027 Notes 400 (6) 394 2047 Notes 400 (10) 390 Total long-term debt $ 4,440 $ (50) $ 4,390 For the year ending December 31, 2018 (remaining three months) $ — 2019 — 2020 — 2021 650 2022 400 Thereafter 1,650 Total $ 2,700 For the Nine Months Ended September 30, 2018 Foreign currency Unrealized gain Unrealized gain 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, 2017 Foreign currency Unrealized gain Unrealized gain Total Balance at December 31, 2016 $ (659) $ 29 $ 1 $ (629) Other comprehensive income (loss) before reclassifications 20 (38) (2) (20) Amounts reclassified from accumulated other comprehensive income (loss) into earnings 16 (7) (2) 7 Balance at September 30, 2017 $ (623) $ (16) $ (3) $ (642) 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 Three Months Ended September 30, 2017 Activision Blizzard King Total Segment Net Revenues Net revenues from external customers $ 759 $ 531 $ 528 $ 1,818 Intersegment net revenues (1) — — — — Segment net revenues $ 759 $ 531 $ 528 $ 1,818 Segment operating income $ 261 $ 168 $ 208 $ 637 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 Nine Months Ended September 30, 2017 Activision Blizzard King Total Segment Net Revenues Net revenues from external customers $ 1,291 $ 1,539 $ 1,482 $ 4,312 Intersegment net revenues (1) — — — — Segment net revenues $ 1,291 $ 1,539 $ 1,482 $ 4,312 Segment operating income $ 371 $ 552 $ 538 $ 1,461 Three Months Ended Nine Months Ended 2018 2017 2018 2017 Reconciliation to consolidated net revenues: Segment net revenues $ 1,538 $ 1,818 $ 4,195 $ 4,312 Revenues from other segments (1) 128 84 246 204 Net effect from recognition (deferral) of deferred net revenues (146) (284) 692 458 Elimination of intersegment revenues (2) (8) — (14) — Consolidated net revenues $ 1,512 $ 1,618 $ 5,119 $ 4,974 Reconciliation to consolidated income before income tax expense: Segment operating income $ 485 $ 637 $ 1,275 $ 1,461 Operating (loss) income from other segments (1) 7 (12) (4) (15) Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (89) (132) 468 370 Share-based compensation expense (55) (47) (166) (120) Amortization of intangible assets (83) (187) (279) (571) Fees and other expenses related to the acquisition of King (3) — (3) — (12) Restructuring costs (4) — — — (11) Other non-cash charges (5) — 1 — (14) Consolidated operating income 265 257 1,294 1,088 Interest and other expense (income), net 13 37 67 109 Loss on extinguishment of debt 40 — 40 12 Consolidated income before income tax expense $ 212 $ 220 $ 1,187 $ 967 Three Months Ended September 30, 2018 Activision Blizzard King Non- Elimination 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 Nine Months Ended September 30, 2018 Activision Blizzard King Non- Elimination 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 Three Months Ended Nine Months Ended Net revenues by distribution channel: Digital online channels (1) $ 1,354 $ 4,048 Retail channels 168 698 Other (2) 96 228 Total consolidated net revenues $ 1,618 $ 4,974 Three Months Ended September 30, 2018 Activision Blizzard King Non- Elimination 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 Nine Months Ended September 30, 2018 Activision Blizzard King Non- Elimination 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 Three Months Ended Nine Months Ended Net revenues by geographic region: Americas $ 798 $ 2,586 EMEA (1) 593 1,684 Asia Pacific 227 704 Total consolidated net revenues $ 1,618 $ 4,974 2018. 2018. Three Months Ended September 30, 2018 Activision Blizzard King Non- Elimination 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 Nine Months Ended September 30, 2018 Activision Blizzard King Non- Elimination 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 Three Months Ended Nine Months Ended Net revenues by platform: Console $ 527 $ 1,710 PC 461 1,534 Mobile and ancillary (1) 534 1,502 Other (2) 96 228 Total consolidated net revenues $ 1,618 $ 4,974 At September 30, 2018 At December 31, 2017 Long-lived assets (1) by geographic region: Americas $ 202 $ 197 EMEA 61 75 Asia Pacific 18 22 Total long-lived assets by geographic region $ 281 $ 294 credits. For the Three Months Ended For the Nine Months Ended 2018 2017 2018 2017 Numerator: Consolidated net income $ 260 $ 188 $ 1,162 $ 858 Denominator: Denominator for basic earnings per common share—weighted-average common shares outstanding 763 755 761 753 Effect of potential dilutive common shares under the treasury stock method—employee stock options and awards 8 11 10 11 Denominator for basic earnings per common share—weighted-average dilutive common shares outstanding 771 766 771 764 Basic earnings per common share $ 0.34 $ 0.25 $ 1.53 $ 1.14 Diluted earnings per common share $ 0.34 $ 0.25 $ 1.51 $ 1.12 Activision’s key product Apple Inc.’s (“Apple”) iOS. currency, and we continue to focus on in-game advertising as a growing source of additional revenue. 2018. Uldum bookings and In-game net bookings 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. September 30, 2018 September 30, 2017 Increase Net bookings Three Months Ended $ 1,658 $ 1,902 $ (244) Nine Months Ended $ 4,427 $ 4,516 $ (89) 2018 Duty franchise catalog titles. 2018 catalog titles. September 30, June 30, March 31, December 31, September 30, June 30, Activision 46 45 51 55 49 47 Blizzard 37 37 38 40 42 46 King 262 270 285 290 293 314 Total 345 352 374 385 384 407 Candy Crush franchise. The slight increase in Blizzard’s average MAUs is due to an increase in average MAUs for franchises, such as the October 2019 launch of Duty League. 2018. We also have mobile titles in development based on Activision’s and Blizzard’s intellectual property, such as the recently released For the Three Months Ended September 30, For the Nine Months Ended September 30, 2018 2017 2018 2017 Net revenues Product sales $ 263 17% $ 384 24% $ 1,447 28% $ 1,373 28% Subscription, licensing, and other revenues 1,249 83 1,234 76 3,672 72 3,601 72 Total net revenues 1,512 100 1,618 100 5,119 100 4,974 100 Costs and expenses: Cost of revenues—product sales: Product costs 127 48 149 39 416 29 422 31 Software royalties, amortization, and intellectual property licenses 20 8 37 10 214 15 200 15 Cost of revenues—subscription, licensing, and other revenues: Game operations and distribution costs 257 21 249 20 777 21 717 20 Software royalties, amortization, and intellectual property licenses 109 9 117 9 278 8 359 10 Product development 263 17 273 17 776 15 750 15 Sales and marketing 263 17 345 21 741 14 899 18 General and administrative 208 14 191 12 623 12 539 11 Total costs and expenses 1,247 82 1,361 84 3,825 75 3,886 78 Operating income 265 18 257 16 1,294 25 1,088 22 Interest and other expense (income), net 13 1 37 2 67 1 109 3 Loss on extinguishment of debt (1) 40 3 — — 40 1 12 — Income before income tax expense (benefit) 212 14 220 14 1,187 23 967 19 Income tax expense (benefit) (48) (3) 32 2 25 — 109 2 Net income $ 260 17% $ 188 12% $ 1,162 23% $ 858 17% For the Three Months Ended September 30, For the Nine Months Ended September 30, 2018 2017 Increase % Change 2018 2017 Increase % Change Consolidated net revenues $ 1,512 $ 1,618 $ (106) (7)% $ 5,119 $ 4,974 $ 145 3% Net effect from recognition (deferral) of deferred net revenues (146) (284) 138 692 458 234 2018 December 2018). 2018 franchise. 2018 December 2018). 2018 franchise. Three Months Ended September 30, 2018 $ Increase / (Decrease) Activision Blizzard King Total Activision Blizzard King Total Segment Net Revenues Net revenues from external customers $ 397 $ 627 $ 506 $ 1,530 $ (362) $ 96 $ (22) $ (288) Intersegment net revenues (1) — 8 — 8 — 8 — 8 Segment net revenues $ 397 $ 635 $ 506 $ 1,538 $ (362) $ 104 $ (22) $ (280) Segment operating income $ 112 $ 189 $ 184 $ 485 $ (149) $ 21 $ (24) $ (152) Three Months Ended September 30, 2017 Activision Blizzard King Total Segment Net Revenues Net revenues from external customers $ 759 $ 531 $ 528 $ 1,818 Intersegment net revenues (1) — — — — Segment net revenues $ 759 $ 531 $ 528 $ 1,818 Segment operating income $ 261 $ 168 $ 208 $ 637 Nine Months Ended September 30, 2018 $ Increase / (Decrease) Activision Blizzard King Total Activision Blizzard King Total Segment Net Revenues Net revenues from external customers $ 1,047 $ 1,592 $ 1,542 $ 4,181 $ (244) $ 53 $ 60 $ (131) Intersegment net revenues (1) — 14 — 14 — 14 — 14 Segment net revenues $ 1,047 $ 1,606 $ 1,542 $ 4,195 $ (244) $ 67 $ 60 $ (117) Segment operating income $ 288 $ 444 $ 543 $ 1,275 $ (83) $ (108) $ 5 $ (186) Nine Months Ended September 30, 2017 Activision Blizzard King Total Segment Net Revenues Net revenues from external customers $ 1,291 $ 1,539 $ 1,482 $ 4,312 Intersegment net revenues (1) — — — — Segment net revenues $ 1,291 $ 1,539 $ 1,482 $ 4,312 Segment operating income $ 371 $ 552 $ 538 $ 1,461 For the Three Months Ended For the Nine Months Ended 2018 2017 2018 2017 Reconciliation to consolidated net revenues: Segment net revenues $ 1,538 $ 1,818 $ 4,195 $ 4,312 Revenues from other segments (1) 128 84 246 204 Net effect from recognition (deferral) of deferred net revenues (146) (284) 692 458 Elimination of intersegment revenues (2) (8) — (14) — Consolidated net revenues $ 1,512 $ 1,618 $ 5,119 $ 4,974 Reconciliation to consolidated income before income tax expense: Segment operating income $ 485 $ 637 $ 1,275 $ 1,461 Operating (loss) income from other segments (1) 7 (12) (4) (15) Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (89) (132) 468 370 Share-based compensation expense (55) (47) (166) (120) Amortization of intangible assets (83) (187) (279) (571) Fees and other expenses related to the acquisition of King — (3) — (12) Restructuring costs — — — (11) Other non-cash charges — 1 — (14) Consolidated operating income 265 257 1,294 1,088 Interest and other expense (income), net 13 37 67 109 Loss on extinguishment of debt 40 — 40 12 Consolidated income before income tax expense $ 212 $ 220 $ 1,187 $ 967 2018 by: 2018 Duty franchise catalog titles; Crash Team Racing Nitro-Fueled. 2018 League. 2018 advertising revenues. same driver and offsetting factor discussed above. 2018 publishing rights for Destiny to Bungie in December 2018). 2018 June 2019, respectively. 2018 game development cycles. 2018 service provider fees, primarily digital storefront fees (e.g. fees retained by Apple and Google for our sales on their platforms); and 2018 our sales on their platforms), payment processor fees, and server bandwidth fees; and For the Three Months Ended September 30, For the Nine Months Ended September 30, 2018 2017 Increase 2018 2017 Increase Net revenues by distribution channel: Digital online channels (1) $ 1,276 $ 1,354 $ (78) $ 3,998 $ 4,048 $ (50) Retail channels 76 168 (92) 764 698 66 Other (2) 160 96 64 357 228 129 Total consolidated net revenues $ 1,512 $ 1,618 $ (106) $ 5,119 $ 4,974 $ 145 2018 2018 2018 2018 to Bungie in December 2018); and by: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2018 2017 Increase 2018 2017 Increase Net revenues by geographic region: Americas $ 774 $ 798 $ (24) $ 2,740 $ 2,586 $ 154 EMEA (1) 534 593 (59) 1,774 1,684 90 Asia Pacific 204 227 (23) 605 704 (99) Consolidated net revenues $ 1,512 $ 1,618 $ (106) $ 5,119 $ 4,974 $ 145 2018 December 2018). 2018 franchise. 2018 2018 the Destiny franchise; and 2018 Hearthstone. 2018 the Destiny franchise. For the Three Months Ended September 30, For the Nine Months Ended September 30, 2018 2017 Increase 2018 2017 Increase Net revenues by platform: Console $ 347 $ 527 $ (180) $ 1,730 $ 1,710 $ 20 PC 482 461 21 1,452 1,534 (82) Mobile and ancillary (1) 523 534 (11) 1,580 1,502 78 Other (2) 160 96 64 357 228 129 Total consolidated net revenues $ 1,512 $ 1,618 $ (106) $ 5,119 $ 4,974 $ 145 2018 by: 2018 March 2019. 2018 the Destiny franchise. 2018 franchise; 2018. Three Months % of associated Three Months % of associated Increase Cost of revenues—product sales: Product costs $ 127 48% $ 149 39% $ (22) Software royalties, amortization, and intellectual property licenses 20 8 37 10 (17) Cost of revenues—subscription, licensing, and other revenues: Game operations and distribution costs 257 21 249 20 8 Software royalties, amortization, and intellectual property licenses 109 9 117 9 (8) Total cost of revenues $ 513 34% $ 552 34% $ (39) Nine Months % of associated Nine Months % of associated Increase Cost of revenues—product sales: Product costs $ 416 29% $ 422 31% $ (6) Software royalties, amortization, and intellectual property licenses 214 15 200 15 14 Cost of revenues—subscription, licensing, and other revenues: Game operations and distribution costs 777 21 717 20 60 Software royalties, amortization, and intellectual property licenses 278 8 359 10 (81) Total cost of revenues $ 1,685 33% $ 1,698 34% $ (13) 2018 retail revenues. franchise (reflecting our sale of the publishing rights for Destiny to Bungie in December 2018). 2018 Revenues 2018 payment processor fees, and server bandwidth fees. 2018 server bandwidth fees. September 30, % of September 30, % of Increase Three Months Ended $ 263 17% $ 273 17% $ (10) Nine Months Ended $ 776 15% $ 750 15% $ 26 2018 releases of $33 million, primarily due to lower personnel costs; and 2018 Destiny franchise. September 30, % of September 30, % of Increase Three Months Ended $ 263 17% $ 345 21% $ (82) Nine Months Ended $ 741 14% $ 899 18% $ (158) 2018 September 30, % of September 30, % of Increase Three Months Ended $ 208 14% $ 191 12% $ 17 Nine Months Ended $ 623 12% $ 539 11% $ 84 2018 costs. 2018 the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for further discussion. September 30, % of September 30, % of Increase Three Months Ended $ 13 1% $ 37 2% $ (24) Nine Months Ended $ 67 1% $ 109 3% $ (42) 2018 repayment activities during 2018. 2018 2018. September 30, % of pretax September 30, % of pretax Increase Three Months Ended $ (48) (23)% $ 32 15% $ (80) Nine Months Ended $ 25 2% $ 109 11% $ (84) payments in the current year, and an increase in U.S. tax on foreign earnings. . credit. certain restrictions. September 30, 2018 December 31, 2017 Increase Cash and cash equivalents $ 3,308 $ 4,713 $ (1,405) Short-term investments 123 62 61 $ 3,431 $ 4,775 $ (1,344) Percentage of total assets 21% 26% For the Nine Months Ended September 30, 2018 2017 Increase Net cash provided by operating activities $ 791 $ 1,055 $ (264) Net cash used in investing activities (160) (163) 3 Net cash used in financing activities (2,020) (640) (1,380) Effect of foreign exchange rate changes (15) 72 (87) Net increase (decrease) in cash and cash equivalents and restricted cash $ (1,404) $ 324 $ (1,728) 2018. prior-year period. . At September 30, 2018 Gross Carrying Unamortized Net Carrying 2021 Notes $ 650 $ (4) $ 646 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 $ (30) $ 2,670 At December 31, 2017 Gross Carrying Unamortized Net Carrying 2017 TLA $ 990 $ (8) $ 982 2021 Notes 650 (4) 646 2022 Notes 400 (4) 396 2023 Notes 750 (9) 741 2026 Notes 850 (9) 841 2027 Notes 400 (6) 394 2047 Notes 400 (10) 390 Total long-term debt $ 4,440 $ (50) $ 4,390 28, 2019. contained leases under the new and (2) carry forward our historical lease classifications. As of September 30, 2018 As of December 31, 2017 Notional amount Fair value gain (loss) Notional amount Fair value gain (loss) Foreign Currency: Buy USD, Sell Euro $ 843 $ 7 $ 521 $ (5) For the Three Months Ended For the Nine Months Ended 2018 2017 2018 2017 Statement of Operations Classification Cash Flow Hedges $ 3 $ (2) $ (11) $ 7 Net revenues As of September 30, 2018 As of December 31, 2017 Notional amount Fair value gain (loss) Notional amount Fair value gain (loss) Foreign Currency: Buy Euro, Sell USD $ 119 $ (5) $ — $ — Exhibit 3.2 31.2 32.1 32.2 101.INS XBRL Instance 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. 7, 2019 /s/ DENNIS DURKIN Principal Financial Officer, Activision Blizzard, Inc.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. o☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒The number of shares of the registrant’s Common Stock outstanding at November 1, 2018October 31, 2019 was 763,050,718.768,260,070.Table of ContentsThis 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;services and restructuring activities; (3) statements of future financial or operating performance, including the impact of tax items thereon; and (4) statements of assumptions underlying such statements. Activision Blizzard, Inc. generally uses words such as “outlook,” “forecast,” “will,” “could,” “should,” “would,” “to be,” “plan,” “plans,” “believes,” “may,” “might,” “expects,” “intends,” “intends as,” “anticipates,” “estimate,” “future,” “positioned,” “potential,” “project,” “remain,” “scheduled,” “set to,” “subject to,” “upcoming”“upcoming,” and other similar expressions to help identify forward-looking statements. Forward-looking statements are subject to business and economic risks, reflect management’s current expectations, estimates, and projections about our business, and are inherently uncertain and difficult to predict.The company cautionsWe caution that a number of important factors could cause Activision Blizzard, Inc.’sour 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: sales levelsour ability to consistently deliver popular, high-quality titles in a timely manner; our ability to satisfy the expectations of Activision Blizzard, Inc.’s titles, products, and services;consumers with respect to our brands, games, services, and/or business practices; concentration of revenue among a small number of titles; Activision Blizzard, Inc.’s ability to predict consumer preferences, including interest in specific genres and modes and preferences among platforms; the continued growth in the scope and complexity of our business, including the diversion of management time and attention to issues relating to the operations of our newly acquired or started businesses and the potential impact of our expansion into new businesses on our existing businesses; our ability to realize the expected financial and operational benefits of, and effectively manage, our recently announced restructuring plans; increasing importance of revenues derived from digital distribution channels; risks associated with the retail sales business model; substantial influence of third-party platform providers over our products and costs; success and availability of video game consoles manufactured by third parties; risks associated with the free-to-play business model, including dependence on a relatively small number of consumers for a significant portion of revenues and profits from any given game; risks and costs associated with legal proceedings; changes in tax rates or exposure to additional tax liabilities, as well as the outcome of current or future tax disputes; rapid changes in technology and industry standards; competition, including from other forms of entertainment; our ability to sell products at assumed pricing levels; our ability to attract, retain, and motivate skilled personnel; reliance on external developers for development of some of our software products; the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt; counterparty risks relating to customers, licensees, licensors, and manufacturers; maintenanceintellectual property claims; piracy and unauthorized copying of relationships with key personnel, customers, financing providers, licensees, licensors, manufacturers, vendors,our products; risks and third-party developers, includinguncertainties of conducting business outside the ability to attract, retain, and motivate key personnel and developers that can create high-quality titles,United States (“U.S.”); fluctuations in currency exchange rates; increasing regulation of our business, products, and services; changing business models within the video game industry, including digital delivery of contentdistribution in key territories; compliance with continually evolving laws and the increased prevalence of free-to-play games; product delays or defects; competition, including from other forms of entertainment; rapid changes in technology and industry standards; possible declines in software pricing; product returns and price protection; the identification of suitable future acquisition opportunities and potential challenges associated with geographic expansion; the seasonal and cyclical nature of the interactive entertainment market; the outcome of current or future tax disputes; litigation risks and associated costs; protection of proprietary rights;regulations concerning data privacy; potential data breaches and other cybersecurity risks; shifts in consumer spending trends; capital market risks; the impact of applicable laws, rules, and regulations, including changes in those laws, rules, and regulations; domestic and international economic, financial, and political conditions and policies; tax rates and foreign exchange rates; the impact of the current macroeconomic environment; 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, 2017.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 United States (“U.S.”) dollars, unless otherwise explicitly stated to the contrary.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsACTIVISION BLIZZARD, INC. AND SUBSIDIARIES(Unaudited)(Amounts in millions, except share data)
2018
2017 At September 30, 2019 At December 31, 2018 Assets Current assets: Cash and cash equivalents $ 4,939 $ 4,225 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 Software development 240 264 Other current assets 345 539 Total current assets 6,012 6,106 Software development 109 65 Property and equipment, net 249 282 Deferred income taxes, net 357 458 Other assets 731 482 Intangible assets, net 583 735 Goodwill 9,764 9,762 Total assets $ 17,805 $ 17,890 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 274 $ 253 Deferred revenues 695 1,493 Accrued expenses and other liabilities 782 896 Total current liabilities 1,751 2,642 Long-term debt, net 2,674 2,671 Deferred income taxes, net 23 18 Other liabilities 1,122 1,167 Total liabilities 5,570 6,498 Commitments and contingencies (Note 19) 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 — — Additional paid-in capital 11,116 10,963 Less: Treasury stock, at cost, 428,676,471 shares at September 30, 2019 and December 31, 2018 (5,563 ) (5,563 ) Retained earnings 7,289 6,593 Accumulated other comprehensive loss (607 ) (601 ) Total shareholders’ equity 12,235 11,392 Total liabilities and shareholders’ equity $ 17,805 $ 17,890 ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES(Unaudited)(Amounts in millions, except per share data)
September 30,
September 30, For the Three Months Ended September 30, For the Nine Months Ended September 30, 2019 2018 2019 2018 Net revenues Product sales $ 260 $ 263 $ 1,276 $ 1,447 Subscription, licensing, and other revenues 1,022 1,249 3,227 3,672 Total net revenues 1,282 1,512 4,503 5,119 Costs and expenses Cost of revenues—product sales: Product costs 137 127 388 416 Software royalties, amortization, and intellectual property licenses 9 20 171 214 Cost of revenues—subscription, licensing, and other revenues: Game operations and distribution costs 246 257 714 777 Software royalties, amortization, and intellectual property licenses 50 109 164 278 Product development 210 263 702 776 Sales and marketing 182 263 580 741 General and administrative 177 208 527 623 Restructuring and related costs 24 — 104 — Total costs and expenses 1,035 1,247 3,350 3,825 Operating income 247 265 1,153 1,294 Interest and other expense (income), net (Note 15) (2 ) 13 (33 ) 67 Loss on extinguishment of debt — 40 — 40 Income before income tax expense (benefit) 249 212 1,186 1,187 Income tax expense (benefit) 45 (48 ) 208 25 Net income $ 204 $ 260 $ 978 $ 1,162 Earnings per common share Basic $ 0.27 $ 0.34 $ 1.28 $ 1.53 Diluted $ 0.26 $ 0.34 $ 1.27 $ 1.51 Weighted-average number of shares outstanding Basic 767 763 766 761 Diluted 771 771 770 771 ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES(Unaudited)(Amounts in millions)
September 30,
September 30, For the Three Months Ended September 30, For the Nine Months Ended September 30, 2019 2018 2019 2018 Net income $ 204 $ 260 $ 978 $ 1,162 Other comprehensive income (loss): Foreign currency translation adjustment, net of tax (6 ) 3 (5 ) (7 ) Unrealized gains (losses) on forward contracts designated as hedges, net of tax 10 (11 ) 4 25 Unrealized gains (losses) on investments, net of tax (3 ) — (5 ) 4 Total other comprehensive income (loss) $ 1 $ (8 ) $ (6 ) $ 22 Comprehensive income $ 205 $ 252 $ 972 $ 1,184 ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES(Unaudited)(Amounts in millions)(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. For the Nine Months Ended September 30, 2019 2018 Cash flows from operating activities: Net income $ 978 $ 1,162 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes 100 175 Depreciation and amortization 246 385 Non-cash operating lease cost 49 — Amortization of capitalized software development costs and intellectual property licenses (1) 163 238 Loss on extinguishment of debt — 40 Share-based compensation expense (2) 127 164 Unrealized gain on equity investment (Note 8) (38 ) — Other 47 20 Changes in operating assets and liabilities: Accounts receivable, net 635 290 Inventories (65 ) (127 ) Software development and intellectual property licenses (186 ) (305 ) Other assets 17 (15 ) Deferred revenues (809 ) (710 ) Accounts payable 22 (14 ) Accrued expenses and other liabilities (373 ) (512 ) Net cash provided by operating activities 913 791 Cash flows from investing activities: Proceeds from maturities of available-for-sale investments 153 — Purchases of available-for-sale investments — (59 ) Capital expenditures (79 ) (97 ) Other investing activities 5 (4 ) Net cash provided by (used in) investing activities 79 (160 ) Cash flows from financing activities: Proceeds from issuance of common stock to employees 87 91 Tax payment related to net share settlements on restricted stock units (55 ) (85 ) Dividends paid (283 ) (259 ) Repayment of long-term debt — (1,740 ) Premium payment for early redemption of note — (25 ) Other financing activities — (2 ) Net cash used in financing activities (251 ) (2,020 ) Effect of foreign exchange rate changes on cash and cash equivalents (24 ) (15 ) Net increase (decrease) in cash and cash equivalents and restricted cash 717 (1,404 ) Cash and cash equivalents and restricted cash at beginning of period 4,229 4,720 Cash and cash equivalents and restricted cash at end of period $ 4,946 $ 3,316 (1) Excludes deferral and amortization of share-based compensation expense. (2) Includes the net effects of capitalization, deferral, and amortization of share-based compensation expense. ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESFor the Three and Nine Months Ended September 30, 2018(Unaudited)(Amounts and shares in millions, except per share data)
Paid-In
Other
Comprehensive
Shareholders’ 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 ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYFor 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 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 Components of comprehensive income: Net income — — — — — 500 — 500 Other comprehensive loss — — — — — — (14 ) (14 ) Issuance of common stock pursuant to employee stock options 3 — — — 47 — — 47 Issuance of common stock pursuant to restricted stock units 2 — — — — — — — Restricted stock surrendered for employees’ tax liability (1 ) — — — (64 ) — — (64 ) 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 Components of comprehensive income: Net income — — — — — 402 — 402 Other comprehensive income — — — — — — 44 44 Issuance of common stock pursuant to employee stock options 1 — — — 30 — — 30 Restricted stock surrendered for employees’ tax liability — — — — (10 ) — — (10 ) Share-based compensation expense related to employee stock options and restricted stock units — — — — 61 — — 61 Balance at June 30, 2018 1,191 $ — (429 ) $ (5,563 ) $ 10,867 $ 5,647 $ (605 ) $ 10,346 Components of comprehensive income: Net income — — — — — 260 — 260 Other comprehensive loss — — — — — — (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 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESNotes to Condensed Consolidated Financial Statements(Unaudited)1.Description of Business and Basis of Consolidation and PresentationActivision 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 eventsleagues and leaguesevents and create film and television content based on our intellectual property. The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries.The Company was originally incorporated in California in 1979 and was reincorporated in Delaware in December 1992. In connection with the 2008 business combination by and among the Company (then known as Activision, Inc.), Vivendi S.A. (“Vivendi”), and Vivendi Games, Inc., then an indirect wholly-owned subsidiary of Vivendi S.A., we were renamed Activision Blizzard, Inc.The common stock of Activision Blizzard is traded on The Nasdaq Stock Market under the ticker symbol “ATVI.”Our SegmentsBased upon our organizational structure, we conduct our business through three3 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 platforms.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. We have also established a long-term alliance with Bungie to publish its game universe, Destiny.franchises include:franchise is Call of Dutyplatforms; and Destiny, an online universeplatforms. Also, on October 1, 2019, in collaboration with Tencent, Activision released Call of first-person action gameplay (which we call a “shared-world shooter”)Duty: Mobile for the consolemobile platform, including for Google Inc.’s (“Google”) Android and PC platforms.In 2010, Activision entered into an exclusive relationship with Bungie, Inc. (“Bungie”) to publish games in the Destiny franchise. Effective December 31, 2018, Activision and Bungie mutually agreed to terminate their publishing relationship related to the Destiny franchise. As part of this termination, Activision agreed to transfer its publishing rights for the Destiny franchise to Bungie in exchange for cash and Bungie’s assumption of on-going customer obligations of Activision. Activision no longer has any material rights or obligations related to the Destiny franchise.(ii) Blizzard Entertainment, Inc.Blizzard Entertainment, Inc. (“Blizzard”) is a leading global developer and publisher of interactive software products and entertainment content, particularly for the PC platform. Blizzard primarily delivers content through retail and digital channels, including subscriptions, full-game, and in-game sales, as well as by licensing software to third-party or related-party companies that distribute Blizzard products. Blizzard also maintains a proprietary online gaming service, Blizzard Battle.net®, which facilitates digital distribution of Blizzard content and selected Activision content, online social connectivity, and the creation of user-generated content. Blizzard also includes the activities of the Overwatch LeagueTM, the first major global professional esports league with city-based teams, and our Major League Gaming (“MLG”) business, which is responsible for various esports events and serves as a multi-platform network for Activision Blizzard esports content.Blizzard’s key product franchises include: World of Warcraft®, a subscription-based massive multi-player online role-playing game for the PC platform; StarCraft®, a real-time strategy franchise for the PC platform; Diablo®, an action role-playing franchise for the PC and console platforms; Hearthstone®, an online collectible card franchise for the PC and mobile platforms; Heroes of the Storm®, a free-to-play team brawler for the PC platform; and Overwatch®, a team-based first-person shooter for the PC and console platforms.(iii) King Digital EntertainmentKing Digital Entertainment (“King”) is a leading global developer and publisher of interactive entertainment content and services, particularly onprimarily for the mobile platforms, such as Google Inc.’s (“Google”)platform, including for Google’s Android and Apple Inc.’s (“Apple”)Apple’s iOS. King also distributes its content and services on the PC platform, primarily via Facebook. King’s games are free to play,play; however, players can acquire in-game items, either with virtual currency or directly using real currency.King’s key product franchises, all of which are for the mobile and PC platforms, include: Candy Crush���Crush™, which features “match three” games; Farm Heroes™, which also features “match three” games; and Bubble Witch™, which features “bubble shooter” games.OtherWe also engage in other businesses that do not represent reportable segments, including:· the Activision Blizzard Studios (“Studios”) business, which is devoted to creating original film and television content based on our library of globally recognized intellectual properties, and which, in September 2018, released the third season of the animated TV series Skylanders™ Academy on Netflix; and·• the Activision Blizzard 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; andthe 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 PresentationThe accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) 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. TheAdditionally, 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, 2017.The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. In the opinion of management, all adjustments (consisting of normal recurring accruals) 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. Certain reclassifications have been made to prior year amounts to conform to the current period presentation.The Company considers events or transactions that occur after the balance sheet date, but before the financial statements are issued, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures.During the three months ended March 31, 2019, we identified an error principally related to the initial recognition of global intangible low-taxed income of foreign subsidiaries income taxes which should have been recorded in the three months and year ended December 31, 2018. Income tax expense for the three months and year ended December 31, 2018 should have been reduced by $35 million. This amount is not material to the consolidated financial statements for the year ended December 31, 2018, and we will revise our 2018 consolidated financial statements to correct this matter in our Annual Report on Form 10-K for the year ending December 31, 2019. Our condensed consolidated balance sheet as of December 31, 2018, as presented in this Form 10-Q, has been revised to reflect the correction of this error.Supplemental Cash Flow InformationFor the nine months ended September 30, 2018, the beginning and ending cash and cash equivalents and restricted cash reported within our condensed consolidated statement of cash flows include restricted cash of $7 million and $8 million, respectively. For the nine months ended September 30, 2017, theThe beginning and ending cash and cash equivalents and restricted cash reported within our condensed consolidated statement of cash flows included restricted cash of $17 million and $10 million, respectively. At September 30, 2019 2018 Beginning restricted cash $ 4 $ 7 Ending restricted cash 7 8 2.Summary of Significant Accounting PoliciesDuring the nine months ended September 30, 2018, there were no significant changes to our accounting policies, except for our adoption of a new revenue accounting standard as discussed below. Refer to Note 2 contained in our Annual Report on Form 10-K for the year ended December 31, 2017 for a summary of our other significant accounting policies.Adoption of Accounting Standards Codification 606: Revenue from Contracts with CustomersIn May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to revenue recognition. The new standard replaces all current U.S. GAAP guidance on this topic, eliminating all industry-specific guidance and providing a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. On January 1, 2018, we adopted the new accounting standard and related amendments (collectively, the “new revenue accounting standard”). As a result, we have updated our significant accounting policy disclosure for revenue recognition herein. Refer to Note 3 for the impact of adoption on our condensed consolidated financial statements.Revenue RecognitionWe generate revenue primarily through the sale of our interactive entertainment content and services, principally for console, PC, and mobile devices, as well as through the licensing of our intellectual property. Our products span various genres, including first-person shooter, action/adventure, role-playing, strategy, and “match three,” among others. We primarily offer the following products and services:· full games, which typically provide access to main game content, primarily for console or PC;· downloadable content, which provides players with additional in-game content to purchase following the purchase of a full game;· microtransactions, which typically provide relatively small pieces of additional in-game content or enhancements to gameplay; and· subscriptions to players in our World of Warcraft franchise, which provide continual access to the game content.When control of the promised products and services is transferred to our customers, we recognize revenue in the amount that reflects the consideration we expect to receive in exchange for these products and services.We determine revenue recognition by:· identifying the contract, or contracts, with a customer;· identifying the performance obligations in the contract;· determining the transaction price;· allocating the transaction price to performance obligations in the contract; and· recognizing revenue when, or as, we satisfy performance obligations by transferring the promised goods or services.Certain products are sold to customers with a “street date” (which is the earliest date these products may be sold by retailers). For these products, we recognize revenues on the later of the street date and the date the product is sold to our customer. For digital full-game downloads sold to customers, we recognize revenue when it is available for download or is activated for gameplay. Revenues are recorded net of taxes assessed by governmental authorities that are imposed at the time of the specific revenue-producing transaction between us and our customer, such as sales and value-added taxes.Payment terms and conditions vary by contract type, although terms generally include a requirement of payment immediately upon purchase or within 30 to 90 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to our customer and payment for that product or service will be one year or less.Product SalesProduct sales consist of sales of our games, including physical products and digital full-game downloads. We recognize revenues from the sale of our products after both (1) control of the products has been transferred to our customers and (2) underlying performance obligations have been satisfied.Revenues from product sales are recognized after deducting the estimated allowance for returns and price protection, which are accounted for as variable consideration when estimating the amount of revenue to recognize. Returns and price protection are estimated at contract inception and updated at the end of each reporting period as additional information becomes available.Sales incentives and other consideration given by us to our customers, such as rebates and product placement fees, are considered adjustments of the transaction price of our products and are reflected as reductions to revenues. Sales incentives and other consideration that represent costs incurred by us for distinct goods or services received, such as the appearance of our products in a customer’s national circular ad, are recorded as “Sales and marketing” expense when the benefit from the sales incentive is separable from sales to the same customer and we can reasonably estimate the fair value of the good or service.Products with Online FunctionalityFor our software products that include both offline functionality (i.e., do not require an Internet connection to access) and significant online functionality, such as titles for the Call of Duty franchise, we evaluate whether the license of our intellectual property and the online functionality are distinct and separable. This evaluation is performed for each software product or product add-on, including downloadable content. If we determine that our software products contain a license of intellectual property separate from the online functionality, we consider market conditions and other observable inputs to estimate the transaction price for the license, since we do not generally sell the software license on a standalone basis. These products may be sold in a bundle with other products and services, which often results in the recognition of additional performance obligations.We recognize revenue for arrangements that include both a license of intellectual property and separate online functionality when control of the license transfers to our customers for the portion of the transaction price allocable to the license and ratably over the estimated service period for the portion of the transaction price allocable to the online functionality. Similarly, we defer a portion of the cost of revenues on these arrangements and recognize the costs as the related revenues are recognized. The cost of revenues that are deferred include product costs, distribution costs, and software royalties, amortization, and intellectual property licenses, and excludes intangible asset amortization.Online Hosted Software ArrangementsFor our online hosted software arrangements, such as titles for the Destiny, Overwatch, World of Warcraft, and Candy Crush franchises, substantially all gameplay and functionality are obtained through our continuous hosting of the game content for the player. Similar to our software products with online functionality, these arrangements may include other products and services, which often results in the recognition of additional performance obligations. Revenues related to online hosted software arrangements are generally recognized ratably over the estimated service period.Subscription ArrangementsSubscription revenue arrangements are mostly derived from World of Warcraft, which is playable through Blizzard’s servers and is generally sold on a subscription-only basis. Revenues associated with the sales of subscriptions are deferred until the subscription service is activated by the consumer and are then recognized ratably over the subscription period as the performance obligations are satisfied.Revenues attributable to the purchase of World of Warcraft software by our customers, including expansion packs, are classified as “Product sales,” whereas revenues attributable to subscriptions and other in-game revenues are classified as “Subscription, licensing, and other revenues.”Licensing RevenuesIn certain countries, we utilize third-party licensees to distribute and host our games in accordance with license agreements, for which the licensees typically pay us a fixed minimum guarantee and sales-based royalties. These arrangements typically include multiple performance obligations, such as an upfront license of intellectual property and rights to specified or unspecified future updates. Our estimate of the selling price is comprised of several factors including, but not limited to, prior selling prices, prices charged separately by other third-party vendors for similar service offerings, and a cost-plus-margin approach. Based on the allocated transaction price, we recognize revenue associated with the minimum guarantee when we transfer control of the upfront license of intellectual property and/or upon transfer of control of future specified updates and ratably over the contractual term in which we provide the customer with unspecified future updates. Royalty payments in excess of the minimum guarantee are generally recognized when the licensed product is sold by the licensee.Other RevenuesOther revenues primarily include revenues from downloadable content (e.g., multi-player content packs), microtransactions, and licensing of intellectual property other than software to third-parties.Microtransaction revenues are derived from the sale of virtual currencies and goods to our players to enhance their gameplay experience. Proceeds from these sales of virtual currencies and goods are initially recorded in deferred revenue. Proceeds from the sales of virtual currencies are recognized as revenues when a player uses the virtual goods purchased with a virtual currency. Proceeds from the sales of virtual goods directly are similarly recognized as revenues when a player uses the virtual goods. We categorize our virtual goods as either “consumable” or “durable”. Consumable virtual goods represent goods that can be consumed by a specific player action; accordingly, we recognize revenues from the sale of consumable virtual goods as the goods are consumed and our performance obligation is satisfied. Durable virtual goods represent goods that are accessible to the player over an extended period of time; accordingly, we recognize revenues from the sale of durable virtual goods ratably over the period of time the goods are available to the player and our performance obligation is satisfied, which is generally the estimated service period.Revenues from the licensing of intellectual property other than software to third parties primarily include the licensing of our (1) brand, logo, or franchise to customers and (2) media content. Fixed fee payments from customers for the license of our brand or franchise are generally recognized over the license term. Fixed fee payments from customers for the license of our media content are generally recognized when control has transferred to the customer, which may be upfront or over time.Significant Judgment around Revenue Arrangements with Multiple DeliverablesOur contracts with customers often include promises to transfer multiple products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Certain of our games, such as titles in the Call of Duty franchise, may contain a license of our intellectual property to play the game offline, but also depend on a significant level of integration and interdependency with the online functionality. In these cases, significant judgment is required to determine whether this license of our intellectual property should be considered distinct and accounted for separately, or not distinct and accounted for together with the online functionality provided and recognized over time. Generally, for titles in which the software license is functional without the online functionality and a significant component of gameplay is available offline, we believe we have separate performance obligations for the license of the intellectual property and the online functionality.Significant judgment is also required to determine the standalone selling price for each distinct performance obligation and to determine whether there is a discount that needs to be allocated based on the relative standalone selling price of the various products and services. To estimate the standalone selling price we consider market data, including our pricing strategies for the product being evaluated and other similar products we may offer, competitor pricing to the extent data is available, and costs to determine whether the estimated selling price yields an appropriate profit margin.Estimated Service PeriodWe consider a variety of data points when determining the estimated service period for players of our games, including the weighted average number of days between players’ first and last days played online, the average total hours played, the average number of days in which player activity stabilizes, and the weighted-average number of days between players’ first purchase date and last date played online. We also consider known online trends, the service periods of our previously released games, and, to the extent publicly available, the service periods of our competitors’ games that are similar in nature to ours. We believe this provides a reasonable depiction of the transfer of services to our customers, as it is the best representation of the time period during which our customers play our games. Determining the estimated service period is subjective and requires management’s judgment. Future usage patterns may differ from historical usage patterns, and therefore the estimated service period may change in the future. The estimated service periods for players of our current games are generally less than 12 months.Principal Agent ConsiderationsWe evaluate sales of our products and content via third-party digital storefronts, such as Microsoft Corporation’s (“Microsoft”) Xbox Games Store, Sony Interactive Entertainment Inc.’s (“Sony”) PSN, the Apple App Store, and the Google Play Store, to determine whether revenues should be reported gross or net of fees retained by the storefront. Key indicators that we evaluate in determining gross versus net treatment include, but are not limited to, the following:· which party is primarily responsible for fulfilling the promise to provide the specified good or service; and· which party has discretion in establishing the price for the specified good or service.Based on our evaluation of the above indicators, we report revenues on a gross basis for sales arrangements via the Apple App Store and the Google Play Store, and we report revenues on a net basis (i.e., net of fees retained by the digital storefront) for sales arrangements via Microsoft’s Xbox Games Store and Sony’s PSN.Contract BalancesWe generally record a receivable related to revenue when we have an unconditional right to invoice and receive payment, and record deferred revenue when cash payments are received or due in advance of our performance, even if amounts are refundable.The allowance for doubtful accounts reflects our best estimate of probable losses inherent in our accounts receivable balance. In estimating the allowance for doubtful accounts, we analyze the age of current outstanding account balances, historical bad debts, customer concentrations, customer creditworthiness, current economic trends, and changes in our customers’ payment terms and their economic condition, as well as whether we can obtain sufficient credit insurance. Any significant changes in any of these criteria would affect management’s estimates in establishing our allowance for doubtful accounts.Deferred revenue is comprised primarily of unearned revenue related to the sale of products with online functionality or online hosted arrangements. We typically invoice, and collect payment for, these sales at the beginning of the contract period and recognize revenue ratably over the estimated service period. Deferred revenue also includes payments for: product sales pending delivery or activation; subscription revenues; licensing revenues with fixed minimum guarantees; and other revenues for which we have been paid in advance and earn the revenue when we transfer control of the product or service.Refer to Note 9 for further information, including changes in deferred revenue during the period.Assets Recognized from Costs to Obtain a Contract with a CustomerWe apply the practical expedient to expense costs, as incurred, to obtain a contract with a customer when the amortization period would have been one year or less for certain similar contracts in which commissions are paid to internal personnel or third parties. We believe application of the practical expedient has a limited effect on the amount and timing of cost recognition. Total capitalized costs to obtain a contract were immaterial as of September 30, 2018.Allowances for Returns and Price ProtectionWe closely monitor and analyze the historical performance of our various titles, the performance of products released by other publishers, market conditions, and the anticipated timing of other releases to assess future demand of current and upcoming titles. Initial volumes shipped upon title launch and subsequent reorders are evaluated with the goal of ensuring that quantities are sufficient to meet the demand from the retail markets, but at the same time are controlled to prevent excess inventory in the channel. We benchmark units to be shipped to our customers using historical and industry data.We may permit product returns from, or grant price protection to, our customers under certain conditions. In general, price protection refers to the circumstances in which we elect to decrease, on a short- or longer-term basis, the wholesale price of a product by a certain amount and, when granted and applicable, allow customers a credit against amounts owed by such customers to us with respect to open and/or future invoices. The conditions our customers must meet to be granted the right to return products or receive price protection credits include, among other things, compliance with applicable trading and payment terms and consistent return of inventory and delivery of sell-through reports to us. We may also consider other factors, including achievement of sell-through performance targets in certain instances, the facilitation of slow-moving inventory, and other market factors.Significant management judgments and estimates with respect to potential future product returns and price protection related to current period product revenues must be made and used when establishing the allowance for returns and price protection in any accounting period. We estimate the amount of future returns and price protection for current period product revenues utilizing historical experience and information regarding inventory levels and the demand and acceptance of our products by the end consumer, and record revenue for the transferred products in the amount of consideration to which we expect to be entitled to. The following factors are used to estimate the amount of future returns and price protection for a particular title: historical performance of titles in similar genres; historical performance of the hardware platform; historical performance of the franchise; console hardware life cycle; sales force and retail customer feedback; industry pricing; future pricing assumptions; weeks of on-hand retail channel inventory; absolute quantity of on-hand retail channel inventory; our warehouse on-hand inventory levels; the title’s recent sell-through history (if available); marketing trade programs; and the performance of competing titles. The relative importance of these factors varies among titles depending upon, among other things, genre, platform, seasonality, and sales strategy.Based upon historical experience, we believe that our estimates are reasonable. However, actual returns and price protection could vary materially from our allowance estimates due to a number of reasons, including, among others: a lack of consumer acceptance of a title, the release in the same period of a similarly themed title by a competitor, or technological obsolescence due to the emergence of new hardware platforms. There may be material differences in the amount and timing of our revenues for any period if factors or market conditions change or if matters resolve in a manner that is inconsistent with management’s assumptions utilized in determining the allowances for returns and price protection.Shipping and HandlingShipping and handling costs consist primarily of packaging and transportation charges incurred to move finished goods to customers. We recognize all shipping and handling costs as an expense in “Cost of revenues-product costs,” including those incurred when control of the product has already transferred to the customer.3.Recently Issued Accounting PronouncementsRecently Adopted Accounting PronouncementsRevenue RecognitionAs noted in Note 2 above, we adopted the new revenue accounting standard effective January 1, 2018, utilizing the modified retrospective method. Additionally, we elected to apply the new revenue accounting standard only to contracts not completed as of the adoption date. For contracts that were modified before the period of adoption, we elected to reflect the aggregate effect of all modifications when (1) identifying the satisfied and unsatisfied performance obligations, (2) determining the transaction price, and (3) allocating the transaction price to the satisfied and unsatisfied performance obligations. We recognized the cumulative effect of initially applying the new revenue accounting standard as an adjustment to the openingbalance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The cumulative effect adjustment recorded to our retained earnings was $88 million (see our condensed consolidated statements of changes in shareholders’ equity) and included the impact from the following adjustments to our condensed consolidated balance sheet at January 1, 2018 (amounts in millions):
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January 1, 2018The most significant impacts of the new revenue accounting standard for us are:·The accounting for our sales of our games with significant online functionality for which we do not have vendor-specific objective evidence (“VSOE”) for unspecified future updates and ongoing online services provided. Under the prior accounting standards, VSOE for undelivered elements was required. This requirement was eliminated under the new revenue accounting standard. Accordingly, we are required to recognize as revenue a portion of the sales price upon delivery of this software, as compared to recognizing the entire sales price ratably over an estimated service period as previously required. This difference in accounting primarily impacts revenues from our Call of Duty franchise, where approximately 20% of the sales price is now recognized as revenue upon delivery of the games to our customers. The amount of revenue recognized upon delivery of games to our customers is analyzed on a title-by-title basis and may change in the future. For example, we expect the entire sales price from our Call of Duty: Black Ops 4 release to be recognized ratably over an estimated service period, as the gameplay has an increased focus towards the online competitive and cooperative game modes with no single-player campaign mode. Many of our other franchises, such as Destiny, Overwatch, World of Warcraft, and Candy Crush, are online hosted arrangements, and the accounting for our sales of these games under the new standard is relatively unchanged; and·The accounting for certain of our software licensing arrangements. While the impact of the new revenue accounting standard may differ on a contract-by-contract basis (as the actual revenue recognition treatment required under the standard will depend on contract-specific terms), the new revenue accounting standard generally results in earlier revenue recognition for these arrangements.Adoption of the new revenue accounting standard impacted our condensed consolidated statement of operations for the three and nine months ended September 30, 2018, and our condensed consolidated balance sheet as of September 30, 2018 as follows (in millions, except per share data):
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standardAdoption of the new revenue accounting standard had no impact to net cash from or used in operating, investing, or financing activities in our condensed consolidated statement of cash flows.Financial InstrumentsIn January 2016, the FASB issued new guidance related to the recognition and measurement of financial assets and financial liabilities. The new standard, among other things, generally requires companies to measure investments in other entities, except those accounted for under the equity method, at fair value and to recognize any changes in fair value in net income. The new standard also simplifies the impairment assessment of equity investments without readily determinable fair values. The new standard is effective for fiscal years beginning after December 15, 2017, and the guidance should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The guidance related to equity investments without readily determinable fair values (including disclosure requirements) is applied prospectively to equity investments that exist as of the date of adoption. We adopted the new standard during the first quarter of 2018 and it did not have a material impact on our condensed consolidated financial statements.Statement of Cash Flows-Restricted CashIn November 2016, the FASB issued new guidance related to the classification of restricted cash in the statement of cash flows. The new standard requires that a statement of cash flows explain any change during the period in total cash, cash equivalents, and restricted cash. Therefore, restricted cash will be included with “Cash and cash equivalents” when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017, and should be applied retrospectively.We adopted the new standard during the first quarter of 2018 and applied the standard retrospectively for all periods presented. The application of this new standard did not have a material impact on our condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017.In our Annual Report on Form 10-K for the year ending December 31, 2018, there will be a significant impact to the consolidated statements of cash flows for 2016, as this period includes, as an investing activity, the $3.6 billion movement in restricted cash resulting from the transfer of cash into escrow at December 31, 2015 to facilitate the acquisition of King, and the subsequent release of that cash in 2016 to complete the acquisition. Under this new standard, the restricted cash balance will be included in the beginning and ending total cash, cash equivalents, and restricted cash balances and, hence, will not be included as an investing activity in the statement of cash flows.Derivatives and HedgingIn August 2017, the FASB issued new guidance related to the accounting for derivatives and hedging. The new guidance expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedged items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of a hedge’s effectiveness. The new standard is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. We adopted the standard during the first quarter of 2018. The adoption of the standard did not have a material impact to our condensed consolidated financial statements.Recent Accounting Pronouncements Not Yet AdoptedLeasesIn February 2016, the FASB issued new guidance related to the accounting for leases. The new standard will replacereplaces 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. Classification will beOn 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.LeasesWe 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 criteria that are largely similar to those applied in current lease accounting. The lease liability will be equal to the present value of future lease payments. The asset will bepayments 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 liability, subjectROU asset also includes any lease payments made prior to adjustment forcommencement, initial direct costs incurred, and lease incentives received,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 any prepaidis based on the information available at the commencement date of the lease. For leased assets with similar lease payments. Operatingterms 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, will result inthe 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 pattern, whileassociated 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 will resulton 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 front-loaded expense pattern. The standard is effectiveportfolio approach to effectively account for fiscal years,the operating lease ROU assets and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. Whenliabilities.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 PronouncementsRecently Adopted Accounting PronouncementsLeasesAs noted in Note 2 above, we adopted the new lease accounting standard was initially issued, it was requiredeffective January 1, 2019. We elected to be adopted using a modified retrospective transition that required application of the new guidance at the beginning of the earliest comparative period presented, subject to certain transition practical expedients available to provide relief in connection with the adoption. In July 2018, the FASB issued guidance to provide forapply an optional adoption method, that allows companies to usewhich uses the effective date of the new lease standard 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 therefore does not require prior periods(2) carry forward our historical lease classifications.The impact from the adoption of the new lease accounting standard to be restated.Although we continue to evaluate the impactour 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 new accounting guidance on our financial statements, we expect it tostandard did not have a significantan impact on our condensed consolidated balance sheet as a resultstatement of establishing lease liabilities and right-of-use assets for our operating leases. As partoperations or condensed consolidated statements of our evaluation process, we have established a project implementation team that is evaluating our lease portfolio and system solutions, as well as identifying required process and policy changes, which include consideration of internal controls. We have made progress in gathering the necessary data elements for our lease population, have selected a system provider, and system configuration and implementation is underway. We do not plan to early adopt this new standard but do expect to elect and apply the available transition practical expedients, including the optional adoption method discussed above.Recent Accounting Pronouncements Not Yet AdoptedGoodwillIn 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, anthat entity will be required to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit, as determined in Step 1 from the goodwill impairment test, with its carrying amount and recognize an impairment charge, if any, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new standard is effective for fiscal years beginning after December 15, 2019, and should be applied prospectively. Early adoption is permitted. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption. We are evaluating the impact, if any, of adoptingdo not currently expect this new accounting guidance to have an impact on our consolidated financial statements.Cloud Computing ArrangementsIn August 2018, the FASB issued new guidance related to a customer’s accounting for implementation costs incurred in a cloud computing arrangement (i.e. hosting arrangement) that is a service contract. The new guidance requires customers to capitalize implementation costs for these arrangements by applying the same criteria that isare utilized for existing internal-use software guidance. The capitalized costs are required to be amortized over the associated term of the arrangement, generally on a straight-line basis, with amortization of these costs presented in the same financial statement line item as other costs associated with the arrangement. The new standard is effective for fiscal years beginning after December 15, 2019, and can be applied retrospectively or prospectively. Early adoption is permitted. We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements.Financial Instruments - Credit LossesIn June 2016, the FASB issued new guidance related to accounting for credit losses on financial instruments. The update replaces the existing incurred loss impairment model with an expected loss model which requires the use of historical and forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will generally result in earlier recognition of credit losses. The new standard is effective for fiscal years beginning after December 15, 2019, and will be applied on a modified retrospective basis, with the cumulative effect of adoption recorded as an adjustment to retained earnings. We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements, however, our preliminary conclusion is that the new guidance will not have a material impact on our financial statements and related disclosures.4.Inventories, NetInventories, 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, 20182019 and December 31, 2017,2018, inventory reserves were $23$13 million and $36$22 million, respectively.5.Software Development and Intellectual Property LicensesThe 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 As of both September 30, 20182019 and December 31, 2017,2018, capitalized intellectual property licenses were not material.Amortization of capitalized software development costs and intellectual property licenses was as follows (amounts in millions):
September 30,
September 30, For the Three Months Ended September 30, For the Nine Months Ended September 30, 2019 2018 2019 2018 Amortization of capitalized software development costs and intellectual property licenses $ 11 $ 33 $ 175 $ 242 6.Intangible Assets, NetIntangible assets, net, consist of the following (amounts in millions):
lives
amount
amortization
amount
lives
amount
amortization
amount 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 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. Amortization expense of our intangible assets was $188 million and $573 million for the three and nine months ended September 30, 2017, respectively.At September 30, 2018,2019, future amortization of definite-lived intangible assets is estimated as follows (amounts in millions):For the years ending December 31, 2019 (remaining three months) $ 52 2020 74 2021 12 2022 7 2023 2 Thereafter 3 Total $ 150 7.GoodwillThe changes in the carrying amount of goodwill by reportable segment at September 30, 2018 and December 31, 2017 wasare 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 8.Fair Value MeasurementsThe 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 BasisThe 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):
September 30, 2018 Using
September 30,
2018
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
Using
December 31,
2017
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3) 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 Foreign Currency Forward ContractsForeign Currency Forward Contracts Designated as Hedges (“Cash Flow Hedges”)The total gross notional amounts and fair values of our Cash Flow Hedges are as follows (amounts in millions): As of 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 At September 30, 2018,2019, our Cash Flow Hedges have remaining maturities of 15three months or less. Additionally, $3$2 million of net realized but unrecognized gains are recorded within “Accumulated other comprehensive income (loss)” at September 30, 20182019 for Cash Flow Hedges that had settled but were deferred and will be amortized into earnings, along with the associated hedged revenues.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):
September 30,
September 30, 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 HedgesThe 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, 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, 20182019 and 2017,2018, pre-tax net gains (losses) associated with these forward contracts were recorded in “General and administrative expenses” and were not material.Fair Value Measurements on a Non-Recurring BasisWe 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, 20182019 and 2017,2018, there were no impairment charges related to assets that are measured on a non-recurring basis.9.Deferred revenuesWe record deferred revenues when cash payments are received or due in advance of the fulfillment of our associated performance obligations. The opening balance of deferred revenues as of January 1, 20182019 and the ending balance as of September 30, 20182019, were $1.8$1.6 billion and $1.0$0.8 billion, respectively, including our current and non-current balances. For the nine months ended September 30, 2018,2019, the additions to our deferred revenues balance were primarily due to cash payments received or due in advance of satisfying our performance obligations, while the reductions to our deferred revenues balance were primarily due to the recognition of revenues upon fulfillment of our performance obligations, both of which were in the ordinary course of business. During the three and nine months ended September 30, 2018, $1.62019, $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 beginningthree 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 period.As of September 30, 2018,2019, the aggregate amount of contracted revenues allocated to our unsatisfied performance obligations is $2.2$2.5 billion, which includes our deferred revenues balances and amounts to be invoiced and recognized as revenue in future periods. We expect to recognize a significant majority of this balance as revenueapproximately $1.4 billion over the next 12 months, $0.4 billion in the subsequent 12-month period, and the remainder thereafter. This balance does not include an estimate for variable consideration arising from sales-based royalty license revenue in excess of the contractual minimum guarantee.10.DebtCredit FacilitiesAtOur 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, 2017,2018, 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.DebtCredit FacilitiesAs of September 30, 2019 and December 31, 2018, we had outstanding term loans “A” of approximately $990 million (the “2017 TLA”) and $250 million$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”).On August 24, 2018, using available cash on hand, we made a voluntary prepayment of $990 million to fully repay and extinguish the 2017 TLA. As a result, we wrote-off unamortized discount and financing costs of $7 million, which are included in “Loss on extinguishment of debt” in the condensed consolidated statement of operations. On August 24, 2018, we also entered into the Seventh Amendment (the “Amendment”) to the Credit Agreement. The Amendment, among other things: (1) provided for a new tranche of revolving credit commitments in an aggregate principal amount of $1.5 billion (the “New Revolver”), which replaced our prior revolving credit facility; (2) amended the Credit Agreement to remove mechanics related to the 2017 TLA, which, as noted above, was repaid in full prior to the effectiveness of the Amendment; and (3) eliminated or amended certain representations, warranties and covenants to reflect our current credit ratings.The New Revolver is scheduled to mature on August 24, 2023. Borrowings under the New Revolver will bear interest, at the Company’s option, at either (1) a base rate equal to the highest of (i) the federal funds rate, plus 0.5%, (ii) the prime commercial lending rate of Bank of America, N.A. and (iii) the London Interbank Offered Rate (“LIBOR”) for an interest period of one month beginning on such day plus 1.00%, or (2) LIBOR, in each case, plus an applicable interest margin. LIBOR will be subject to a floor of 0% and base rate will be subject to an effective floor of 1.00%. The applicable interest margin for borrowings under the New Revolver will range from 0.875% to 1.375% for LIBOR borrowings and from 0% to 0.375% for base rate borrowings and will be determined by reference to a pricing grid based on the Company’s credit ratings. To date, we have not drawn on the New Revolver.Under the Credit Agreement,Revolver, and we are subject to a financial covenant requiring the Company’s Consolidated Total Net Debt Ratio (as defined in the Credit Agreement) not to exceed 3.75:1.00 (or, at the Company’s option and for a limited period of time upon the consummation of a Qualifying Acquisition (as defined in the Credit Agreement), 4.25:1.00). The Credit Agreement contains covenants customary for transactions of this type for issuers with similar credit ratings, including those restricting liens, debt of non-guarantor subsidiaries and certain fundamental changes, in each case with exceptions, including exceptions for secured debt and debt of non-guarantor subsidiaries of the Company, in each case up to an amount not exceeding 7.5% of Total Assets (as defined in the Credit Agreement). We were in compliance with the terms of the Credit Agreement as of September 30, 2018.Refer to Note 1113 contained in our Annual Report on Form 10-K for the year ended December 31, 20172018 for further details regarding the Credit Agreement, its key terms, and previous amendments made to it.Unsecured Senior NotesAt September 30, 2019 and December 31, 2017,2018, we had the following unsecured senior notes outstanding:· $750 million of 6.125% unsecured senior notes due September 2023 that we issued on September 19, 2013 (the “2023 Notes”), in a private offering made in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”);· $650$650 million of 2.3% unsecured senior notes due September 2021 (the “2021 Notes”) and $850;$400 million of 2.6% unsecured senior notes due June 2022 (the “2022 Notes”);$850 million of 3.4% unsecured senior notes due September 2026 (the “2026 Notes”) that we initially issued on September 19, 2016, in a private offering made in accordance with Rule 144A and Regulation S under the Securities Act, and subsequently exchanged for publicly registered notes in June 2017; and· $400 million of 2.6% unsecured senior notes due June 2022 (the “2022 Notes”), $400;$400 million of 3.4% unsecured senior notes due June 2027 (the “2027 Notes”),; and $400$400 million of 4.5% unsecured senior notes due June 2047 (the “2047 Notes”, and together with the 2021 Notes, the 2022 Notes, the 2023 Notes, the 2026 Notes, and the 2027 Notes, the “Notes”), that we issued on May 26, 2017, in a public underwritten offering.On July 17, 2018, we issued an irrevocable notice of redemption to the holders of all of our outstanding 2023 Notes. Accordingly, on August 16, 2018, using available cash on hand, we redeemed the 2023 Notes in full at a redemption price equal to 100% of the principal amount of the 2023 Notes plus a “make-whole” premium calculated as set forth in the indenture governing the 2023 Notes and accrued and unpaid interest to the redemption date. The redemption of the 2023 Notes resulted in a “Loss on extinguishment of debt” recorded in the condensed consolidated statement of operations of $33 million, comprised of premium payments of $25 million and a write-off of unamortized discount and deferred financing costs of $8 million. All other Notes referred to above remained outstanding as of September 30, 2018.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 New Revolver described above. The Notes are not secured and are effectively junior to any of the Company’s existing and future indebtedness that is secured to the extent of the value of the collateral securing such indebtedness. We were in compliance with the terms of the Notes as of September 30, 2018.Interest is payable semi-annually in arrears on March 15 and September 15 of each year for the 2021 Notes, the 2023 Notes and the 2026 Notes, and payable semi-annually in arrears on June 15 and December 15 of each year for the 2022 Notes, the 2027 Notes, and the 2047 Notes. Accrued interest payable is recorded within “Accrued expenses and other liabilities” in our condensed consolidated balance sheets. As of September 30, 20182019 and December 31, 2017,2018, we had accrued interest payable of $14 million and $28$15 million, respectively, related to the Notes.Refer to Note 1113 contained in our Annual Report on Form 10-K for the year ended December 31, 20172018 for further details regarding key terms under our indentures that govern the Notes.Interest Expense and Financing CostsFees 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 werewas $1 million and $5 million, respectively. For the three and nine months ended September 30, 2017, interest expense was $39 million and $110 million, respectively, and amortization of the debt discount and deferred financing costs were $2 million and $10 million, respectively.A summary of our outstanding debt is as follows (amounts in millions):
Amount
Discount and
Deferred Financing
Costs
Amount
Amount
Discount and
Deferred Financing
Costs
Amount At September 30, 2019 Gross CarryingAmount Unamortized
Discount and Deferred Financing Costs Net Carrying
Amount2021 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
Amount2021 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, 2018,2019, 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):On February 1, 2018, our Board of Directors authorized repayment of up to $1.8 billionFor 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 company’s outstanding debt during 2018. As of September 30, 2018, we had utilized this entire authorization to repay our 2017 TLA and redeem our 20232047 Notes, as described above.Usingusing 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 September 30,December 31, 2018, based on Level 2 inputs, the fair values of the 2026 Notes, the 2027 Notes, and the 2047 Notes were $809$800 million, $379$376 million, and $380$360 million, respectively.Using Level 2 inputs at December 31, 2017, with the exception of the 2023 Notes and the 2047 Notes, the carrying values of our debt instruments approximated their fair values. At December 31, 2017, based on Level 2 inputs, the fair values of the 2023 Notes and the 2047 Notes were $795 million and $421 million, respectively.11.12.Accumulated Other Comprehensive Income (Loss)The components of accumulated other comprehensive income (loss) were as follows (amounts in millions):
translation
adjustments
(loss) on forward
contracts
(loss) on available-
for-sale securities
translation
adjustments
(loss) on forward
contracts
(loss) on available-
for-sale securitiesIncome taxes were not previously provided for foreign currency translation items, as these were considered indefinite investments in non-U.S. subsidiaries. Due to the Tax Cuts and Jobs Act enacted on December 22, 2017 (the “U.S. Tax Reform Act”), we re-evaluated our indefinite reinvestment assertions and no longer consider these items to be indefinite investments. The corresponding tax impact for this change in assertion was not material.12. 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 ) 13.Operating Segments and Geographic RegionCurrently, we have three3 reportable segments.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, 20182019 and 2017,2018, are presented below (amounts in millions): 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, 20182019 and 2017,2018, are presented below (amounts in millions):(1) Intersegment revenues reflect licensing and service fees charged between segments. 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. 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):
September 30,
September 30,(1) Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 Reconciliation to consolidated net revenues: Segment net revenues $ 1,103 $ 1,538 $ 3,443 $ 4,195 Revenues from non-reportable segments (1) 113 128 245 246 Net effect from recognition (deferral) of deferred net revenues (2) 68 (146 ) 824 692 Elimination of intersegment revenues (3) (2 ) (8 ) (9 ) (14 ) Consolidated net revenues $ 1,282 $ 1,512 $ 4,503 $ 5,119 Reconciliation to consolidated income before income tax expense: Segment operating income $ 294 $ 485 $ 900 $ 1,275 Operating income (loss) from non-reportable segments (1) 5 7 10 (4 ) Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (2) 53 (89 ) 629 468 Share-based compensation expense (27 ) (55 ) (127 ) (166 ) Amortization of intangible assets (50 ) (83 ) (151 ) (279 ) Restructuring and related costs (4) (28 ) — (108 ) — Consolidated operating income 247 265 1,153 1,294 Interest and other expense (income), net (2 ) 13 (33 ) 67 Loss on extinguishment of debt — 40 — 40 Consolidated income before income tax expense $ 249 $ 212 $ 1,186 $ 1,187 (1) Includes other income and expenses from operating segments managed outside the reportable segments, including our Studios and Distribution businesses. Also includes unallocated corporate income and expenses. (3) Intersegment revenues reflect licensing and service fees charged between segments. (4) Reflects restructuring initiatives, primarily severance and other restructuring-related costs. Net revenues by distribution channel, including a reconciliation to each of our reportable segment’s revenues, for the three and nine months ended September 30, 2019 and 2018, include a reconciliation to our segment revenues as disclosed for each of our reportable segments above. Net revenues by distribution channel were as follows (amounts in millions):
reportable
segments
of
intersegment
revenues (3)
reportable
segments
of
intersegment
revenues (3) Three Months Ended September 30, 2019 Activision Blizzard King Non-reportable segments Elimination of intersegment revenues (3) Total Net revenues by distribution channel: Digital online channels (1) $ 179 $ 335 $ 502 $ — $ (2 ) $ 1,014 Retail channels 73 20 — — — 93 Other (2) — 62 — 113 — 175 Total consolidated net revenues $ 252 $ 417 $ 502 $ 113 $ (2 ) $ 1,282 Change in deferred revenues: Digital online channels (1) $ (16 ) $ (21 ) $ (2 ) $ — $ — $ (39 ) Retail channels (27 ) (2 ) — — — (29 ) Other (2) — — — — — — Total change in deferred revenues $ (43 ) $ (23 ) $ (2 ) $ — $ — $ (68 ) Segment net revenues: Digital online channels (1) $ 163 $ 314 $ 500 $ — $ (2 ) $ 975 Retail channels 46 18 — — — 64 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 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 three and nine months ended September 30, 2017,2019 and 2018, were as follows (amounts in millions):
September 30, 2017
September 30, 2017(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. Nine Months Ended September 30, 2019 Activision Blizzard King Non-reportable segments Elimination of intersegment revenues (3) Total Net revenues by distribution channel: Digital online channels (1) $ 894 $ 1,081 $ 1,527 $ — $ (9 ) $ 3,493 Retail channels 548 51 — — — 599 Other (2) — 157 — 254 — 411 Total consolidated net revenues $ 1,442 $ 1,289 $ 1,527 $ 254 $ (9 ) $ 4,503 Change in deferred revenues: Digital online channels (1) $ (285 ) $ (159 ) $ — $ — $ — $ (444 ) Retail channels (363 ) (10 ) — — — (373 ) Other (2) — 2 — (9 ) — (7 ) Total change in deferred revenues $ (648 ) $ (167 ) $ — $ (9 ) $ — $ (824 ) Segment net revenues: Digital online channels (1) $ 609 $ 922 $ 1,527 $ — $ (9 ) $ 3,049 Retail channels 185 41 — — — 226 Other (2) — 159 — 245 — 404 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 (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 and nine months ended September 30, 2019 and 2018, were as follows (amounts in millions):
reportable
segments
of
intersegment
revenues (2)
reportable
segments
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intersegment
revenues (2) 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 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 and nine months ended September 30, 2017,2019 and 2018, were as follows (amounts in millions):
September 30, 2017
September 30, 2017(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 46% and 43% of consolidated net revenues for both the three months ended September 30, 20182019 and 2017, respectively.2018. The Company’s net revenues in the U.K. were 13% and 12% of consolidated net revenues for both the three months ended September 30, 20182019 and 2017, respectively.2018. No other country’s net revenues exceeded 10% of consolidated net revenues for either the three months ended September 30, 20182019 or 2017.The Company’s net revenues in the U.S. were 47%48% and 46%47% of consolidated net revenues for the nine months ended September 30, 20182019 and 2017,2018, respectively. The Company’s net revenues in the U.K. were 11%10% and 10%11% of consolidated net revenues for the nine months ended September 30, 20182019 and 2017,2018, respectively. No other country’s net revenues exceeded 10% of consolidated net revenues for either the nine months ended September 30, 20182019 or 2017.Net revenues by platform, including a reconciliation to each of our reportable segment’s net revenues, for the three and nine months ended September 30, 2019 and 2018, were as follows (amounts in millions):
reportable
segments
of
intersegment
revenues (3)
reportable
segments
of
intersegment
revenues (3) 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 Net revenues by platform, including a reconciliation to each of our reportable segment’s net revenues, for the three and nine months ended September 30, 2017,2019 and 2018, were as follows (amounts in millions):
September 30, 2017
September 30, 2017(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 toys and accessories from our Skylanders® franchise and other physical merchandise and accessories.(2) Net revenues from “Other” include revenues from our Studios and Distribution businesses, as well as revenues from MLG and the Overwatch League.(3) Intersegment revenues reflect licensing and service fees charged between segments. Nine Months Ended September 30, 2019 Activision Blizzard King Non-reportable segments Elimination of intersegment revenues (3) Total Net revenues by platform: Console $ 1,222 $ 102 $ — $ — $ — $ 1,324 PC 204 909 92 — (9 ) 1,196 Mobile and ancillary (1) 16 121 1,435 — — 1,572 Other (2) — 157 — 254 — 411 Total consolidated net revenues $ 1,442 $ 1,289 $ 1,527 $ 254 $ (9 ) $ 4,503 Change in deferred revenues: Console $ (563 ) $ (26 ) $ — $ — $ — $ (589 ) PC (84 ) (133 ) (1 ) — — (218 ) Mobile and ancillary (1) (1 ) (10 ) 1 — — (10 ) Other (2) — 2 — (9 ) — (7 ) Total change in deferred revenues $ (648 ) $ (167 ) $ — $ (9 ) $ — $ (824 ) Segment net revenues: Console $ 659 $ 76 $ — $ — $ — $ 735 PC 120 776 91 — (9 ) 978 Mobile and ancillary (1) 15 111 1,436 — — 1,562 Other (2) — 159 — 245 — 404 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 (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 (1) Net revenues from “Mobile and ancillary” include revenues from mobile devices, as well as non-platform specific game-related revenues, such as standalone sales of physical merchandise and accessories. (2) Net revenues from “Other” include revenues from our Studios and Distribution businesses, as well as revenues from MLG and the Overwatch League. (3) Intersegment revenues reflect licensing and service fees charged between segments. Long-lived assets by geographic region were as follows (amounts in millions):(1) 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. 14.RestructuringOn February 12, 2019, the Company committed to a Board-authorized restructuring plan under which the Company aims to refocus its resources on its largest opportunities and to remove unnecessary levels of complexity and duplication from certain parts of the business. We have been, and will continue:increasing our investment in development for our largest, internally-owned franchises—across upfront releases, in-game content, mobile, and geographic expansion;reducing certain non-development and administrative-related costs across our business; andintegrating 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 only long-livedrestructuring actions are in process and are largely expected to be completed by the end of 2019, although the timing of cash payments may continue into 2020.The following table summarizes accrued restructuring and related costs included in “Accrued expenses and other liabilities” in our condensed consolidated balance sheet (amounts in millions): Severance and employee related costs Facilities and related costs Other costs Total 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. Total restructuring and related costs by segment are (amounts in millions): 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 three months ended September 30, 2019, we also recorded $4 million to write-down inventory resulting from changes to certain of our consumer product activities as part of our restructuring actions, whereby those activities will now operate under a licensing business model rather than being direct sales. This write-down is recorded within “Cost of revenues—product sales: Product costs” in our condensed consolidated statement of operations.We expect to incur aggregate pre-tax restructuring charges of approximately $150 million in 2019 associated with the restructuring plan, which includes the inventory write-down discussed above. These charges will primarily relate to severance (approximately 55% of the aggregate charge), including, in many cases, amounts above those that we classifyare legally required, facilities costs (approximately 20% of the aggregate charge), and other asset write-downs and costs (approximately 25% of the aggregate charge). A majority of the total pre-tax charge associated with the restructuring will be paid in cash using amounts on hand and the outlays are expected to be largely incurred throughout 2019, with the remainder continuing into 2020.The total expected pre-tax restructuring charges related to the restructuring plan by regionsegment, inclusive of amounts already incurred, are our long-term tangible fixed assets, which consistpresented below (amounts in millions): 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 property, plant, and equipment assets; all other long-term assets are not allocated by location.13.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 16.Income TaxesWe account for our provision for income taxes in accordance with Accounting Standards Codification (“ASC”)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 differscould be different from the statutory U.S. income tax rate due toto: the effect of state and local income taxes,taxes; tax rates that apply to our foreign income (including U.S. tax on foreign income),; research and development credits,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 (including changes in the mix of income by tax jurisdiction);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.On June 27, 2018,The income tax expense of $45 million for the Company entered intothree 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 closing agreementdiscrete 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”) to resolve certain intercompany transfer pricing arrangements for, a discrete tax periods starting in 2009 (the “Closing Agreement”). The primary adjustments related to the Closing Agreement that werebenefit recognized in the second quarter of 2018 were a tax expense of $70 millionprior year in connection with adjustments made to the provisional amounts initially recorded in connection with the U.S. Tax Reform Act, and a reduction in unrecognizedlower excess tax benefits of $437 million. In addition, we recognized $185 million of tax benefits related to other tax adjustments resulting from share-based payments in the changes in U.S. tax attributes and taxable income causedcurrent year. This increase was partially offset by the primary adjustments. The Closing Agreement results in federal and state cash tax payments totaling approximately $345 million, of which we made federal tax payments of $334 million in October 2018.We evaluate deferred tax assets each period for recoverability. We record a valuation allowance for assets that do not meet the threshold of “more likely than not” to be realizedrecorded in the future. To make that determination, the Company evaluates the likelihood of realization based on the weight of all positive and negative evidence available. As of December 31, 2017, the Company had a deferred tax asset forprior year with regard to California research and development credit carryforwards (“CA R&D Credits”), which can be carried forward indefinitely. The Closing Agreement impacts historical and prospective filings in certain states, including California, and after considering the impact of the Closing Agreement on its prospective California taxable income, the Company determined that its remaining CA R&D Credits no longer met the threshold of more likely than not of being realized in the future. Accordingly, during the three months ended June 30, 2018, we recorded a full valuation allowance of $57 million. Additionally, the Company has not recognized a tax benefit for current-year CA R&D Credits in its year-to-date tax expense. We will reassess this determination quarterly and record a tax benefit if future evidence allows for a partial or full release of this valuation allowance.On December 22, 2017, the U.S. Tax Reform Act was enacted. The U.S. Tax Reform Act, among other things, reduced the U.S. corporate income tax rate from 35% to 21% beginning in 2018 and implemented a modified territorial tax system that imposed a one-time tax on deemed repatriated earnings of foreign subsidiaries (the “Transition Tax”).On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on how to account for the effects of the U.S. Tax Reform Act under ASC 740. SAB 118 enables companies to record a provisional amount for the effects of the U.S. Tax Reform Act based on a reasonable estimate, subject to adjustment during a measurement period of up to one year, until accounting is complete. During the fourth quarter of 2017, we recorded provisional amounts for the effects of the U.S. Tax Reform Act in accordance with SAB 118. In addition, as of December 31. 2017, we no longer considered the available cash balances related to undistributed earnings held outside of the U.S. by our foreign subsidiaries to be indefinitely reinvested. We continue to analyze the effects of the U.S. Tax Reform Act on our condensed consolidated financial statements. Accounting for the income tax effects of the U.S. Tax Reform Act requires complex new calculations to be performed and significant judgments in interpreting the legislation. Additional guidance may be issued on how the provisions of the U.S. Tax Reform Act will be applied or otherwise administered that is different from our interpretation. We may make adjustments to the provisional amounts as we collect and prepare the data necessary to finalize our calculations, interpret the U.S. Tax Reform Act and any additional guidance issued, and consider the effects of any additional actions we may take as a result of the U.S. Tax Reform Act.During the three months ended June 30, 2018, the Company obtained additional information, including adjustments related to the Closing Agreement, and the evaluation of the impact of changing our indefinite reinvestment assertion, which affected the provisional amount initially recorded for the U.S. Tax Reform Act in the fourth quarter of 2017. As a result, the Company recorded an additional tax expense of $34 million in the three months ended June 30, 2018, reflecting the effects of the U.S. Tax Reform Act.In conjunction with the filing of our 2017 federal tax return, during the three months ended September 30, 2018, the Company prepared and analyzed additional information, which affected the provisional amounts initially recorded for the U.S. Tax Reform Act in the fourth quarter of 2017. As result, the Company recorded a tax benefit of $80 million related to the Transition Tax and remeasurement of deferred taxes in the three months September 30, 2018, reflecting the effects of the U.S. Tax Reform Act.We continue to evaluate the ongoing impacts of the U.S. Tax Reform Act, including provisions impacting certain foreign income, such as a tax on global intangible low-taxed income of foreign subsidiaries (“GILTI”) and a deduction for foreign derived intangible income. These provisions are complex and subject to continuing regulatory interpretation by the IRS. While we have included an estimate of GILTI in our estimated effective tax rate for 2018, we may make adjustments as we interpret the U.S. Tax Reform Act and any additional guidance issued and consider the effects of any additional actions we may take as a result of the U.S. Tax Reform Act.The income tax benefit of $48 million for the three months ended September 30, 2018, reflects an effective tax rate of (23)%, which is lower than the effective tax rate of 15% for the three months ended September 30, 2017. The decrease is due to a discrete tax benefit resulting from adjustments made to the provisional amount initially recorded for U.S. Tax Reform Act described above and the benefit from the lower U.S. corporate income tax rate in the current year. This decrease was partially offset by lower excess tax benefits from share-based payments.The income tax expense of $25 million for the nine months ended September 30, 2018, reflects an effective tax rate of 2%, which is lower than the effective tax rate of 11% for the nine months ended September 30, 2017. The decrease is due to a discrete net tax benefit resulting from the Closing Agreement, a discrete tax benefit resulting from adjustments made to the provisional amount initially recorded for U.S. Tax Reform Act and the benefit from the lower U.S. corporate income tax rate in the current year, net of the impact of GILTI. This decrease was partially offset by the valuation allowance recorded with regard to CA R&D Credits and lower excess tax benefits from share-based payments.The effective tax rate of (23)% and 2%18% for both the three and nine months ended September 30, 2018, respectively,2019, is lower than the U.S. statutory rate of 21%, primarily due to a discrete net tax benefit resulting from the Closing Agreement, a discrete tax benefit resulting from adjustments made to the provisional amount initially recorded for U.S. Tax Reform Act, foreign earnings taxed at relatively lower statutory rates the recognition of excessas compared to domestic earnings, which is partially offset by U.S. tax benefits from share-based payments,on foreign earnings, and the recognition of federal research and development credits, partially offset by the valuation allowance recorded with regard to CA R&D Credits.Activision Blizzard’s 2009 through 20162018 tax years remain open to examination by certain major taxing jurisdictions to which we are subject. During February 2018, the Company was notified by theThe IRS that itsis currently examining our federal tax returns for the 2012 through 2016 tax years will be subject to examination. In September 2018, the IRS concluded its examination of our 2009 through 2011 tax years. The CompanyWe also hashave several state and non-U.S. audits pending, including the French audit discussed below. In addition, as part of purchase price accounting for our 2016 acquisition of King, the Company assumed $74 million of uncertain tax positions primarily related to pre-acquisition transfer pricing matters. The Company iswe are currently in negotiations withseeking a multilateral agreement among the tax authorities in the U.K., Sweden, and other relevant jurisdictions which include the UK and Sweden, with respect to King’s transfer pricing for both pre- and post-acquisition tax years.years dating back to 2013. While the outcome of these negotiationsany discussions aimed at such an agreement remains uncertain, they could result in an agreement that changes the allocation of profits and losses between these and other relevant jurisdictions or a failure to reach an agreement that results in unilateral adjustments to the amount and timing of taxable income in the jurisdictions in which King operates.On October 25,In December 2018, we received a proposaldecision from the Swedish Tax Agency (“STA”) informing us of their intent to issue an audit assessment toof a Swedish subsidiary of King for the 2016 tax year.year (“Initial Decision”). The STA proposalInitial Decision described the basis for issuing a transfer pricing assessment of approximately 3.5kr billion (approximately $400$359 million), primarily concerning an alleged intercompany asset transfer. We disagree with the STA’s proposal and, if they proceed with issuingOn June 17, 2019, we received a formal tax assessment, intend to vigorously contest it. We would plan to pursue all remedies available to us to successfully resolve the matter, including administrative remedies withreassessment from the STA multilateral procedures with other relevant taxing jurisdictions,(“Reassessment”) which changed the Initial Decision based on a revision of the transfer pricing approach reflected in King’s 2016 Swedish tax return and if necessary, judicial remedies. While we believe ourremoval 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 provisions at September 30, 2018 are appropriate, until such timeyear on the same transfer pricing basis as this matter is ultimately resolved we could be2016. 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 additional tax liabilities.Onimpact to our condensed consolidated financial statements.In December 28, 2017, we received a Notice of Reassessment from the French Tax Authority (“FTA”) related to transfer pricing concerningfor 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 $660$625 million). We disagree with the proposed assessment and intendcontinue to vigorously contest it. We plan to pursue all remedies available to us to successfully resolve this matter, including administrative remedies with the FTA, and, if necessary, judicial remedies. While we believe our tax provisions at September 30, 2018 are appropriate, until2019, were appropriate. Until such time as this matter is ultimately resolved we could be subject to significant additional tax liabilities. In addition to the risk of additional tax for yearsthe 2011 through 2013 if litigation regarding this matter were adversely determined and/ortax 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 subsidiaries in the U.K. The transfer did not result in a taxable gain; however, our U.K. subsidiary received a step-up in tax basis. We are currently assessing the tax impacts associated with this transfer, including its impact to deferred taxes. We expect to record a one-time benefit for the recognition of a deferred tax asset in the U.K. related to the amortizable tax basis in the transferred intellectual property, partially offset by a related deferred tax liability for U.S. taxes on foreign earnings. The net tax impact of this intra-entity asset transfer will be recorded in the quarter ending December 31, 2019. While this one-time impact may be material to our financial statements, we do not expect the transfer to materially affect cash taxes or operating cash flows in 2019.In addition, certain of our subsidiaries are under examination or investigation, or may be subject to examination or investigation, by tax authorities in various jurisdictions. These proceedings may lead to adjustments or proposed adjustments to our taxes or provisions for uncertain tax positions. Such proceedings may have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations in the earlier of the period or periods in which the matters are resolved orand in which appropriate tax provisions are taken into account in our financial statements. If we were to receive a materially adverse assessment from a taxing jurisdiction, we would plan to vigorously contest it and consider all of our options, including the pursuit of judicial remedies.We regularly assess the likelihood of adverse outcomes resulting from these examinations and monitor the progress of ongoing discussions with tax authorities in determining the appropriateness of our tax provisions. The final resolution of the Company’s global tax disputes is uncertain. There is significant judgment required in the analysis of disputes, including the probability determination and estimation of the potential exposure. Based on current information, in the opinion of the Company’s management, the ultimate resolution of these matters is not expected to have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations, except as noted above.17.Computation of Basic/Diluted Earnings Per Common ShareThe following table sets forth the computation of basic and diluted earnings per common share (amounts in millions, except per share data):
September 30,
September 30, 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 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. Approximately 6 million shares are not included in the computation of diluted earnings per share for both the three and nine months ended September 30, 2018, as their underlying performance measures had not yet been met. Approximately 9 million and 8 million shares are not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2017, respectively, as their underlying performance measures had not yet been met.PotentialAdditionally, 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. Therefore, approximately 1 million and 2 million options to purchaseWeighted-average shares of common stock were not included inexcluded from the calculationcomputation of diluted earnings per common share for the three and nine months ended September 30, 2018, respectively, and 1 million options to purchase shares of common stock were not includedas follows (amounts in the calculation of diluted earnings per common share for both the three and nine months ended September 30, 2017, as the effect of their inclusion would be anti-dilutive.15.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 18.Capital TransactionsRepurchase ProgramOn February 2, 2017,January 31, 2019, our Board of Directors authorized a stock repurchase program under which we are authorized to repurchase up to $1$1.5 billion of our common stock during the two-year period from February 14, 2019, until the earlier of February 13, 2017 through February 12, 2019.2021, and a determination by the Board of Directors to discontinue the repurchase program. As of September 30, 2018,2019, we have not repurchased any shares under this program.DividendsOn February 1,12, 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 approveddeclared 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.On February 2, 2017, our Board of Directors approved a cash dividend of $0.30 per common share. On May 10, 2017, we made an aggregate cash dividend payment of $226 million to shareholders of record at the close of business on March 30, 2017.19.Commitments and ContingenciesLegal ProceedingsWe 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 OperationsBusiness OverviewActivision 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 eventsleagues and leaguesevents and create film and television content based on our intellectual property. The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries.The Company was originally incorporated in California in 1979 and was reincorporated in Delaware in December 1992. In connection with the 2008 business combination by and among the Company (then known as Activision, Inc.), Vivendi S.A. (“Vivendi”),S.A, and Vivendi Games, Inc., then an indirect wholly-owned subsidiary of Vivendi S.A., we were renamed Activision Blizzard, Inc.The common stock of Activision Blizzard is traded on The Nasdaq Stock Market under the ticker symbol “ATVI.”Our SegmentsBased 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 platforms.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. We have also established a long-term alliance with Bungie to publish its game universe, Destiny.franchises include:franchise is Call of Dutyplatforms; and Destiny, an online universeplatforms. Also, on October 1, 2019, in collaboration with Tencent, Activision released Call of first-person action gameplay (which we call a “shared-world shooter”)Duty: Mobile for the consolemobile platform, including for Google Inc.’s (“Google”) Android and PC platforms.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 major global professional esports league with city-based teams, and our Major League Gaming (“MLG”) business, which is responsible for various esports events and serves as a multi-platform network for Activision Blizzard esports content.Blizzard’s key product franchises include: World of Warcraft®, a subscription-based massive multi-player online role-playing game for the PC platform; StarCraft®, a real-time strategy franchise for the PC platform; Diablo®, an action role-playing franchise for the PC and console platforms; Hearthstone®, an online collectible card franchise for the PC and mobile platforms; Heroes of the Storm®, a free-to-play team brawler for the PC platform; and Overwatch®, a team-based first-person shooter for the PC and console platforms.(iii) King Digital EntertainmentKing Digital Entertainment (“King”) is a leading global developer and publisher of interactive entertainment content and services, particularly onfor the mobile platforms, such as Google Inc.’s (“Google”)platform, including for Google’s Android and Apple Inc.’s (“Apple”)Apple’s iOS. King also distributes its content and services on the PC platform, primarily via Facebook. King’s games are free to play,play; however, players can acquire in-game items, either with virtual currency or directly using real currency.King’s key product franchises, all of which are for the mobile and PC platforms, include: Candy Crush™, which features “match three” games; Farm Heroes™, which also features “match three” games; and Bubble Witch™, which features “bubble shooter” games.OtherWe also engage in other businesses that do not represent reportable segments, including:· the Activision Blizzard Studios (“Studios”) business, which is devoted to creating original film and television content based on our library of globally recognized intellectual properties, and which, in September 2018, released the third season of the animated TV series Skylanders™ Academy on Netflix; and·• the Activision Blizzard 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; andthe 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.Business Results and HighlightsFinancial ResultsThe Company’s financial results for 2018 are presented in accordance with a new revenue accounting standard that was adopted in the first quarter of 2018. Prior period results have not been restated to reflect this change in accounting standards. Further information about our adoption of the new standard is provided in Notes 2 and 3 of the notes to condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.DuringFor the three months ended September 30, 2018:·2019:consolidated net revenues decreased 7%15% to $1.51$1.28 billion, whileand consolidated operating income increased 3%decreased 7% to $265$247 million, as compared to consolidated net revenues of $1.62$1.51 billion and consolidated operating income of $257$265 million for the three months ended September 30, 2017;·2018;revenues from digital online channels were $1.28$1.01 billion, or 84%79% of consolidated net revenues, as compared to $1.35$1.28 billion, or 84% of consolidated net revenues, for the three months ended September 30, 2017;·2018;operating margin was 17.5%19.3%, which includes $28 million in restructuring and related costs, as compared to 15.9%17.5% for the three months ended September 30, 2017;·2018;consolidated net income increased 38%decreased 22% to $260$204 million, as compared to $188$260 million for the three months ended September 30, 2017;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 Cuts and Jobs Act (“U.S. Tax Reform Act”) (see “Consolidated Results” discussion below for additional details); and·diluted earnings per common share increased 36%decreased 24% to $0.34,$0.26, as compared to $0.25$0.34 for the three months ended September 30, 2017.During2018.For the nine months ended September 30, 2018:·2019:consolidated net revenues increased 3%decreased 12% to $5.12$4.50 billion, and consolidated operating income increased 19%decreased 11% to $1.29$1.15 billion, as compared to consolidated net revenues of $4.97$5.12 billion and consolidated operating income of $1.09$1.29 billion for the nine months ended September 30, 2017;·2018;revenues from digital online channels were $4.00$3.49 billion, or 78% of consolidated net revenues, as compared to $4.05$4.00 billion, or 81%78% of consolidated net revenues, for the nine months ended September 30, 2017;·2018;operating margin was 25.3%25.6%, which includes $108 million in restructuring and related costs, as compared to 21.9%25.3% for the nine months ended September 30, 2017;·2018;cash flows from operating activities were $791$913 million, a decreasean increase of 25%15%, as compared to $1.06$791 million for the nine months ended September 30, 2018;consolidated net income decreased 16% to $978 million, as compared to $1.16 billion for the nine months ended September 30, 2017;· consolidated net income increased 35% to $1.16 billion, as compared to $858 million for the nine months ended September 30, 2017;2018; net income for the 2018 period included $97 million of net tax benefits from several discrete tax items primarily related to updates to our accounting for the U.S. Tax Reform Act, the settlement with the Internal Revenue Service (“IRS”) with respect to intercompany transfer pricing arrangements, and the establishment of a valuation allowance on California research and development credit carryforwards (see “Consolidated Results” discussion below for additional details); and·diluted earnings per common share increased 35%decreased 16% to $1.51,$1.27, as compared to $1.12$1.51 for the nine months ended September 30, 2017.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, 2018,2019, include a net effect of $146$68 million and $89$53 million, respectively, from the deferralrecognition of deferred net revenues and related cost of revenues. Net revenues and operating income for the nine months ended September 30, 2018,2019, include a net effect of $692$824 million and $468$629 million, respectively, from the recognition of deferred net revenues and related cost of revenues.Content Release and Event HighlightsGames and downloadable content that were released duringDuring the three months ended September 30, 2018, include:· Activision’s United Front, the third downloadable content pack for Call of Duty: WWII,2019, Activision released Xbox OneNintendo Switch and PC;· Activision’s Shadow War, the fourth downloadable content pack for Call of Duty: WWII;· Activision’s Forsaken, the third expansion to Destiny 2;· Blizzard’s latest expansion to Hearthstone—Boomsday™; PC,· Blizzard’s Blizzard released Warcraft: Battle for Azeroth™,Warcraft® Classic, a re-creation of the seventh expansionpre-expansion version of the game, and the latest expansions to WorldHearthstone—Saviors of Warcraft.Operating MetricsThe following operating metrics are key performance indicators that we use to evaluate our business.Net BookingsWe monitor net bookings as a key operating metric in evaluating the performance of our business. Net bookings is defined as 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.Net bookings and in-game net bookings were as follows (amounts in millions):
(Decrease) 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 bookingsQ3 20182019 vs. Q3 2017The decrease in net bookings for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, 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; anda decrease in Activision net bookings of $188 million driven by (1) lower net bookings from the Destiny franchise primarily due(reflecting our sale of the publishing rights for Destiny to Bungie in December 2018), and (2) lower net bookings from Forsaken, the third expansion to Destiny 2, which was released in September 2018, as compared to the full game release of Destiny 2 in September 2017;· lower net bookings from Call of Duty: Infinite WarfareTM (which, when referred to herein, is inclusive of Call of Duty: Modern Warfare® Remastered), which was released in November 2016, in its second year after release, as compared to Call of Duty: Black Ops III, which was released in November 2015, in its second year after release; and· lower net bookings from Crash Bandicoot™ N. Sane Trilogy, which was released in June 2017 on the PlayStation 4 platform, and in June 2018 on the Xbox One, PC, and Nintendo Switch platforms.The decrease was partially offset by higher net bookings from World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable release in 2017.YTD Q3 20182019 vs. YTD Q3 2017The decrease in net bookings for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to:·• a decrease in Blizzard net bookings of $484 million driven by (1) lower net bookings from World of Warcraft, primarily due to the 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.In-game net bookings from Call of Duty: Infinite WarfareQ3 2019 vs. Q3 2018The decrease in its second year after release,in-game net bookings for the three months ended September 30, 2019, as compared to Call of Duty: Black Ops IIIthe three months ended September 30, 2018, was primarily due to a decrease in its second year after release;· lowerBlizzard and Activision in-game net bookings from Overwatch, whichof $183 million and $113 million, respectively, due to the same drivers discussed for net bookings above.YTD Q3 2019 vs. YTD Q3 2018The decrease in in-game net bookings for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was releasedprimarily 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; anda decrease in May 2016, and Hearthstone;·Activision in-game net bookings of $254 million driven by (1) lower in-game net bookings from the Destiny franchise primarily due toand (2) lower in-game net bookings from the Forsaken expansion, as compared to the full-game releaseCall of Destiny 2; and· lower net bookings due to fewer content releases in 2018 from our Diablo and Bubble Witch franchises as compared to 2017.The decrease was partially offset by:· higher net bookings from World of Warcraft,Duty franchise, primarily driven by World of Warcraft: Battle for Azeroth;· higher net bookings from Call of Duty: WWII, which was released in November 2017, as compared to Call of Duty: Infinite Warfare, which was released in November 2016;· higher net bookings from the Candy Crush franchise due to increased monetization, primarily through in-game features and events; and· net bookings from the Overwatch League, which started its inaugural regular season in January 2018.Monthly Active UsersWe monitor monthly active users (“MAUs”) as a key measure of the overall size of our user base. MAUs are the number of individuals who accessed a particular game in a given month. We calculate average MAUs in a period by adding the total number of MAUs in each of the months in a given period and dividing that total by the number of months in the period. An individual who accesses two of our games would be counted as two users. In addition, due to technical limitations, for Activision and King, an individual who accesses the same game on two platforms or devices in the relevant period would be counted as two users. For Blizzard, an individual who accesses the same game on two platforms or devices in the relevant period would generally be counted as a single user.The number of MAUs for a given period can be significantly impacted by the timing of new content releases, since new releases may cause a temporary surge in MAUs. Accordingly, although we believe that overall trending in the number of MAUs can be a meaningful performance metric, period-to-period fluctuations may not be indicative of longer-term trends. The following table details our average MAUs on a sequential quarterly basis for each of our reportable segments (amounts in millions):
2018
2018
2018
2017
2017
2017 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 711 million, or 2%3%, for the three months ended September 30, 2018,2019, as compared to the three months ended June 30, 2018.2019, primarily driven by a decrease in average MAUs for King. The sequential decrease in King’s average MAUs is primarily due to minor decreases across franchises from less engaged users leaving the network.Average MAUs decreased by 3929 million, or 10%8%, for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017.2018. The year-over-year decrease in King’s average MAUs is due to decreases across King’s franchises from less engaged users leaving the network. King MAUs were also negatively impacted by technical system changes in the prior quarter made by some third-party partners in response to data initiatives, which inadvertently impacted some users’ ability to play and spend money in King games. The year-over-year decrease in Blizzard’sto:• decreases across King’s various franchises, other than Candy Crush, primarily from less engaged users leaving the network, partially offset by an increase in average MAUs for the Candy Crush franchise, primarily driven by the launch of Candy Crush Friends SagaTM in the fourth quarter of 2018;lower average MAUs isfor Activision, primarily due to the absence of Destiny MAUs in our operating metric and lower average MAUs for Hearthstonefrom the Call of Duty franchise; andOverwatch.• lower average MAUs for Blizzard, primarily due to lower average MAUs for Hearthstone and Overwatch.Management’s Overview of Business TrendsInteractive Entertainment and Mobile Gaming GrowthOur business participates in the global interactive entertainment industry. Games have become an increasingly popular form of entertainment, and we estimate the total industry grew,has grown, on average, 18% annually from 20142015 to 2017.2018. The industry continues to benefit from additional players entering the market as interactive entertainment becomes more commonplace across age groups and as more developing regions gain access to this form of entertainment.Further, theThe wide adoption of smart phones globally and the free-to-play business model on the mobile platformthose platforms has increased the total addressable marketaudience 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 both console and PC gaming, and continues to grow at a significant rate. King is a leading developer of mobile and free-to-play games, and our other business units have mobile efforts underway that present the opportunity for us to expand the reach of, and drive additional player investment from our franchises.Opportunities to Expand Franchises Outside of GamesOur 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. These opportunities include esports, film and television, and consumer products. Our efforts to build these adjacent opportunities are still relatively nascent, but we view them as potentially significant sources of future revenues.AsFor example, as part of our efforts to take advantage of esports opportunities, we have sold rights for 20 teams that are participating in the esports opportunity, during 2017Overwatch League, which recently completed its second season. Additionally, we completedhave sold the sale offirst 12 teams for the Overwatch League, the first major global professional esports league with city-based teams, which completed its inaugural season in July 2018. During 2018, we have completed the saleCall of eight additional teams, which are expected to compete in the league’s second season.Concentration of Sales Among the Most Popular FranchisesThe 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 36%38% of the retail sales in the U.S. interactive entertainment industry in 2017.2018. Similarly, a significant portion of our revenues historically has historically been derived from video games based on a few popular franchises, and these video games werehave been responsible for a disproportionately high percentage of our profits. For example, the Call of Duty, Candy Crush, and World of Warcraft and Overwatch franchises, collectively, accounted for 66%58% of our consolidated net revenues—and a significantly higher percentage of our operating income—for 2017.The top titles in the industry are also becoming more consistent as players and revenues concentrate more heavily in established franchises. The top 10 console franchises in 2017 were all established franchises. Similarly, according to U.S. rankings for the Apple App Store and Google Play store per App Annie Intelligence, as of December 2017, the top 10 mobile games have an average tenure of 22 months.In addition to investing in, and developing sequels and content for, our top franchises, we are continually exploring additional ways to expand those franchises. Further, while there is no guarantee of success, we invest in new properties in an effort to develop future top franchises. InFor example, in 2014, we released Hearthstone and Destiny; in 2015, we released Heroes of the Storm; ,and in 2016, we released Overwatch. Additionally, to diversify our portfolio of key franchises and increase our presence inon the mobile market,platform, in 2016, we acquired King.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 ModelsIncreased 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 DataThe following table sets forth condensed consolidated statements of operations data for the periods indicated in dollars (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:(1) Represents the loss on extinguishment of debt we recognized associated with our debt financing activities. The 2018 loss on extinguishment is comprised of a $25 million premium payment and an $8 million write-off of unamortized discount and deferred financing costs associated with the redemption of our 2023 Notes, along with a $7 million write-off of unamortized discount and deferred financing costs associated with the extinguishment of our outstanding tranche of term loans “A”. The 2017 loss on extinguishment is comprised of a $12 million write-off of unamortized discount and deferred financing costs associated with refinancing activities related to our tranche of term loans “A”. 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 RevenuesThe following table summarizes our consolidated net revenues, in-game net revenues, and the increase (decrease) in deferred net revenues recognized (amounts in millions):
(decrease)
(decrease) 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) In-game net revenues primarily includes the net amount of revenue recognized for downloadable content and microtransactions during the period. Consolidated Net RevenuesQ3 20182019 vs. Q3 2017The decrease in consolidated net revenues and in-game net revenues for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to:• a decrease in Blizzard revenues recognized of $121 million, primarily due to lower revenues recognized from World of Warcraft; anda decrease of $133 million in Activision revenues recognized from Activision,of $100 million, primarily due to lower revenues recognized from Callthe Destiny franchise (reflecting our sale of Duty: Infinite Warfare, which was releasedthe publishing rights for Destiny to Bungie in November 2016, in its second year after release, as compared to Call of Duty: Black Ops III, which was released in November 2015, in its second year after release, and lower revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017 on the PlayStation 4 platform, and in June 2018 on the Xbox One, PC, and Nintendo Switch platforms.The decrease was partially offset by a $20 million increase in revenues recognized from Blizzard, primarily due to higher revenues recognized from World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable release in 2017, partially offset by lower revenues recognized from Overwatch, which was released in May 2016.YTD Q3 20182019 vs. YTD Q3 2017The increasedecrease in consolidated net revenues and in-game net revenues for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to:· an increase of $226• 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 RevenuesQ3 2019 vs. Q3 2018The decrease in in-game net revenues recognized from Activision,for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, was primarily due to (1) highera decrease in Blizzard and Activision in-game revenues recognized from Call of Duty: WWII, which was released$121 million and $116 million, respectively, due to the same drivers discussed for consolidated net revenues above.YTD Q3 2019 vs. YTD Q3 2018The decrease in November 2017,in-game net revenues for the nine months ended September 30, 2019, as compared to Callthe 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;anda decrease in Activision in-game revenues recognized of Duty: Infinite Warfare, which was released in November 2016, and (2) higher$219 million, primarily due to lower in-game revenues recognized from the Destiny franchise, driven by Destiny 2, which was released in September 2017, partially offset by lower revenues recognized from Call of Duty: Infinite Warfare in its second year after release, as compared to Call of Duty: Black Ops III in its second year after release; and· an increase of $81 million in revenues from King, primarily driven by the Candy Crush franchise’s increased monetization, primarily through in-game features and events.The increase was partially offset by a decrease of $164 million in revenues recognized from Blizzard, primarily due to lower revenues recognized from Overwatch, partially offset by revenues from the Overwatch League, which started its inaugural regular season in January 2018.Change in Deferred Revenues RecognizedQ3 20182019 vs. Q3 2017The increase in net deferred revenues recognized for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to (1) an increase of $229$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 million in net deferred revenues recognized from Activision, primarily due to lower net deferralsdeferral of revenues from the Destiny franchise as a result(reflecting our sale of lower net deferralsthe publishing rights for Forsaken, the third expansionDestiny to Destiny 2, which was released Bungie in September 2018, as compared to net deferrals for the full game release of Destiny 2 in September 2017.The increase was partially offset by a decrease of $84 million in net deferred revenues recognized from Blizzard, primarily due to a higher net deferral of revenues for World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable release in 2017.YTD Q3 20182019 vs. YTD Q3 2017The increase in net deferred revenues recognized for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to an increase of $470$237 million in net deferred revenues recognized from Blizzard, primarily due to higher net deferred revenues recognized for World of Warcraft,driven by World of Warcraft: Battle for Azeroth,which was released in August 2018, with no comparable release in 2017. The increase from Blizzard was partially offset by a decrease of $122 million in net deferred revenues recognized from Activision, primarily due to higherlower net deferred revenues recognized from the Destiny franchise, driven by Destiny 2, and its associated in-game content, with no comparable release in 2016.The increase was partially offset by a decrease of $231 million in net deferred revenues from Blizzard, primarily due to a net deferral of revenues for World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable release in 2017.Foreign Exchange ImpactChanges in foreign exchange rates had a negative impact of $14$27 million and a positive impact of $146$133 million on our consolidated net revenues for the three and nine months ended September 30, 2018,2019, 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.Operating Segment ResultsCurrently, we have three reportable segments.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, 20182019 and 2017,2018, are presented below (amounts in millions):Information on reportable segment net revenues and operating income for the nine months ended September 30, 2018 and 2017, are presented below (amounts in millions):(1) Intersegment revenues reflect licensing and service fees charged between segments. Three Months Ended September 30, 2019 $ Increase / (Decrease) Activision Blizzard King Total Activision Blizzard King Total Segment Net Revenues Net revenues from external customers $ 209 $ 392 $ 500 $ 1,101 $ (188 ) $ (235 ) $ (6 ) $ (429 ) Intersegment net revenues (1)— 2 — 2 — (6 ) — (6 ) Segment net revenues $ 209 $ 394 $ 500 $ 1,103 $ (188 ) $ (241 ) $ (6 ) $ (435 ) Segment operating income $ 26 $ 74 $ 194 $ 294 $ (86 ) $ (115 ) $ 10 $ (191 ) 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 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):
September 30,
September 30,(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. 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 (1) Includes other income and expenses from operating segments managed outside the reportable segments, including our Studios and Distribution businesses. Also includes unallocated corporate income and expenses. (2) Intersegment revenues reflect licensing and service fees charged between segments. (3) Reflects restructuring initiatives, primarily severance and other restructuring-related costs. Segment Net RevenuesActivisionQ3 20182019 vs. Q3 2017The decrease in Activision’s net revenues for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to:·lower revenues from the Destiny franchise primarily due(reflecting our sale of the publishing rights for Destiny to Bungie in December 2018);lower revenues from Forsaken, the third expansion to Destiny 2, which was released in September 2018, as compared to the full game release of Destiny 2 in September 2017;· lower revenues from Call of Duty: Infinite Warfare, which was released in November 2016, in its second year after release, as compared to Call of Duty: Black Ops III, which was released in November 2015, in its second year after release;Duty franchise catalog titles; and· lower revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017 on the PlayStation 4 platform, and in June 2018 on the Xbox One, PC, and Nintendo Switch platforms.• 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 higher revenues from the continued strength of Call of Duty: Black Ops III, as compared to prior catalog releases.• 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 20182019 vs. YTD Q3 2017The decrease in Activision’s net revenues for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to:· lower revenues from Call of Duty: Infinite Warfare in its second year after release, as compared to Call of Duty: Black Ops III in its second year after release; and·lower revenues from the Destiny franchise, primarily due to franchise;lower revenues from the releaseCall of the Forsaken expansion, as compared to the full-game release of Destiny 2.• 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.The decrease was partially offset by:· higherby revenues from Call of Duty: WWIINovember 2017, as compared to Call of Duty: Infinite Warfare, which was released in November 2016; March 2019,and· higher revenues from the continued strength of Call of Duty: Black Ops III, as compared to prior catalog releases.BlizzardQ3 20182019 vs. Q3 2017The increasedecrease in Blizzard’s net revenues for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, 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 World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable release in 2017; and· revenues from the Overwatch League, which started its inaugural regular season in January 2018.The increase was partially offset by:· lower revenues from Overwatch, which was released in May 2016; and· lower revenues from Hearthstone, primarily due to lower revenues from the Boomsday expansion, which was released in August 2018, as compared to Knights of the Frozen Throne™, which was released in August 2017.YTD Q3 20182019 vs. YTD Q3 2017The increasedecrease in Blizzard’s net revenues for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to the same drivers and partially offsetting factors as thoseto:• lower revenues from World of Warcraft,primarily due to World of Warcraft: Battle for Azeroth;• lower revenues from Overwatch; and• lower revenues from Hearthstone.KingQ3 2019 vs. Q3 2018King’s net revenues for the three months ended September 30, 2018 discussed above, in addition2019, were roughly equal to lower revenues from the Diablo franchise due to the release of Rise of the Necromancer™, a downloadable content pack for Diablo III, which was released in June 2017, with no comparable release in 2018.KingQ3 2018 vs. Q3 2017The decrease in King’s net revenues for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, was primarily due to decreaseslower in-game revenues from player purchases were largely offset by an increase in revenues across various title offerings.YTD Q3 20182019 vs. YTD Q3 2017The increase in 2018King’s net revenues for the nine months ended September 30, 2018, as compared2019, were roughly equal to net revenues for the nine months ended September 30, 2017, was primarily due to higher revenues from the Candy Crush franchise’s increased monetization, primarily through in-game features and events. The increase was partially offset by lower revenues from the Bubble Witch franchise2018 due to the release of Bubble Witch 3 Saga at the beginning of 2017, with no comparable release in 2018.Segment Income from OperationsActivisionQ3 20182019 vs. Q3 2017The decrease in Activision’s operating income for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to lower revenues, as discussed above. The decrease was partially offset by:·by lower software royalties, amortization, and intellectual property licenses and lower sales and marketingoperating costs both primarily driven byassociated with the Destiny franchise;· lower product costs due to the lower revenues noted above and a higher proportion of net revenues coming from digital online channels, which typically have a higher profit margin; and· higher capitalization of software development costs due to the timingfranchise (reflecting our sale of the game development cycle.YTD Q3 20182019 vs. YTD Q3 2017The decrease in Activision’s operating income for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to:·lower revenues, as discussed above; and· higher developer costs to support existing and upcoming title releases, partially offset by higher capitalization of software development costs.an increase in bad debt provisions.The decrease was partially offset by:·by lower software royalties, amortization,cost of revenues and intellectual property licenses and lower sales and marketingoperating costs, both primarily driven byassociated with the Destiny franchise; and· lower productfranchise, which were partially offset by costs duerelated to the lower revenues noted abovecurrent year releases of a higher proportion of net revenues coming from digital online channels, which typically have a higher profit margin.BlizzardQ3 20182019 vs. Q3 2017The increasedecrease in Blizzard’s operating income for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to higherlower revenues, as discussed above. The increase wasdecrease is partially offset by:·• 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; andhigher capitalization of software development costs due to operate and support Blizzard’s existing business and adjacent areasthe timing of opportunity; and· higher software royalties, amortization, and intellectual property licenses and higher sales and marketing costs, both primarily driven by World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable release in 2017.YTD Q3 20182019 vs. YTD Q3 2017The decrease in Blizzard’s operating income for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017, was primarily due to:· higher costs to operate and support Blizzard’s existing business and adjacent areas of opportunity; and· higher software royalties, amortization, and intellectual property licenses, and higher sales and marketing costs, both primarily driven by World of Warcraft: Battle for Azeroth.The decrease was partially offset by higher revenues, as discussed above, and higher capitalization of software development costs due to the timing of the game development cycle.KingQ3 2018, vs. Q3 2017The decrease in King’s operating income for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, was primarily due to lower revenues, as discussed above,above. The decrease is partially offset by:• lower spending on sales and marketing, primarily driven by lower marketing for esports initiatives, Overwatch, and World of Warcraft;lower personnel costs;• lower software amortization from World of Warcraft,primarily due to World of Warcraft: Battle for Azeroth; andlower 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.KingQ3 2019 vs. Q3 2018The increase in King’s operating income for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, despite the slight decrease in revenues, was primarily due to those to:lower revenues.lower product development costs.YTD Q3 20182019 vs. YTD Q3 2017King’s operating income for the nine months ended September 30, 2018,2019, was comparableflat as compared to the nine months ended September 30, 2017, primarily2018, due to higherto:lower revenues, as discussed above; and• higher sales and marketing costs driven by the Candy Crush franchise, in part due to the launch of Candy Crush Friends Saga in October 2018.The impacts from above were offset by:lower service provider fees, such as digital storefront fees (e.g. fees retained by higher marketingApple and product development costsGoogle for King franchises.lower personnel costs.Foreign Exchange ImpactChanges in foreign exchange rates had a negative impact of $16$20 million and a positive impact of $92 million on reportable segment net revenues for the three and nine months ended September 30, 2018,2019, respectively, as compared to the same periods in the previous year. The changes are primarily due to changes in the value of the U.S. dollar relative to the euro and the British pound.Consolidated ResultsNet Revenues by Distribution ChannelThe following table details our consolidated net revenues by distribution channel (amounts in millions):
(decrease)
(decrease)(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. 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. (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 RevenuesQ3 20182019 vs. Q3 2017The decrease in net revenues from digital online channels for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to:·lower revenues recognized from Callthe Destiny franchise (reflecting our sale of Duty: Infinite Warfare, which was releasedthe publishing rights for Destiny to Bungie in November 2016, in its second year after release, as compared to Call of Duty: Black Ops III, which was released in November 2015, in its second year after release;December 2018); and· lower revenues recognized from Overwatch, which was released in May 2016.The decrease was partially offset by higher revenues recognized from World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable release in 2017.• lower revenues recognized from World of Warcraft.YTD Q3 20182019 vs. YTD Q3 2017The decrease in net revenues from digital online channels for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to:·lower revenues recognized from Call of Duty: Infinite Warfare in its second year after release, as compared to Call of Duty: Black Ops III in its second year after release; and· lower revenues recognized from Overwatch.The decrease was partially offset by:· higher revenues recognized from the Destiny franchise, driven by Destiny 2, which was released in September 2017,franchise; and its associated in-game content, with no comparable release in 2016;· higher revenues from the Candy Crush franchise due to increased monetization, primarily through in-game features and events; and· higher revenues recognized from Call of Duty: WWII, which was released in November 2017, as compared to Call of Duty: Infinite Warfare, which was released in November 2016.• lower revenues recognized from Overwatch.Retail Channel Net RevenuesQ3 20182019 vs. Q3 2017The decreaseincrease in net revenues from retail channels for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to:· lower revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017 on the PlayStation 4 platform, and in June 2018 on the Xbox One, PC, and Nintendo Switch platforms;· lower revenues recognized from the Destiny franchise, primarily due to lower revenues recognized for Forsaken, the third expansion to Destiny 2, which was released in September 2018, as compared to the full game release of Destiny 2 in September 2017; and· lower revenues recognized from Call of Duty: Infinite Warfare, which was released in November 2016, in its second year after release, as compared to Call of Duty: Black Ops III, which was released in November 2015, in its second year after release.• 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 20182019 vs. YTD Q3 2017The increasedecrease in net revenues from retail channels for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to:· higher revenues recognized from Call of Duty: WWII, which was released in November 2017, as compared to Call of Duty: Infinite Warfare, which was released in November 2016; and· higher• 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 driven by (reflecting our sale of the publishing rights for Destiny 2.• lower revenues from Crash Bandicoot N. Sane Trilogy, which was released on the Xbox One, PC, and Nintendo Switch in June 2018.The increasedecrease was partially offset by lower revenues recognized from Overwatch, which was released in May 2016.• 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 RegionThe following table details our consolidated net revenues by geographic region (amounts in millions):
(decrease)
(decrease)(1) “EMEA” consists of the Europe, Middle East, and Africa geographic regions. 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. AmericasQ3 20182019 vs. Q3 2017The decrease in net revenues from the Americas region for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to lower revenues recognized from Callthe Destiny franchise (reflecting our sale of Duty: Infinite Warfare, which was releasedthe publishing rights for Destiny to Bungie in November 2016, in its second year after release, as compared to Call of Duty: Black Ops III, which was released in November 2015, in its second year after release. The decrease was partially offset by higher revenues recognized from World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable release in 2017.YTD Q3 20182019 vs. YTD Q3 2017The increasedecrease in net revenues from the Americas region for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to:· higherto lower revenues recognized from the Destiny franchise, driven by Destiny 2, which was released in September 2017, and its associated in-game content, with no comparable release in 2016;· higher revenues recognized from Call of Duty: WWII, which was released in November 2017, as compared to Call of Duty: Infinite Warfare, which was released in November 2016; and· higher revenues from the Candy Crush franchise due to increased monetization, primarily through in-game features and events.The increase was partially offset by lower revenues recognized from Call of Duty: Infinite Warfare in its second year after release, as compared to Call of Duty: Black Ops III in its second year after release.EMEAQ3 20182019 vs. Q3 2017The decrease in net revenues from the EMEA region for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to:·lower revenues recognized from Call of Duty: Infinite Warfare in its second year after release, as compared to Call of Duty: Black Ops III in its second year after release;the Destiny franchise; and· lower revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017 on the PlayStation 4 platform, and in June 2018 on the Xbox One, PC, and Nintendo Switch platforms.The decrease was partially offset by higher revenues recognized from World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable release in 2017.• lower revenues recognized from World of Warcraft.YTD Q3 20182019 vs. YTD Q3 2017The increasedecrease in net revenues from the EMEA region for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to higherto:lower revenues recognized from Call of Duty: WWII, which was released in November 2017, as compared to Call of Duty: Infinite Warfare, which was released in November 2016.• 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 PacificQ3 20182019 vs. Q3 2017The decrease in net revenues from the Asia Pacific region for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to lower revenues recognized from Overwatch, which was released in May 2016, partially offset by higher revenues recognized from World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable release in 2017.YTD Q3 20182019 vs. YTD Q3 2017The decrease in net revenues from the Asia Pacific region for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to lower revenues recognized from Overwatch.Net Revenues by PlatformThe following table details our consolidated net revenues by platform (amounts in millions):
(Decrease)
(Decrease)(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 toys and accessories from our Skylanders® franchise and other physical merchandise and accessories.(2) Net revenues from “Other” include revenues from our Studios and Distribution businesses, as well as revenues from MLG and the Overwatch League. 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. (2) Net revenues from “Other” include revenues from our Studios and Distribution businesses, as well as revenues from MLG and the Overwatch League. ConsoleQ3 20182019 vs. Q3 2017The decrease in net revenues from the console platform for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to:·lower revenues recognized from Callthe Destiny franchise (reflecting our sale of Duty: Infinite Warfare, which was releasedthe publishing rights for Destiny to Bungie in November 2016, in its second year after release, as compared to Call of Duty: Black Ops III, which was released in November 2015, in its second year after release;· lower revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017 on the PlayStation 4 platform, and in June 2018 on the Xbox One, PC, and Nintendo Switch platforms; and·December 2018);lower revenues recognized from Overwatchthe Call of Duty franchise catalog titles;• lower revenues recognized from Overwatch;• lower revenues recognized from Call of Duty: Black Ops 4, which was released in October 2018, as compared to Call of Duty: WWII, which was released in November 2017; and• lower revenues from Crash Bandicoot N. Sane Trilogy which was released on the Xbox One, PC, and Nintendo Switch in June 2018.The decrease was released in May 2016.The lower revenues above were partially offset by higher revenues recognized from Call of Duty: WWII, which was released in November 2017, as compared to Call of Duty: Infinite Warfare, which was released in November 2016.• 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 20182019 vs. YTD Q3 2017The increasedecrease in net revenues from the console platform for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to:· higher revenues recognized from Call of Duty: WWII, as compared to Call of Duty: Infinite Warfare; and· higherlower revenues recognized from the Destiny franchise;lower revenues recognized from Call of Duty franchise drivencatalog titles; and• lower revenues recognized from Call of Duty: Black Ops 4, as compared to Call of Duty: WWII.The decrease was partially offset by Destiny 2, revenues from Sekiro: Shadows Die Twice,which was released in September 2017, and its associated in-game content, with no comparable release in 2016.The higher revenues above were partially offset by lower revenues recognized from Call of Duty: Infinite Warfare in its second year after release, as compared to Call of Duty: Black Ops III in its second year after release.PCQ3 20182019 vs. Q3 2017The increasedecrease in net revenues from the PC platform for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to higher revenues recognized from World of Warcraft, driven by World of Warcraft: Battle for Azeroth, which was released in August 2018, with no comparable release in 2017, partially offset by to:• lower revenues recognized from World of Warcraft;• lower revenues recognized from Hearthstone;• lower revenues recognized from Overwatch;andlower revenues recognized from Overwatch, which was released in May 2016.YTD Q3 20182019 vs. YTD Q3 2017The decrease in net revenues from the PC platform for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to to:lower revenues recognized from Overwatch, partially offset by revenues recognized from the Destiny 2, which was released on the PC platform in October 2017, and its associated in-game content, with no comparable release in 2016.• lower revenues recognized from Overwatch; and• lower revenues recognized from Hearthstone.Mobile and AncillaryQ3 20182019 vs. Q3 2017The decrease in net2018Net revenues from mobile and ancillary for the three months ended September 30, 2018,2019, were roughly flat as compared to net revenues for the three months ended September 30, 2017, was primarily due to decreases in revenues across various title offerings by King.YTD Q3 20182019 vs. YTD Q3 2017The increase in net2018Net revenues from mobile and ancillary for the nine months ended September 30, 2018,2019, were roughly flat as compared to net revenues for the nine months ended September 30, 2017, was primarily due to higher revenues from the Candy Crush franchise’s increased monetization, primarily through in-game features and events.2018.Costs and ExpensesCost of RevenuesThe following table details the components of cost of revenues in dollars (amounts in millions) and as a percentage of associated net revenues:
Ended September
30, 2018
net revenues
Ended September
30, 2017
net revenues
(Decrease)
Ended September
30, 2018
net revenues
Ended September
30, 2017
net revenues
(Decrease) Three Months Ended September 30, 2019 % of associated net revenues Three Months Ended September 30, 2018 % of associated net revenues Increase (Decrease) Cost of revenues—product sales: Product costs $ 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 20182019 vs. Q3 2017The decreaseincrease in product costs for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was in-linein line with the decreaseincrease in product sales, partially offset by higher product sales from our lower margin distribution business.The decrease in software royalties, amortization, and intellectual property licenses related to product sales for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to a decrease of $19$8 million in software amortization and royalties from Activision, driven by the Destiny franchise.YTD Q3 20182019 vs. YTD Q3 2017The decrease in product costs for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to ain line with the decrease of $11 million in product costs from Activision, primarily related to there being no title releases for the Guitar Hero and Skylanders franchises, largely offset by higher product costs from our lower margin distribution business driven by increased product sales.The increasedecrease in software royalties, amortization, and intellectual property licenses related to product sales for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to an increasea decrease of $37$56 million in software amortization and royalties from Activision, primarily due to the Destiny franchise, driven by the release of Destiny 2, whichfranchise. This decrease was released in September 2017, with no comparable release in 2016, partially offset by lower software amortization and royalties from Call of Duty: WWII, which was released in November 2017, as compared to Call of Duty: Infinite Warfare, which was released in November 2016. 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 increasedecrease from Activision was partially offset by a decreasean increase of $22$12 million in software amortization and royalties from Blizzard, driven by Worldthe release of Warcraft, due to World of Warcraft: LegionBattle for Azeroth, which was released in August 2016,2018, with no comparable release in 2017.Cost of Revenues—Subscription, Licensing, and Other Revenues:Q3 20182019 vs. Q3 2017The increasedecrease in game operations and distribution costs for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to an increase of $20 million in personnel, facilities, and equipment costs associated with our online games and broadcasting operations, partially offset by a decrease of $14$18 million in service provider fees such as digital storefront fees (e.g. fees retained by Apple and Google for our sales on their platforms), primarily associated with the decrease in our mobile game revenues.The decrease in software royalties, amortization, and intellectual property licenses related to subscription, licensing, and other revenues for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to to:a decrease of $30$34 million in amortization of internally-developed franchise intangible assets acquired as part of our acquisition of King.The decrease was partially offset by:· amortization of capitalized film costs associated with the third season of the animated TV series, Skylanders Academy, which was released in September 2018, as compared to the second season, which was released in October 2017; and· an $8 million increase inKing;lower software amortization and royalties from Activision primarily due to higher software amortizationof $14 million, driven by the Destiny franchise; and royalties from expansion releases to Destiny 2, with no comparable releases in 2017.• 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 20182019 vs. YTD Q3 2017The increasedecrease in game operations and distribution costs for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to higher personnel, facilities,a decrease of $50 million in service provider fees such as digital storefront fees (e.g. fees retained by Apple and equipment costs of $52 million associated withGoogle for our online gamessales on their platforms), payment processor fees, and broadcasting operations.The decrease in software royalties, amortization, and intellectual property licenses related to subscription, licensing, and other revenues for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to to:a decrease of $105$83 million in amortization of internally-developed franchise intangible assets acquired as part of our acquisition of King. The decrease was partially offset by an increase of $11 million inKing;lower software amortization and royalties from Activision primarily due toof $22 million, driven by the software amortizationDestiny franchise; and royalties from expansion releases on Destiny 2.• lower amortization of capitalized film costs of $12 million given the release of the third season of the animated TV series, Skylanders Academy, in September 2018, with no comparable release in 2019.Product Development (amounts in millions)
2018
consolidated
net revenues
2017
consolidated
net revenues
(Decrease) 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 20182019 vs. Q3 2017The decrease in product development costs for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to an increase of $28 million in capitalization of software development costs due to increasedto:lower product development costs and the timing of the game development cycle. The decrease was partially offset by an $18 million increase in personnel and external developer costs to supportfor existing and upcoming title releases.lower product development costs from the Destiny franchise (reflecting our sale of the publishing rights for Destiny to Bungie in December 2018).YTD Q3 20182019 vs. YTD Q3 2017The increasedecrease in product development costs for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to a $102 million increase in personnel and external developerto:lower product development costs to supportfor existing and upcoming title releases. The increase was partially offset by an increasereleases of $76$66 million, in capitalization of softwareprimarily due to lower personnel costs; andlower product development costs due tofrom the increased costs previously noted and timing of the game development cycle.Sales and Marketing (amounts in millions)
2018
consolidated
net revenues
2017
consolidated
net revenues
(Decrease) 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 20182019 vs. Q3 2017The decrease in sales and marketing expenses for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to a decrease of $76$81 million in marketing spending and personnel costs, primarily associated with lower marketing costs for the Destiny, World of Warcraft, and Call of Duty franchises, and esports initiatives.YTD Q3 2019 vs. YTD Q3 2018The decrease in sales and marketing expenses for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was primarily due to:• a decrease of $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; anda decrease of $44 million in amortization of the customer base intangible asset acquired as part of our acquisition of King, as the asset was fully amortized during the first quarter of 2018.YTD Q3 2018 vs. YTD Q3 2017The decrease in sales and marketing expenses for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, was primarily due to a decrease of $187 million in amortization of the customer base intangible asset acquired as part of our acquisition of King, as the asset was fully amortized during the first quarter of 2018. The decrease was partially offset by a $30 million increase in marketing spending and personnel costs, primarily associated with the Candy Crush franchise, World of Warcraft, and the Overwatch League, the last of which started its inaugural regular season in January 2018, partially offset by (1) reduced marketing costs for the Destiny franchise, due to lower marketing for Forsaken, the third expansion to Destiny 2, which was released in September 2018, as compared to marketing for the full game release of Destiny 2 in September 2017, and (2) reduced marketing costs for the Bubble Witch franchise, as Bubble Witch 3 SagaTM was released during the first quarter of 2017, with no comparable release in 2018.General and Administrative (amounts in millions)
2018
consolidated
net revenues
2017
consolidated
net revenues
(Decrease) 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 20182019 vs. Q3 2017The increasedecrease in general and administrative expenses for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to an $11a $22 million increasedecrease in personnel costs, including stock-based compensation expense, professional fees, and facilities costs to support the growth of our existing business and adjacent areas of opportunity.YTD Q3 20182019 vs. YTD Q3 2017The increasedecrease in general and administrative expenses for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to an $81a $69 million increasedecrease in personnel costs.Restructuring and related costs including stock-based compensation expense, professional fees,(amounts in millions) 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, 2019, the Company committed to a Board-authorized restructuring plan under which the Company aims to refocus its resources on its largest opportunities and facilitiesremove unnecessary levels of complexity and duplication from certain parts of the business. Since the roll out of the plan, we have been, and will continue focusing on these goals. The restructuring and related costs incurred during the three and nine months ended September 30, 2019, relate primarily to supportseverance costs, write-downs of lease facility assets, and the growthwrite-downs of our existing business and adjacent areasother assets that will no longer be used. Refer to Note 14 of opportunity.Interest and Other Expense (Income), Net (amounts in millions)
2018
consolidated
net revenues
2017
consolidated
net revenues
(Decrease) September 30, 2019 % of consolidated net revenues September 30, 2018 % of consolidated net revenues Increase (Decrease) Three Months Ended $ (2 ) — % $ 13 1 % $ (15 ) Nine Months Ended $ (33 ) (1 )% $ 67 1 % $ (100 ) Q3 20182019 vs. Q3 2017The decrease in interest and other expense (income), net, for the three months ended September 30, 2018,2019, as compared to the three months ended September 30, 2017,2018, was primarily due to a $12an $11 million increasedecrease in interest income fromexpense and amortization of deferred financing costs associated with our cashdebt obligations, due to a decrease in our total debt outstanding as a result of our debt redemptions and cash equivalents and higher interest rates compared to the prior-year period.YTD Q3 20182019 vs. YTD Q3 2017The decrease in interest and other expense (income), net, for the nine months ended September 30, 2018,2019, as compared to the nine months ended September 30, 2017,2018, was primarily due to:a $49 million decrease in interest expense and amortization of deferred financing costs associated with our debt obligations, reflecting a decrease in our total debt outstanding as a result of our debt redemptions and repayment activities during 2018;a $38 million gain recognized as a result of adjusting a cost-method equity investment to a $35fair value, with no comparable activity in the prior period (refer to Note 8 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q); andan $11 million increase in interest income fromdue to our cash and cash equivalents andequivalent balances earning interest at higher interest rates, along with an overall higher cash balance, in 2019 as compared to the prior-year period.Income Tax Expense (amounts in millions)
2018
income
2017
income
(Decrease) 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 benefitexpense of $48$45 million for the three months ended September 30, 2018,2019, reflects an effective tax rate of (23)%18%, which is lowerhigher than the effective tax rate of 15%(23)% for the three months ended September 30, 2017.2018. The decreaseincrease is primarily due to a discrete tax benefit resulting fromrecognized in the prior year in connection with adjustments made to the provisional amountamounts initially recorded forin connection with tax reform legislation known as the U.S.Tax Cuts and Jobs Act enacted in December 22, 2017 (the “U.S. Tax Reform Act described below and the benefit from the lower U.S. corporate income tax rate in the current year. This decrease was partially offset byAct”), lower excess tax benefits from share-based payments.The income tax expense of $25$208 million for the nine months ended September 30, 2018,2019, reflects an effective tax rate of 2%18%, which is lowerhigher than the effective tax rate of 11%2% for the nine months ended September 30, 2017.2018. The decreaseincrease is due to a discrete net tax benefit resulting from a closing agreementrecognized in the Company entered intoprior year in connection with an audit settlement with the IRS to resolve certain intercompany transfer pricing arrangements for tax periods starting in 2009 (the “Closing Agreement”Internal Revenue Service (“IRS”), a discrete tax benefit resulting fromrecognized in the prior year in connection with adjustments made to the provisional amountamounts initially recorded forin connection with the U.S. Tax Reform Act, and the benefitlower excess tax benefits from the lower U.S. corporate income tax rateshare-based payments in the current year, net of the impact of global intangible low-taxed income of foreign subsidiaries (“GILTI”).year. This decreaseincrease was partially offset by thea valuation allowance recorded in the prior year with regard to California research and development credit carryforwards (“CA R&D Credits”) and lower excess tax benefits from share-based payments.The effective tax ratesrate of (23)% and 2%18% for both the three and nine months ended September 30, 2018, respectively, are2019, is lower than the U.S. statutory rate of 21%, primarily due to a discrete net tax benefit resulting from the Closing Agreement, a discrete tax benefit resulting from adjustments made to the provisional amount initially recorded for U.S. Tax Reform Act, foreign earnings taxed at relatively lower statutory rates the recognition of excessas compared to domestic earnings, which is partially offset by U.S. tax benefits from share-based payments,on foreign earnings, and the recognition of federal research and development credits, partially offset by the valuation allowance recorded with regard to CA R&D Credits.On June 27, 2018, the Company entered into the Closing Agreement. The primary adjustments related to the Closing Agreement that were recognized in the second quarter of 2018 were a tax expense of $70 million and a reduction in unrecognized tax benefits of $437 million. In addition, we recognized $185 million of tax benefits related to other tax adjustments resulting from the changes in U.S. tax attributes and taxable income caused by the primary adjustments. The Closing Agreement results in federal and state cash tax payments totaling approximately $345 million, of which we made federal tax payments of $334 million in October 2018.We evaluate deferred tax assets each period for recoverability. We record a valuation allowance for assets that do not meet the threshold of “more likely than not” to be realized in the future. To make that determination, the Company evaluates the likelihood of realization based on the weight of all positive and negative evidence available. As of December 31, 2017, the Company had a deferred tax asset for CA R&D Credits, which can be carried forward indefinitely. The Closing Agreement impacts historical and prospective filings in certain states, including California, and after considering the impact of the Closing Agreement on its prospective California taxable income, the Company determined that its remaining CA R&D Credits no longer met the threshold of more likely than not of being realized in the future. Accordingly, during the three months ended June 30, 2018, we recorded a full valuation allowance of $57 million. Additionally, the Company has not recognized a tax benefit for current-year CA R&D Credits in its year-to-date tax expense. We will reassess this determination quarterly and record a tax benefit if future evidence allows for a partial or full release of this valuation allowance.On December 22, 2017, the U.S. Tax Reform Act was enacted. The U.S. Tax Reform Act, among other things, reduced the U.S. corporate income tax rate from 35% to 21% beginning in 2018 and implemented a modified territorial tax system that imposed a one-time tax on deemed repatriated earnings of foreign subsidiaries (the “Transition Tax”).On December 22, 2017, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on how to account for the effects of the U.S. Tax Reform Act under Accounting Standards Codification (“ASC”) 740. SAB 118 enables companies to record a provisional amount for the effects of the U.S. Tax Reform Act based on a reasonable estimate, subject to adjustment during a measurement period of up to one year, until accounting is complete. During the fourth quarter of 2017, we recorded provisional amounts for the effects of the U.S. Tax Reform Act in accordance with SAB 118. In addition, as of December 31. 2017, we no longer considered the available cash balances related to undistributed earnings held outside of the U.S. by our foreign subsidiaries to be indefinitely reinvested. We continue to analyze the effects of the U.S. Tax Reform Act on our condensed consolidated financial statements. Accounting for the income tax effects of the U.S. Tax Reform Act requires complex new calculations and significant judgments in interpreting the legislation. Additional guidance may be issued on how the provisions of the U.S. Tax Reform Act will be applied or otherwise administered that is different from our interpretation. We may make adjustments to the provisional amounts as we collect and prepare the data necessary to finalize our calculations, interpret the U.S. Tax Reform Act and any additional guidance issued, and consider the effects of any additional actions we may take as a result of the U.S. Tax Reform Act.During the three months ended June 30, 2018, the Company obtained additional information, including adjustments related to the Closing Agreement, and the evaluation of the impact of changing our indefinite reinvestment assertion, which affected the provisional amount initially recorded for the U.S. Tax Reform Act in the fourth quarter of 2017. As a result, the Company recorded an additional tax expense of $34 million in the three months ended June 30, 2018, reflecting the effects of the U.S. Tax Reform Act.In conjunction with the filing of our 2017 federal tax return, during the three months ended September 30, 2018, the Company prepared and analyzed additional information, which affected the provisional amounts initially recorded for the U.S. Tax Reform Act in the fourth quarter of 2017. As result, the Company recorded a tax benefit of $80 million related to the Transition Tax and remeasurement of deferred taxes in the three months September 30, 2018, reflecting the effects of the U.S. Tax Reform Act.We continue to evaluate the ongoing impacts of the U.S. Tax Reform Act, including provisions impacting certain foreign income, such as a tax on GILTI and a deduction for foreign derived intangible income. These provisions are complex and subject to continuing regulatory interpretation by the IRS. While we have included an estimate of GILTI in our estimated effective tax rate for 2018, we may make adjustments as we interpret the U.S. Tax Reform Act and any additional guidance issued and consider the effects of any additional actions we may take as a result of the U.S. Tax Reform Act.Our effective tax rate differscould 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 (including changes in the mix of income by tax jurisdiction);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 1316 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.Liquidity and Capital ResourcesWe believe our ability to generate cash flows from operating activities is one of our fundamental financial strengths. In the near term, we expect our business and financial condition to remain strong and to continue to generate significant operating cash flows, which, we believe, in combination with our existing balance of cash and cash equivalents and short-term investments of $3.4$4.9 billion, our access to capital, and the availability of our $1.5 billion revolving credit facility, will be sufficient to finance our operational and financing requirements for the next 12 months. Our primary sources of liquidity, which are available to us to fund cash outflows such as our anticipatedpotential dividend payments or share repurchases, and scheduled debt maturities, include our cash and cash equivalents, short-term investments, and cash flows provided by operating activities.As of September 30, 2018,2019, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $1.1$2.3 billion, as compared to $3.0$1.4 billion as of December 31, 2017. Following the enactment of the U.S. Tax Reform Act and the current period expense on unrepatriated earnings, we no longer consider these available2018. These cash balances which primarily relateare generally available for use in the U.S., subject in some cases to undistributed earnings of our most significant foreign subsidiaries, to be indefinitely reinvested.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)
(Decrease)
(Decrease) September 30, 2019 December 31, 2018 Increase (Decrease) Cash and cash equivalents $ 4,939 $ 4,225 $ 714 Short-term investments 7 155 (148 ) $ 4,946 $ 4,380 $ 566 Percentage of total assets 28 % 24 % 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 ActivitiesThe 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, 2018,2019, was $791$913 million, as compared to $1.06 billion$791 million for the nine months ended September 30, 2017.2018. The decreaseincrease was primarily due to changes in our working capital resulting from the timing of collections and payments. The decreasepayments 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 higherlower 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, 2018,2019, as compared to the nine months ended September 30, 2017.Net Cash Used inProvided by (Used in) Investing ActivitiesThe primary drivers of net cash flows associated with investing activities typically include capital expenditures, purchases and sales of investments, changes in restricted cash balances, and cash used for acquisitions.Net cash used inprovided by investing activities for the nine months ended September 30, 2018,2019, was $160$79 million, as compared to net cash used in investing activities of $163$160 million for the nine months ended September 30, 2017.2018. The decrease in the cash used in investing activitiesincrease was primarily due to lower$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, 2018, as compared to $80 million in2019, were lower than the prior-year period, partially offset by higher capital expenditures of $97 million for the nine months ended September 30, 2018, as compared to $86 million in the prior-year period.Net Cash (Used in) Provided byUsed in Financing ActivitiesThe primary drivers of net cash flows associated with financing activities typically include the proceeds from, and repayments of, our long-term debt and transactions involving our common stock, including the issuance of shares of common stock to employees upon the exercise of stock options, as well as the payment of dividends.Net cash used in financing activities for the nine months ended September 30, 2018,2019, was $2.0 billion,$251 million, as compared to net cash used in financing activities of $640 million$2.0 billion for the nine months ended September 30, 2017.2018. The changedecrease was primarily attributeddue to our debt financing activities. For the nine months ended September 30, 2018, we had debt repayments, inclusive of premium payments, of $1.8 billion as compared to net debt repayments of $500 million for the nine months ended September 30, 2017. The increase in cash used in financing activities was further impacted by:· lower proceeds from stock option exercises of $91 million forduring the nine months ended September 30, 2018, as compared to $150 million forwith no comparable repayment activity in the nine months ended September 30, 2017;· higher tax payments made for net share settlements on restricted stock units2019. The Company paid dividends of $85$283 million forduring the nine months ended September 30, 2018,2019, as compared to $44 million for the nine months ended September 30, 2017; and· higher dividends paid of $259 million forduring the nine months ended September 30, 2018, as compared to $226 million for the nine months ended September 30, 2017.Effect of Foreign Exchange Rate ChangesChanges in foreign exchange rates had a negative impact of $15$24 million on our cash and cash equivalents and restricted cash for the nine months ended September 30, 2018,2019, as compared to a positivenegative impact of $72$15 million for the nine months ended September 30, 2017.2018. The change was primarily due to changes in the value of the U.S. dollar relative to the euro and the British pound.DebtAs ofAt both September 30, 20182019 and December 31, 2017,2018, our total outstanding debt was $2.7 billion, and $4.4 billion, respectively, bearing interest at a weighted average rate of 3.18% and 3.58%, respectively. During the nine months ended September 30, 2018, we had the following significant activity associated with our debt instruments:· on August 16, 2018, using available cash on hand, we redeemed the 2023 Notes in full at a redemption price equal to 100% of the principal amount of the 2023 Notes plus a “make-whole” premium calculated as set forth in the indenture governing the 2023 Notes and accrued and unpaid interest to the redemption date, resulting in a “Loss on extinguishment of debt” recorded in the condensed consolidated statement of operations of $33 million, comprised of premium payments of $25 million and a write-off of unamortized discount and financing costs of $8 million;· on August 24, 2018, using available cash on hand, we made a voluntary prepayment of $990 million to fully repay and extinguish the 2017 TLA resulting in a write-off of unamortized discount and deferred financing costs of $7 million, which is included in “Loss on extinguishment of debt” in the condensed consolidated statement of operations; and· on August 24, 2018, we also entered a Seventh Amendment (the “Amendment”) to our Credit Agreement for which the Amendment, among other things replaced our prior revolving credit facility of $250 million with a new revolving credit facility with commitments in an aggregate principal amount of $1.5 billion, which is scheduled to mature on August 24, 2023.A summary of our outstanding debt is as follows (amounts in millions):
Amount
Discount and Deferred
Financing Costs
Amount
Amount
Discount and Deferred
Financing Costs
Amount 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 1011 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.DividendsOn February 1, 2018,12, 2019, our Board of Directors approveddeclared a cash dividend of $0.34$0.37 per common share. On May 9, 2018,2019, we made an aggregate cash dividend payment of $259$283 million to shareholders of record at the close of business on March 30, 2018.Capital ExpendituresFor the year ending December 31, 2018,2019, we anticipate total capital expenditures of approximately $125$130 million, primarily for leasehold improvements, computer hardware, and software purchases. During the nine months ended September 30, 2018,2019, capital expenditures were $97$79 million.Off-Balance Sheet ArrangementsAt each of September 30, 20182019 and December 31, 2017,2018, Activision Blizzard had no significant relationships with unconsolidated entities or financial parties, often referred to as “structured finance” or “special purpose” entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.Critical Accounting Policies and EstimatesOur condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).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;· Income Taxes;·•Fair Value Estimates (including Business Combinations and Assessment of Impairment of Assets); and·•Share-Based Payments.During the nine months ended September 30, 2018,2019, there were no significant changes to the above critical accounting policies and estimates, with the exception of our adoption of ASC 606: Revenue from Contracts with Customers. Refer to Note 2 of the notes to condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for disclosures regarding our updated revenue recognition accounting policies and see “Recently Issued Accounting Pronouncements” below for the financial statement impact as a result of our adoption of the new standard.estimates. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2017,2018, for a more complete discussion of our other critical accounting policies and estimates.Recently Issued Accounting PronouncementsBelow are recently issued accounting pronouncements that were most significant to our accounting policy activities. For a detailed discussion of all relevant recently issued accounting pronouncements, see Note 3 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.Recently Adopted Accounting PronouncementsRevenue RecognitionLeasesAs discussednoted in Note 2 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, in May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to revenue recognition and on January 1, 2018, we adopted the new lease accounting standard and related amendments (collectively,effective January 1, 2019. We elected to apply an optional adoption method, which uses the “new revenue accounting standard”), utilizingeffective date as the modifiedinitial date of application on transition with no retrospective method.adjustments to prior periods. Additionally, we elected to apply the new revenue accounting standard onlypackage of transition practical expedients which permitted us to, among other things, (1) not reassess if existing contracts not completed as of the adoption date. For contracts that were modified before the period of adoption, we elected to reflect the aggregate effect of all modifications when (1) identifying the satisfied and unsatisfied performance obligations, (2) determining the transaction price, and (3) allocating the transaction price to the satisfied and unsatisfied performance obligations. We recognized the cumulative effect of initially applying the new revenue accounting standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The cumulative effect adjustment recorded to our retained earnings at January 1, 2018 was $88 million.The most significant impacts of the new revenue accounting standard for us are:·The accounting for our sales of our games with significant online functionality for which we do not have vendor-specific objective evidence (“VSOE”) for unspecified future updates and ongoing online services provided. Under the prior accounting standards, VSOE for undelivered elements was required. This requirement was eliminatedrevenue accounting standard. Accordingly, we are required to recognize as revenue a portion of the sales price upon delivery of this software, as compared to recognizing the entire sales price ratably over an estimated service period, as previously required. This difference in accounting primarily impacts revenues from our Call of Duty franchise, where approximately 20% of the sales price is now recognized as revenue upon delivery of the games to our customers. The amount of revenue recognized upon delivery of games to our customers is analyzed on a title-by-title basis and may change in the future. For example, we expect the entire sales price from our Call of Duty: Black Ops 4 release to be recognized ratably over an estimated service period, as the gameplay has an increased focus towards the online competitive and cooperative game modes with no single-player campaign mode. Many of our other franchises, such as Destiny, Overwatch, World of Warcraft, and Candy Crush, are online hosted arrangements, and the accounting for our sales of these games under the new standard is relatively unchanged; and·The accounting for certain of our software licensing arrangements. While the impact of the new revenuelease accounting standard, may differ on a contract-by-contract basis (as the actual revenue recognition treatment required under the standard will depend on contract-specific terms), the new revenue accounting standard generally results in earlier revenue recognition for these arrangements.For additional discussion regarding the impact of our adoption of the new revenuelease accounting standard including the impacts to our condensed consolidated balance sheet, and statement of operations, see Note 3 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.Statement of Cash Flows-Restricted CashIn November 2016, the FASB issued new guidance related to the classification of restricted cash in the statement of cash flows. The new standard requires that a statement of cash flows explain any change during the period in total cash, cash equivalents, and restricted cash. Therefore, restricted cash will be included with “Cash and cash equivalents” when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017, and should be applied retrospectively.We adopted the new standard during the first quarter of 2018 and applied the standard retrospectively for all periods presented. The application of this new standard did not have a material impact on our condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017.In our Annual Report on Form 10-K for the year ending December 31, 2018, there will be a significant impact to the consolidated statements of cash flows for 2016, as this period includes, as an investing activity, the $3.6 billion movement in restricted cash resulting from the transfer of cash into escrow at December 31, 2015 to facilitate the acquisition of King, and the subsequent release of that cash in 2016 to complete the acquisition. Under this new standard, the restricted cash balance will be included in the beginning and ending total cash, cash equivalents, and restricted cash balances and, hence, will not be included as an investing activity in the statement of cash flows.Derivatives and HedgingIn August 2017, the FASB issued new guidance related to the accounting for derivatives and hedging. The new guidance expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedged items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of a hedge’s effectiveness. The new standard is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. We adopted the standard during the first quarter of 2018. The adoption of the standard did not have a material impact to our condensed consolidated financial statements.Recent Accounting Pronouncements Not Yet AdoptedLeasesIn February 2016, the FASB issued new guidance related to the accounting for leases. The new standard will replace 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 asset for its leases. Classification will be based on criteria that are largely similar to those applied in current lease accounting. The lease liability will be equal to the present value of lease payments. The asset will be based on the lease liability, subject to adjustment for initial direct costs, lease incentives received, and any prepaid lease payments. Operating leases will result in a straight-line expense pattern, while finance leases will result in a front-loaded expense pattern. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. When the new standard was initially issued, it was required to be adopted using a modified retrospective transition that required application of the new guidance at the beginning of the earliest comparative period presented, subject to certain transition practical expedients available to provide relief in connection with the adoption. In July 2018, the FASB issued guidance to provide for an optional adoption method that allows companies to use the effective date of the new lease standard as the initial date of application on transition, and therefore does not require prior periods to be restated.Although we continue to evaluate the impact of this new accounting guidance on our financial statements, we expect it to have a significant impact on our consolidated balance sheet as a result of establishing lease liabilities and right-of-use assets for our operating leases. As part of our evaluation process, we have established a project implementation team that is evaluating our lease portfolio and system solutions, as well as identifying required process and policy changes, which include consideration of internal controls. We have made progress in gathering the necessary data elements for our lease population, have selected a system provider, and system configuration and implementation is underway. We do not plan to early adopt this new standard but do expect to elect and apply the available transition practical expedients, including the optional adoption method discussed above.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 RiskWe transact business in many different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates. Revenues and related expenses generated from our international operations are generally denominated in their respective local currencies. Primary currencies include euros, British pounds, Australian dollars, South Korean won, Chinese yuan, and Swedish krona. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions will result in reduced revenues, operating expenses, net income, and cash flows from our international operations. Similarly, our revenues, operating expenses, net income, and cash flows will increase for our international operations if the U.S. dollar weakens against foreign currencies. Since we have significant international sales, but incur the majority of our costs in the United States, the impact of foreign currency fluctuations, particularly the strengthening of the U.S. dollar, may have an asymmetric and disproportional impact on our business. We monitor currency volatility throughout the year.To mitigate our foreign currency risk resulting from our foreign currency-denominated monetary assets, liabilities, and earnings and our foreign currency risk related to functional currency-equivalent cash flows resulting from our intercompany transactions, we periodically enter into currency derivative contracts, principally forward contracts. These forward contracts generally have a maturity of less than one year. The counterparties for our currency derivative contracts are large and reputable commercial or investment banks.The fair values of our foreign currency contracts are estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period.We do not hold or purchase any foreign currency forward contracts for trading or speculative purposes.Foreign Currency Forward Contracts Designated as Hedges (“Cash Flow Hedges”)The total gross notional amounts and fair values of our Cash Flow Hedges are as follows (amounts in millions): As of 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 At September 30, 2018,2019, our Cash Flow Hedges have remaining maturities of 15three months or less. Additionally, $3$2 million of net realized but unrecognized gains are recorded within “Accumulated other comprehensive income (loss)” at September 30, 20182019 for Cash Flow Hedges that had settled but were deferred and will be amortized into earnings, along with the associated hedged revenues.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):
September 30,
September 30, 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 HedgesThe 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, 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, 20182019 and 2017,2018, 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, 2018,2019, a hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in a theoretical decline of our net income of approximately $90$78 million. This sensitivity analysis assumes a parallel adverse shift of all foreign currency exchange rates against the U.S. dollar; however, all foreign currency exchange rates do not always move in this manner and actual results may differ materially.Interest Rate RiskOur 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, 2018,2019, our $3.31 billion of cash and cash equivalents waswere comprised primarily of money market funds.The Company has determined that, based on the composition of our investment portfolio as of September 30, 2018,2019, there was no material interest rate risk exposure to the Company’s consolidated financial condition, results of operations, or liquidity as of that date.Definition and Limitations of Disclosure Controls and ProceduresOur 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 SEC’sSecurities 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 ProceduresOur 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, 2018,2019, the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at September 30, 2018,2019, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized, and reported on a timely basis, and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.Changes in Internal Control Over Financial ReportingOur 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, 2018.2019. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at September 30, 2018,2019, there have not been any changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.PART II. OTHER INFORMATIONWe 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.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, 2017.2018.The exhibits listed on the accompanying Exhibit Index are hereby incorporated by reference into this Quarterly Report on Form 10-Q.Exhibit NumberExhibit3.13.1 10.131.1Document.104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) condensed consolidated balance sheets at September 30, 2018 and December 31, 2017, (ii) condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and September 30, 2017, (iii) condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2018 and September 30, 2017, (iv) condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and September 30, 2017; (v) condensed consolidated statement of changes in shareholders’ equity for the nine months ended September 30, 2018; and (vi) notes to condensed consolidated financial statements.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 8, 2018ACTIVISION BLIZZARD, INC./s/ SPENCER NEUMANN/s/ STEPHEN WEREBSpencer NeumannStephen WerebDennis Durkin Chief Financial Officer, andDeputy Chief Financial Officer, Chief Accounting Officer,ofand Principal Accounting Officer ofActivision Blizzard, Inc.71