(Mark one)
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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 | |||
(Address of principal executive offices) | (Zip Code) | |||||
(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 $ 3,576 $ 3,245 Accounts receivable, net of allowances of $172 and $261, at September 30, 2017 and December 31, 2016, respectively 888 732 Inventories, net 94 49 Software development 377 412 Other current assets 451 392 Total current assets 5,386 4,830 Software development 114 54 Property and equipment, net 254 258 Deferred income taxes, net 439 283 Other assets 469 401 Intangible assets, net 1,292 1,858 Goodwill 9,764 9,768 Total assets $ 17,718 $ 17,452 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 313 $ 222 Deferred revenues 1,373 1,628 Accrued expenses and other liabilities 703 806 Total current liabilities 2,389 2,656 Long-term debt, net 4,388 4,887 Deferred income taxes, net 40 44 Other liabilities 934 746 Total liabilities 7,751 8,333 Commitments and contingencies (Note 13) Shareholders’ equity: Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,184,733,296 and 1,174,163,069 shares issued at September 30, 2017 and December 31, 2016, respectively — — Additional paid-in capital 10,671 10,442 Less: Treasury stock, at cost, 428,676,471 shares at September 30, 2017 and December 31, 2016 (5,563) (5,563) Retained earnings 5,501 4,869 Accumulated other comprehensive loss (642) (629) Total shareholders’ equity 9,967 9,119 Total liabilities and shareholders’ equity $ 17,718 $ 17,452 For the Three Months Ended For the Nine Months Ended 2017 2016 2017 2016 Net revenues Product sales $ 384 $ 355 $ 1,373 $ 1,501 Subscription, licensing, and other revenues 1,234 1,213 3,601 3,093 Total net revenues 1,618 1,568 4,974 4,594 Costs and expenses Cost of revenues—product sales: Product costs 149 111 422 429 Software royalties, amortization, and intellectual property licenses 37 42 200 250 Cost of revenues—subscription, licensing, and other revenues: Game operations and distribution costs 249 237 717 620 Software royalties, amortization, and intellectual property licenses 117 139 359 319 Product development 273 249 750 673 Sales and marketing 345 340 899 830 General and administrative 191 156 539 486 Total costs and expenses 1,361 1,274 3,886 3,607 Operating income 257 294 1,088 987 Interest and other expense (income), net 37 63 121 181 Income before income tax expense 220 231 967 806 Income tax expense 32 32 109 93 Net income $ 188 $ 199 $ 858 $ 713 Earnings per common share Basic $ 0.25 $ 0.27 $ 1.14 $ 0.96 Diluted $ 0.25 $ 0.26 $ 1.12 $ 0.94 Weighted-average number of shares outstanding Basic 755 742 753 739 Diluted 766 756 764 753 Dividends per common share $ — $ — $ 0.30 $ 0.26 For the Three Months Ended For the Nine Months Ended 2017 2016 2017 2016 Net income $ 188 $ 199 $ 858 $ 713 Other comprehensive income (loss): Foreign currency translation adjustment 9 — 36 (20) Unrealized gains (losses) on forward contracts designated as hedges, net of tax (8) (4) (45) — Unrealized gains (losses) on investments, net of tax (3) — (4) — Total other comprehensive loss $ (2) $ (4) $ (13) $ (20) Comprehensive income $ 186 $ 195 $ 845 $ 693 For the Nine Months Ended September 30, 2017 2016 Cash flows from operating activities: Net income $ 858 $ 713 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes (138) (200) Provision for inventories 9 29 Depreciation and amortization 670 584 Amortization of capitalized software development costs and intellectual property licenses (1) 202 248 Amortization of debt discount, financing costs, and non-cash write-off due to extinguishment of debt 22 26 Share-based compensation expense (2) 118 107 Other 15 — Changes in operating assets and liabilities, net of effect from business acquisitions: Accounts receivable, net (140) 395 Inventories (50) (32) Software development and intellectual property licenses (227) (295) Other assets (70) 85 Deferred revenues (320) (396) Accounts payable 78 (76) Accrued expenses and other liabilities 28 108 Net cash provided by operating activities 1,055 1,296 Cash flows from investing activities: Purchases of available-for-sale investments (80) — Acquisition of King, net of cash acquired (see Note 14) — (4,588) Release of cash in escrow — 3,561 Capital expenditures (86) (99) Other investing activities 10 (24) Net cash used in investing activities (156) (1,150) Cash flows from financing activities: Proceeds from issuance of common stock to employees 150 86 Tax payment related to net share settlements on restricted stock units (44) (76) Dividends paid (226) (195) Proceeds from debt issuances, net of discounts 3,741 6,878 Repayment of long-term debt (4,251) (4,604) Other financing activities (10) (6) Net cash (used in) provided by financing activities (640) 2,083 Effect of foreign exchange rate changes on cash and cash equivalents 72 (23) Net increase in cash and cash equivalents 331 2,206 Cash and cash equivalents at beginning of period 3,245 1,823 Cash and cash equivalents at end of period $ 3,576 $ 4,029 2019 Common Stock Treasury Stock Additional Retained Accumulated Total Shares Amount Shares Amount Capital Earnings Income (Loss) Equity Balance at December 31, 2016 1,174 $ — (429) $ (5,563) $ 10,442 $ 4,869 $ (629) $ 9,119 Components of comprehensive income: Net income — — — — — 858 — 858 Other comprehensive loss — — — — — — (13) (13) Issuance of common stock pursuant to employee stock options 10 — — — 150 — — 150 Issuance of common stock pursuant to restricted stock units 2 — — — — — — — Restricted stock surrendered for employees’ tax liability (1) — — — (43) — — (43) Share-based compensation expense related to employee stock options and restricted stock rights — — — — 122 — — 122 Dividends ($0.30 per common share) — — — — — (226) — (226) Balance at September 30, 2017 1,185 $ — (429) $ (5,563) $ 10,671 $ 5,501 $ (642) $ 9,967 Activision’s key product 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. responsible for various esports events and serves as a multi-platform network for Activision Blizzard esports content. currency, and we continue to focus on in-game advertising as a growing source of additional revenue. 2018. At September 30, 2017 At December 31, 2016 Finished goods $ 80 $ 40 Purchased parts and components 14 9 Inventories, net $ 94 $ 49 At September 30, 2017 At December 31, 2016 Internally-developed software costs $ 266 $ 277 Payments made to third-party software developers 225 189 Total software development costs $ 491 $ 466 For the Three Months Ended For the Nine Months Ended 2017 2016 2017 2016 Amortization of capitalized software development costs and intellectual property licenses $ 34 $ 47 $ 206 $ 260 At September 30, 2017 Estimated useful Gross carrying Accumulated Net carrying Acquired definite-lived intangible assets: Internally-developed franchises 3 - 11 years $ 1,154 $ (799) $ 355 Developed software 2 - 5 years 601 (264) 337 Customer base 2 years 617 (497) 120 Trade names 7 - 10 years 54 (14) 40 Other 1 - 15 years 19 (12) 7 Total definite-lived intangible assets $ 2,445 $ (1,586) $ 859 Acquired indefinite-lived intangible assets: Activision trademark Indefinite 386 Acquired trade names Indefinite 47 Total indefinite-lived intangible assets $ 433 Total intangible assets, net $ 1,292 At December 31, 2016 Estimated useful Gross carrying Accumulated Net carrying Acquired definite-lived intangible assets: Internally-developed franchises 3 - 11 years $ 1,154 $ (583) $ 571 Developed software 3 - 5 years 595 (145) 450 Customer base 2 years 617 (266) 351 Trade names 7 - 10 years 54 (8) 46 Other 1 - 8 years 18 (11) 7 Total definite-lived intangible assets $ 2,438 $ (1,013) $ 1,425 Acquired indefinite-lived intangible assets: Activision trademark Indefinite 386 Acquired trade names Indefinite 47 Total indefinite-lived intangible assets $ 433 Total intangible assets, net $ 1,858 2017 (remaining three months) $ 186 2018 364 2019 216 2020 72 2021 11 Thereafter 10 Total $ 859 Activision Blizzard (1) King Total Balance at December 31, 2016 (1) $ 6,903 $ 190 $ 2,675 $ 9,768 Other (4) — — (4) Balance at September 30, 2017 $ 6,899 $ 190 $ 2,675 $ 9,764 Fair Value Measurements at September 30, 2017 As of Quoted Significant Significant Balance Sheet Classification Financial Assets: Recurring fair value measurements: Money market funds $ 3,355 $ 3,355 $ — $ — Cash and cash equivalents Foreign government treasury bills 49 49 — — Cash and cash equivalents U.S. treasuries and government agency securities 80 80 — — Other current assets Total recurring fair value measurements $ 3,484 $ 3,484 $ — $ — Financial liabilities: Foreign currency forward contracts designated as hedges $ (10) $ — $ (10) $ — Accrued expenses and other liabilities Fair Value Measurements at December 31, 2016 As of Quoted Significant Significant Balance Sheet Classification Financial Assets: Recurring fair value measurements: Money market funds $ 2,921 $ 2,921 $ — $ — Cash and cash equivalents Foreign government treasury bills 38 38 — — Cash and cash equivalents Foreign currency forward contracts designated as hedges 22 — 22 — Other current assets Auction rate securities (“ARS”) 9 — — 9 Other assets Total recurring fair value measurements $ 2,990 $ 2,959 $ 22 $ 9 At September 30, 2017 Gross Carrying Unamortized Net Carrying 2017 TLA $ 990 $ (8) $ 982 2021 Notes 650 (5) 645 2022 Notes 400 (4) 396 2023 Notes 750 (10) 740 2026 Notes 850 (9) 841 2027 Notes 400 (6) 394 2047 Notes 400 (10) 390 Total long-term debt $ 4,440 $ (52) $ 4,388 At December 31, 2016 Gross Carrying Unamortized Net Carrying 2016 TLA $ 2,690 $ (27) $ 2,663 2021 Notes 650 (5) 645 2023 Notes 750 (11) 739 2026 Notes 850 (10) 840 Total long-term debt $ 4,940 $ (53) $ 4,887 For the year ending December 31, 2017 (remaining three months) $ — 2018 — 2019 — 2020 — 2021 1,640 Thereafter 2,800 Total $ 4,440 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) For the Nine Months Ended September 30, 2016 Foreign currency Unrealized gain Unrealized gain Total Balance at December 31, 2015 $ (630) $ (4) $ 1 $ (633) Other comprehensive income (loss) before reclassifications (20) (1) — (21) Amounts reclassified from accumulated other comprehensive income (loss) into earnings — 1 — 1 Balance at September 30, 2016 $ (650) $ (4) $ 1 $ (653) For the Three Months Ended September 30, 2017 2016 2017 2016 Net revenues Operating income and income Activision $ 759 $ 377 $ 261 $ 123 Blizzard 531 729 168 316 King 528 459 208 138 Reportable segments total 1,818 1,565 637 577 Reconciliation to consolidated net revenues / consolidated income before income tax expense: Other segments (1) 84 65 (12) (2) Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (284) (62) (132) (33) Share-based compensation expense — — (47) (33) Amortization of intangible assets — — (187) (211) Fees and other expenses related to the King Acquisition (2) — — (3) (4) Other non-cash charges (4) — — 1 — Consolidated net revenues / operating income $ 1,618 $ 1,568 $ 257 $ 294 Interest and other expense (income), net 37 63 Consolidated income before income tax expense $ 220 $ 231 For the Nine Months Ended September 30, 2017 2016 2017 2016 Net revenues Operating income and income Activision $ 1,291 $ 1,069 $ 371 $ 309 Blizzard 1,539 1,767 552 730 King 1,482 1,149 538 381 Reportable segments total 4,312 3,985 1,461 1,420 Reconciliation to consolidated net revenues / consolidated income before income tax expense: Other segments (1) 204 162 (15) (5) Net effect from recognition (deferral) of deferred net revenues and related cost of revenues 458 447 370 228 Share-based compensation expense — — (120) (118) Amortization of intangible assets — — (571) (495) Fees and other expenses related to the King Acquisition (2) — — (12) (43) Restructuring costs (3) — — (11) — Other non-cash charges (4) — — (14) — Consolidated net revenues / operating income $ 4,974 $ 4,594 $ 1,088 $ 987 Interest and other expense (income), net 121 181 Consolidated income before income tax expense $ 967 $ 806 For the Three Months Ended September 30, For the Nine Months Ended September 30, 2017 2016 2017 2016 Net revenues by geographic region: Americas $ 798 $ 796 $ 2,586 $ 2,411 EMEA (1) 593 499 1,684 1,528 Asia Pacific 227 273 704 655 Total consolidated net revenues $ 1,618 $ 1,568 $ 4,974 $ 4,594 For the Three Months Ended September 30, For the Nine Months Ended September 30, 2017 2016 2017 2016 Net revenues by platform: Console $ 527 $ 452 $ 1,710 $ 1,867 PC 461 609 1,534 1,421 Mobile and ancillary (1) 534 440 1,502 1,137 Other (2) 96 67 228 169 Total consolidated net revenues $ 1,618 $ 1,568 $ 4,974 $ 4,594 At September 30, 2017 At December 31, 2016 Long-lived assets (1) by geographic region: Americas $ 160 $ 154 EMEA 77 87 Asia Pacific 17 17 Total long-lived assets by geographic region $ 254 $ 258 For the Three Months Ended September 30, For the Nine Months Ended September 30, 2017 2016 2017 2016 Numerator: Consolidated net income $ 188 $ 199 $ 858 $ 713 Less: Distributed earnings to unvested share-based awards that participate in earnings — — — (2) Less: Undistributed earnings allocated to unvested share-based awards that participate in earnings — (1) — (2) Numerator for basic and diluted earnings per common share—income available to common shareholders $ 188 $ 198 $ 858 $ 709 Denominator: Denominator for basic earnings per common share—weighted-average common shares outstanding 755 742 753 739 Effect of potential dilutive common shares under the treasury stock method: Employee stock options and awards 11 14 11 14 Denominator for diluted earnings per common share—weighted-average common shares outstanding plus dilutive common shares under the treasury stock method 766 756 764 753 Basic earnings per common share $ 0.25 $ 0.27 $ 1.14 $ 0.96 Diluted earnings per common share $ 0.25 $ 0.26 $ 1.12 $ 0.94 (in millions) For the Three Months Ended For the Nine Months Ended Net revenues $ 447 $ 1,088 Net loss $ (72) $ (171) (in millions) For the Three Months Ended For the Nine Months Ended Net revenues $ 1,568 $ 4,873 Net income $ 218 $ 739 Basic earnings per common share $ 0.29 $ 0.99 Diluted earnings per common share $ 0.29 $ 0.97 842: Leases Activision’s key product 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. responsible for various esports events and serves as a multi-platform network for Activision Blizzard esports content. currency, and we continue to focus on in-game advertising as a growing source of additional revenue. 2018. Duty franchise, primarily driven by catalog titles. Users September 30, June 30, 2017 March 31, December 31, September 30, June 30, 2016 Activision 49 47 48 51 46 49 Blizzard 42 46 41 41 42 33 King 293 314 342 355 394 409 Total 384 407 431 447 482 491 Warcraft Call of Duty franchise; and franchises, such as the October 2019 launch of 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 For the Nine Months Ended 2017 2016 2017 2016 Net revenues Product sales $ 384 24% $ 355 23% $ 1,373 28% $ 1,501 33% Subscription, licensing, and other revenues 1,234 76 1,213 77 3,601 72 3,093 67 Total net revenues 1,618 100 1,568 100 4,974 100 4,594 100 Costs and expenses: Cost of revenues—product sales: Product costs 149 39 111 31 422 31 429 29 Software royalties, amortization, and intellectual property licenses 37 10 42 12 200 15 250 17 Cost of revenues—subscription, licensing, and other revenues: Game operations and distribution costs 249 20 237 20 717 20 620 20 Software royalties, amortization, and intellectual property licenses 117 9 139 11 359 10 319 10 Product development 273 17 249 16 750 15 673 15 Sales and marketing 345 21 340 22 899 18 830 18 General and administrative 191 12 156 10 539 11 486 11 Total costs and expenses 1,361 84 1,274 81 3,886 78 3,607 79 Operating income 257 16 294 19 1,088 22 987 21 Interest and other expense (income), net 37 2 63 4 121 3 181 3 Income before income tax expense 220 14 231 15 967 19 806 18 Income tax expense 32 2 32 2 109 2 93 2 Net income $ 188 12% $ 199 13% $ 858 17% $ 713 16% revenues: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2017 2016 Increase % Change 2017 2016 Increase % Change Consolidated net revenues $ 1,618 $ 1,568 $ 50 3% $ 4,974 $ 4,594 $ 380 8% Net effect from recognition (deferral) of deferred net revenues (284) (62) (222) 458 447 11 2018 December 2018). 2018 Destiny franchise. 2018 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 deferral of revenues from the Destiny franchise (reflecting our sale of the publishing rights for Destiny to Bungie in December 2018). 2018 Destiny franchise. For the Three Months Ended For the Nine Months Ended 2017 2016 Increase 2017 2016 Increase Segment net revenues: Activision $ 759 $ 377 $ 382 $ 1,291 $ 1,069 $ 222 Blizzard 531 729 (198) 1,539 1,767 (228) King 528 459 69 1,482 1,149 333 Reportable segments net revenues total 1,818 1,565 253 4,312 3,985 327 Reconciliation to consolidated net revenues: Other segments (1) 84 65 204 162 Net effect from recognition (deferral) of deferred net revenues (284) (62) 458 447 Consolidated net revenues $ 1,618 $ 1,568 $ 4,974 $ 4,594 Segment income (loss) from operations: Activision $ 261 $ 123 $ 138 $ 371 $ 309 $ 62 Blizzard 168 316 (148) 552 730 (178) King 208 138 70 538 381 157 Reportable segment income from operations total 637 577 60 1,461 1,420 41 Reconciliation to consolidated operating income and consolidated income before income tax expense: Other segments (1) (12) (2) (15) (5) Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (132) (33) 370 228 Share-based compensation expense (47) (33) (120) (118) Amortization of intangible assets (187) (211) (571) (495) Fees and other expenses related to the King Acquisition (2) (3) (4) (12) (43) Restructuring costs (3) — — (11) — Other non-cash charges (4) 1 — (14) — Consolidated operating income 257 294 1,088 987 Interest and other expense (income), net 37 63 121 181 Consolidated income before income tax expense $ 220 $ 231 $ 967 $ 806 2018 by: 2018 Crash Team Racing Nitro-Fueled. 2018 Overwatch League. 2018 to: an increase in advertising revenues. offsetting factor discussed above. 2018 December 2018). 2018 current year releases of 2018 game development cycles. 2018 server bandwidth fees. 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, 2017 2016 Increase 2017 2016 Increase Net revenues by distribution channel Digital online channels (1) $ 1,354 $ 1,344 $ 10 $ 4,048 $ 3,412 $ 636 Retail channels 168 157 11 698 1,013 (315) Other (2) 96 67 29 228 169 59 Total consolidated net revenues $ 1,618 $ 1,568 $ 50 $ 4,974 $ 4,594 $ 380 For the Three Months Ended September 30, For the Nine Months Ended September 30, 2017 2016 Increase 2017 2016 Increase Increase/(decrease) in deferred revenues recognized by distribution channel: Digital online channels (1) $ (114) $ (158) $ 44 $ 236 $ (288) $ 524 Retail channels (177) 96 (273) 208 735 (527) Other (2) 7 — 7 14 — 14 Net effect from recognition (deferral) of deferred net revenues $ (284) $ (62) $ (222) $ 458 $ 447 $ 11 2018 2018 to: 2018 For the Three Months Ended September 30, For the Nine Months Ended September 30, 2017 2016 Increase 2017 2016 Increase Geographic region net revenues: Americas $ 798 $ 796 $ 2 $ 2,586 $ 2,411 $ 175 EMEA (1) 593 499 94 1,684 1,528 156 Asia Pacific 227 273 (46) 704 655 49 Consolidated net revenues $ 1,618 $ 1,568 $ 50 $ 4,974 $ 4,594 $ 380 December 2018). 2018 Destiny franchise. 2018 2018 2018 2018 Destiny franchise. For the Three Months Ended September 30, For the Nine Months Ended September 30, 2017 2016 Increase 2017 2016 Increase Platform net revenues: Console $ 527 $ 452 $ 75 $ 1,710 $ 1,867 $ (157) PC 461 609 (148) 1,534 1,421 113 Mobile and ancillary (1) 534 440 94 1,502 1,137 365 Other (2) 96 67 29 228 169 59 Total consolidated net revenues $ 1,618 $ 1,568 $ 50 $ 4,974 $ 4,594 $ 380 2018 partially offset by: 2018 March 2019. 2018 Destiny franchise. 2018 Destiny franchise; 2018. 2018. Three Months % of associated Three Months % of associated Increase Cost of revenues—product sales: Product costs $ 149 39% $ 111 31% $ 38 Software royalties, amortization, and intellectual property licenses 37 10 42 12 (5) Cost of revenues—subscription, licensing, and other revenues: Game operations and distribution costs 249 20 237 20 12 Software royalties, amortization, and intellectual property licenses 117 9 139 11 (22) Total cost of revenues $ 552 34% $ 529 34% $ 23 Nine Months % of associated net revenues Nine Months % of associated Increase Cost of revenues—product sales: Product costs $ 422 31% $ 429 29% $ (7) Software royalties, amortization, and intellectual property licenses 200 15 250 17 (50) Cost of revenues—subscription, licensing, and other revenues: Game operations and distribution costs 717 20 620 20 97 Software royalties, amortization, and intellectual property licenses 359 10 319 10 40 Total cost of revenues $ 1,698 34% $ 1,618 35% $ 80 revenues: 2018 retail revenues. 2018, was primarily due to a decrease of $8 million in software amortization and royalties from Activision, driven by the Destiny franchise (reflecting our sale of the publishing rights for Destiny to Bungie in December 2018). 2018 sales. 2018, with no comparable release in 2017. Revenues 2018 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. Destiny franchise; and 2018 server bandwidth fees. Destiny franchise; and September 30, % of September 30, % of Increase Three Months Ended $ 273 17% $ 249 16% $ 24 Nine Months Ended $ 750 15% $ 673 15% $ 77 2018 December 2018). 2018 Destiny franchise. September 30, % of September 30, % of Increase Three Months Ended $ 345 21% $ 340 22% $ 5 Nine Months Ended $ 899 18% $ 830 18% $ 69 franchises, and esports initiatives. 2018 2018. September 30, % of September 30, % of Increase Three Months Ended $ 191 12% $ 156 10% $ 35 Nine Months Ended $ 539 11% $ 486 11% $ 53 2018 costs. 2018 in Item 1 of this Quarterly Report on Form 10-Q for further discussion. September 30, % of September 30, % of Increase Three Months Ended $ 37 2% $ 63 4% $ (26 ) Nine Months Ended $ 121 3% $ 181 3% $ (60 ) cash equivalent balances earning interest at higher rates, along with an overall higher cash balance, in 2019 as compared to 2018. September 30, % of pretax September 30, % of pretax Increase Three Months Ended $ 32 15% $ 32 14% $ — Nine Months Ended $ 109 11% $ 93 12% $ 16 year in connection with an audit settlement with the Internal Revenue Service (“IRS”), a discrete tax benefit recognized in the prior year in connection with adjustments made to the provisional amounts initially recorded in connection with the U.S. Tax Reform Act, and lower excess tax benefits from share-based payments in the current year. This increase was partially offset by a valuation allowance recorded in the prior year with regard to California research and development credit carryforwards (“CA R&D Credits”). credit. September 30, 2017 December 31, 2016 Increase Cash and cash equivalents $ 3,576 $ 3,245 $ 331 Short-term investments 89 13 76 $ 3,665 $ 3,258 $ 407 Percentage of total assets 21% 19% For the Nine Months Ended September 30, 2017 2016 Increase Net cash provided by operating activities $ 1,055 $ 1,296 $ (241 ) Net cash used in investing activities (156) (1,150) 994 Net cash (used in) provided by financing activities (640) 2,083 (2,723 ) Effect of foreign exchange rate changes 72 (23) 95 Net increase in cash and cash equivalents $ 331 $ 2,206 $ (1,875 ) 2018. Additionally, capital expenditures of $79 million for the nine months ended September 30, 2019, were lower than the capital expenditures of $97 million for the prior-year period. At September 30, 2017 Gross Carrying Unamortized Net Carrying 2017 TLA $ 990 $ (8) $ 982 2021 Notes 650 (5) 645 2022 Notes 400 (4) 396 2023 Notes 750 (10) 740 2026 Notes 850 (9) 841 2027 Notes 400 (6) 394 2047 Notes 400 (10) 390 Total long-term debt $ 4,440 $ (52) $ 4,388 At December 31, 2016 Gross Carrying Unamortized Net Carrying 2016 TLA $ 2,690 $ (27) $ 2,663 2021 Notes 650 (5) 645 2023 Notes 750 (11) 739 2026 Notes 850 (10) 840 Total long-term debt $ 4,940 $ (53) $ 4,887 28, 2019. 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, 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, Principal Accounting Officer of 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 October 26, 201731, 2019 was 756,099,455.768,260,070.This Quarterly Report on Form 10-Q contains, or incorporates by reference, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements consist of any statement other than a recitation of historical facts and include, but are not limited to: (1) projections of revenues, expenses, income or loss, earnings or loss per share, cash flow, or other financial items; (2) statements of our plans and objectives, including those related to releases of products or services;services and restructuring activities; (3) statements of future financial or operating performance;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,the continued growth in the scope and complexity of our business, including interest in specific genres and preferences among platforms; the diversion of management time and attention to issues relating to the operations of our newly acquired or newly 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; the adoption rate and availability of new hardware (including peripherals) and related software; 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 develop 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; risks relating to the expansion into new businesses, including thedistribution in key territories; compliance with continually evolving laws and regulations concerning data privacy; potential impact on our existing businesses; changing business models within the video game industry, including digital delivery of contentdata breaches 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; shifts in consumer spending trends; capital marketcybersecurity risks; the impact of applicable 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, 2016.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 StatesU.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)
2017
2016 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, 2017(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 across all of the major gaming platforms, includingon video game consoles, personal computers (“PC”)s), and mobile devices. We also operate esports leagues and events and create film and television content based on our intellectual property. The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries.The Company was originally incorporated in California in 1979 and was reincorporated in Delaware in December 1992. We are the result ofIn connection with the 2008 business combination (the “Business Combination”) by and among the Company (then known as Activision, Inc.), Vivendi S.A. (“Vivendi”), and Vivendi Games, Inc. (“Vivendi Games”), then an indirect wholly-owned subsidiary of Vivendi. In connection with the consummation of the Business Combination, Activision, Inc. wasVivendi 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.”The King AcquisitionOn February 23, 2016 (the “King Closing Date”), we acquired King Digital Entertainment, a leading interactive mobile entertainment company (“King”), by purchasing all of its outstanding shares (the “King Acquisition”), as further described in Note 14. Our condensed consolidated financial statements include the operations of King commencing on the King Closing Date.Our SegmentsAs part of the continued implementation of our esports strategy, we instituted changes to our internal organization and reporting structure such that the Major League Gaming (“MLG”) business now operates as a division of Blizzard Entertainment, Inc. (“Blizzard”). As such, commencing with the second quarter of 2017, MLG, which was previously a separate operating segment, is now a component of the Blizzard operating segment. MLG is responsible for the operations of the Overwatch LeagueTM, along with other esports events, and will also continue to serve as a multi-platform network for Activision Blizzard esports content.Based 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 infor the console gaming.platform. Activision primarily delivers content through retail and digital channels, including full-game and in-game sales, as well as licenses ofby licensing software to third-party or related-party companies that distribute Activision products. Activision develops, markets, and sells products which are principallyprimarily based on our internally-developedinternally 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; Destiny,platforms. Also, on October 1, 2019, in collaboration with Tencent, Activision released Call of Duty: Mobile for the mobile platform, including for Google Inc.’s (“Google”) Android and Apple Inc.’s (“Apple”) iOS.In 2010, Activision entered into an online universe of first-person action gameplay (which we call a “shared-world shooter”exclusive relationship with Bungie, Inc. (“Bungie”) for console and PC platforms; and Skylanders®, a franchise geared towards children that brings physical toys to life digitallypublish games in the game, primarilyDestiny 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 console platforms.(ii) Blizzard Entertainment, Inc.Blizzard Entertainment, Inc. (“Blizzard”) is a leading global developer and publisher of interactive software products and entertainment content, particularly infor the PC gaming.platform. Blizzard primarily delivers content through retail and digital channels, including subscriptions, full-game, and in-game sales, as well as licenses ofby licensing software to third-party or related partyrelated-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, across all Blizzard games, and the creation of user-generated content for Blizzard’s games. As noted above,content. Blizzard also includes the activities of the Overwatch LeagueTM, the first major global professional esports league with city-based teams, and our MLGMajor League Gaming (“MLG”) business, which is devoted to esports.Blizzard’s key product franchises include: World of Warcraft®, a subscription-based massive multi-player online role-playing game for the PC;PC platform; StarCraft®, a real-time strategy franchise for the PC franchise;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; 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 asplatform, including for Google’s Android and Apple’s iOS. King also distributes its content and services on online social platforms, such as Facebook and the king.com websites.PC platform, primarily via Facebook. King’s games are free-to-play,free to play; however, players can acquire in-game items, either with virtual currency the players purchase or directly using real currency.King’s key product franchises, all of which are for the PCmobile and mobilePC platforms, include: Candy Crush™, which features “match three” games; Farm Heroes™, which also features “match three” games; Pet Rescue™, which is a “clicker” game; 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 October 2017, released the second 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, 2016.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.Supplemental Cash Flow Information: Non-cash Investing and Financing activitiesForDuring the ninethree months ended September 30, 2016,March 31, 2019, we had non-cash purchase price consideration of $89 millionidentified an error principally related to vested and unvested stock options and awards that were assumed and replaced with Activision Blizzard equity or deferred cash awardsthe initial recognition of global intangible low-taxed income of foreign subsidiaries income taxes which should have been recorded in the King Acquisition. Refer to Note 14 for further discussion.2.Inventories, NetInventories, net, consist of the following (amounts in millions):At September 30, 2017three months and year ended December 31, 2016, inventory reserves were $21 million2018. Income tax expense for the three months and $45 million, respectively.3.Software Development and Intellectual Property LicensesThe following table summarizes the components of our capitalized software development costs (amounts in millions):As of September 30, 2017 andyear ended December 31, 2016, intellectual property licenses were2018 should have been reduced by $35 million. This amount is not material to our condensedthe consolidated balance sheets.Amortization of capitalized software development costs and intellectual property licenses was as follows (amounts in millions):
September 30,
September 30,4.Intangible Assets, NetIntangible assets, net, consist of the following (amounts in millions):
lives
amount
amortization
amount
lives
amount
amortization
amountAmortization expense of intangible assets was $188 million and $573 millionfinancial statements for the three and nine monthsyear ended September 30, 2017, respectively. Amortization expense of intangible assets was $211 million and $496 million for the three and nine months ended September 30, 2016, respectively.At September 30, 2017, future amortization of definite-lived intangible assets is estimated as follows (amounts in millions):5.GoodwillThe changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2017, are as follows (amounts in millions):(1) As a result of the change in our operating segments discussed in Note 1, goodwill of $12 million previously reported within the “Other segments” is now included in the “Blizzard” reportable segment. The prior period balance has been revised to reflect this change.6.Fair Value MeasurementsFinancial Accounting Standards Board (“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):
Using
September 30,
2017
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
Using
December 31,
2016
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)ARS represented the only Level 3 investment held by the Company as of December 31, 2016. During the nine months ended September 30, 2017,2018, and we soldwill revise our ARS investment. The realized gain on the sale of2018 consolidated financial statements to correct this investment was not material.Foreign Currency Forward ContractsForeign Currency Forward Contracts Not Designated as HedgesAt September 30, 2017 and December 31, 2016, we did not have any outstanding foreign currency forward contracts not designated as hedges.Foreign Currency Forward Contracts Designated as Hedges (“Cash Flow Hedges”)At September 30, 2017, the gross notional amount of outstanding Cash Flow Hedges was approximately $328 million. The fair value of these contracts, all of which have remaining maturities of 15 months or less, was $10 million of net unrealized losses. At September 30, 2017, we had approximately $6 million of net realized but unrecognized losses recorded within “Accumulated other comprehensive income (loss)” associated with contracts that had settled but were deferred and will be amortized into earnings, along with the associated hedged revenues. Such amounts will be reclassified into earnings within the next 12 months.At December 31, 2016, the gross notional amount of outstanding Cash Flow Hedges was approximately $346 million. The fair value of these contracts was $22 million of net unrealized gains as of December 31, 2016.During the three and nine months ended September 30, 2017 and 2016, there was no ineffectiveness relating to our Cash Flow Hedges. The amount of pre-tax net realized gains (losses) associated with these contracts that were reclassified out of “Accumulated other comprehensive income (loss)” and into earnings was 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.For the three and nine months ended September 30, 2017 and 2016, there were no impairment charges related to assets that are measured on a non-recurring basis.7.DebtCredit FacilitiesAt December 31, 2016, we had outstanding term loans “A” of approximately $2.7 billion (the “2016 TLA”) and $250 million available under a revolving credit facility (the “Revolver”) pursuant to a credit agreement executed on October 11, 2013 (as amended thereafter and from time to time, the “Credit Agreement”).On February 3, 2017, we entered into a sixth amendment (the “Sixth Amendment”) to the Credit Agreement. The Sixth Amendment: (i) provided for a new tranche of term loans “A” in an aggregate principal amount of $2.55 billion (the “2017 TLA” and, together with the Revolver, the “Credit Facilities”) and (ii) released each of our subsidiary guarantors from their respective guarantees provided under the Credit Agreement. All proceeds of the 2017 TLA, together with additional cash on hand of $139 million, were used to fully retire the 2016 TLA, including all accrued and unpaid interest thereon. The terms of the 2017 TLA, other than the absence of the subsidiary guarantees, are generally the same as the terms of the 2016 TLA. The fees incurred as a result of the Sixth Amendment were not material. The 2017 TLA will mature on August 23, 2021.At September 30, 2017, the 2017 TLA bore interest at 2.49%. We were in compliance with the terms of the Credit Facilities as of September 30, 2017. To date, we have not drawn on the Revolver.During the nine months ended September 30, 2017, we reduced our total outstanding term loan balances by $1.7 billion. This included $139 million of cash used to retire the 2016 TLA, as discussed above, along with prepayments on the 2017 TLA of $361 million made on February 15, 2017, and $1.2 billion made on May 26, 2017. The May prepayment was made using proceeds from a concurrent issuance of $1.2 billion in notes, as discussed further below. As part of that refinancing, we wrote-off unamortized discount and deferred financing costs of $12 million, which is included in “Interest and other expense (income), net” in the condensed consolidated statement of operations.The prepayments made on our 2017 TLA have satisfied the remaining required quarterly principal repayments for the entire term of the Credit Agreement.Refer to Note 11 containedmatter in our Annual Report on Form 10-K for the year endedending December 31, 2016 for further details regarding the Credit Agreement, key terms, and amendments made to the Credit Agreement.Unsecured Senior NotesAt December 31, 2016, 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”); and· $650 million of 2.3% unsecured senior notes due September 2021 (the “Unregistered 2021 Notes”) and $850 million of 3.4% unsecured senior notes due September 2026 (the “Unregistered 2026 Notes”) that we issued on September 19, 2016, in a private offering made in accordance with Rule 144A and Regulation S under the Securities Act.In connection with the issuance of the Unregistered 2021 Notes and the Unregistered 2026 Notes, we entered into a registration rights agreement (the “Registration Rights Agreement”), among the Company, and the representatives of the initial purchasers of the Unregistered 2021 Notes and the Unregistered 2026 Notes. Under the Registration Rights Agreement, we were required to use commercially reasonable efforts to, within one year of the issue date of the Unregistered 2021 Notes and the Unregistered 2026 Notes, among other things, (1) file a registration statement with respect to an offer to exchange each series of the Unregistered 2021 Notes and the Unregistered 2026 Notes for new notes that were substantially identical in all material respects (except for the provisions relating to the transfer restrictions and payment of additional interest) (the “Exchange Offer”), and (2) cause that registration statement (the “Exchange Offer Registration Statement”) to be declared effective by the SEC under the Securities Act. The Exchange Offer Registration Statement was declared effective by the SEC on April 28, 2017, and we completed the Exchange Offer on June 1, 2017, such that all the Unregistered 2021 Notes and Unregistered 2026 Notes were exchanged for registered 2021 notes (the “2021 Notes”) and registered 2026 notes (the “2026 Notes”).In addition, on May 26, 2017, in a public underwritten offering, we issued $400 million of 2.6% unsecured senior notes due June 2022 (the “2022 Notes”), $400 million of 3.4% unsecured senior notes due June 2027 (the “2027 Notes”), and $400 million of 4.5% unsecured senior notes due June 2047 (the “2047 Notes”, and together with the 2021 Notes, the 2022 Notes, the 2023 Notes, the 2026 Notes, and the 2027 Notes, the “Notes”), which were outstanding at September 30, 2017.We may redeem some or all of the 2022 Notes, the 2027 Notes and the 2047 Notes, in whole or in part, at any time on or after May 15, 2022, March 15, 2027, and December 15, 2046, respectively, and in each case at 100% of the aggregate principal amount thereof plus accrued and unpaid interest. In addition, we may redeem some or all of the 2022 Notes, the 2027 Notes, and the 2047 Notes prior to May 15, 2022, March 15, 2027, and December 15, 2046, respectively, and in each case at a price equal to 100% of the aggregate principal amount thereof plus a “make-whole” premium and accrued and unpaid interest.Upon the occurrence of certain change of control events, we will be required to offer to repurchase the 2022 Notes, the 2027 Notes, and the 2047 Notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest. These repurchase requirements are considered clearly and closely related to the 2022 Notes, the 2027 Notes, and the 2047 Notes and were not accounted for separately upon issuance.The 2022 Notes, the 2027 Notes, and the 2047 Notes contain covenants that place restrictions in certain circumstances on, among other things, the incurrence of secured debt, entry into sale or leaseback transactions, and certain merger or consolidation transactions.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 Credit Facilities described above. The Notes are not secured and are effectively subordinated to any of the Company’s existing and future indebtedness that is secured. The Company was in compliance with the terms of each of the Notes as of September 30, 2017.Interest is payable semi-annually in arrears on March 15 and September 15 of each year for the 2021 Notes, the 2023 Notes, and 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 2047 Notes. Accrued interest payable is recorded within “Accrued expenses and other liabilities” in our2019. Our condensed consolidated balance sheets. Assheet as of September 30, 2017 and December 31, 2016, we had accrued interest payable2018, as presented in this Form 10-Q, has been revised to reflect the correction of $18 millionthis error.Supplemental Cash Flow InformationThe beginning and $25 million, respectively, related to the Notes.Refer to Note 11 contained in our Annual Report on Form 10-K for the year ended December 31, 2016 for further details regarding our key terms under our indentures that govern the 2021 Notes, the 2023 Notes,ending cash and the 2026 Notes.Interest Expensecash equivalents 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 is amortized over their respective terms. Amortization expense is recordedrestricted cash reported within “Interest and other expense (income), net” in our condensed consolidated statement of operations.In connection with the May 2017 note issuances, we incurred approximately $20 million of discounts and financing costs that were capitalized and recorded within “Long-term debt, net” in our condensed consolidated balance sheet.For the three and nine months ended September 30, 2017, interest expense was $39 million and $110 million, respectively; amortization of the debt discount and deferred financing costs was $2 million and $10 million, respectively; and commitment fees for the Revolver were not material. For the three and nine months ended September 30, 2016, interest expense was $50 million and $158 million, respectively; amortization of the debt discount and deferred financing costs was $4 million and $16 million, respectively; and commitment fees for the Revolver were not material.A summary of our debt iscash flows included restricted cash amounts as follows (amounts in millions):
Amount
Discount and
Deferred Financing
Costs
Amount
Amount
Discount and
Deferred Financing
Costs
AmountAs At September 30, 2019 2018 Beginning restricted cash $ 4 $ 7 Ending restricted cash 7 8 2.Summary of September 30, 2017, the scheduled maturities and contractual principal repaymentsSignificant Accounting PoliciesAdoption of our debt for each of the five succeeding years are as follows (amounts in millions):With the exception of the 2023 Notes, using Level 2 inputs (i.e., observable market prices in less-than-active markets), the carrying values of our debt instruments approximated their fair value as of September 30, 2017, as the interest rates are similar to current rates at which we can borrow funds over the selected interest periods. At September 30, 2017, based on Level 2 inputs, the fair value of the 2023 Notes was $804 million.At December 31, 2016, the carrying value of the 2016 TLA approximated its fair value, based on Level 2 inputs. At December 31, 2016, based on Level 2 inputs, the fair values of the 2021 Notes, 2023 Notes, and 2026 Notes were $635 million, $818 million, and $808 million, respectively.8.Accumulated Other Comprehensive Income (Loss)The components of accumulated other comprehensive income (loss) at September 30, 2017 and 2016, 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 provided for foreign currency translation items as these are considered indefinite investments in non-U.S. subsidiaries.9.Operating Segments and Geographic RegionCurrently, we have three reportable segments. 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 makerAccounting Standards Codification (“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 costs; and 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 organization structure, the way we assess operating performance and allocate resources, and the availability of separate financial information. We do not aggregate operating segments. As discussed in Note 1, commencing with the second quarter of 2017, we made changes to our operating segments which reflect the changes in our organization and reporting structure. Our MLG business, which was previously included in the non-reportable “Other segments,” is now presented within the “Blizzard” reportable operating segment. Prior period amounts have been revised to reflect this change. The change had no impact on consolidated net revenues or operating income.Information on the reportable segments and reconciliations of total segment net revenues and total segment operating income to consolidated net revenues from external customers and consolidated income before income tax expense for the three and nine months ended September 30, 2017 and 2016, are presented below (amounts in millions):
before income tax expense
before income tax expense(1) Includes other income and expenses from operating segments managed outside the reportable segments, including our Studios and Distribution businesses. Also includes unallocated corporate income and expenses.(2) Reflects fees and other expenses, such as legal, banking, and professional services fees, related to the King Acquisition and associated integration activities, inclusive of related debt financings.(3) Reflects restructuring charges, primarily severance costs.(4) Reflects a non-cash accounting charge to reclassify certain cumulative translation gains (losses) into earnings due to the substantial liquidation of certain of our foreign entities.Geographic information presented below for the three and nine months ended September 30, 2017 and 2016, is based on the location of the paying customer. Net revenues from external customers by geographic region were as follows (amounts in millions):(1) Consists of the Europe, Middle East, and Africa geographic regions.The Company’s net revenues in the U.S. were 43% of consolidated net revenues for both the three months ended September 30, 2017 and 2016. The Company’s net revenues in the U.K. were 12% and 10% of consolidated net revenues for the three months ended September 30, 2017 and 2016, respectively. No other country’s net revenues exceeded 10% of consolidated net revenues for the three months ended September 30, 2017 or 2016.The Company’s net revenues in the U.S. were 46% of consolidated net revenues for both the nine months ended September 30, 2017 and 2016. The Company’s net revenues in the U.K. were 10% of consolidated net revenues for both the nine months ended September 30, 2017 and 2016. No other country’s net revenues exceeded 10% of consolidated net revenues for the nine months ended September 30, 2017 or 2016.Net revenues by platform were as follows (amounts in millions):(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.Long-lived assets by geographic region at September 30, 2017 and December 31, 2016, were as follows (amounts in millions):(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.10.Income Taxes��The Company accounts for its provision for income taxes in accordance with ASC 740, Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the interim period, taking into account year-to-date amounts and projected results for the full year. The provision for income taxes represents federal, foreign, state, and local income taxes. Our effective tax rate differs from the statutory U.S. income tax rate due to the effect of state and local income taxes, tax rates in foreign jurisdictions, and certain nondeductible expenses. Our effective tax rate could fluctuate significantly from quarter to quarter based on recurring and nonrecurring factors including, but not limited to: variations in the estimated and actual level of pre-tax income or loss by jurisdiction; changes in the mix of income by tax jurisdiction (as taxes are levied at relatively lower statutory rates in foreign regions and relatively higher statutory rates in the U.S.); research and development credits; changes in enacted tax laws and regulations, rulings, and interpretations thereof, including with respect to tax credits and state and local income taxes; developments in tax audits and other matters; recognition of excess tax benefits and tax deficiencies from share-based payments; and certain nondeductible expenses. Changes in judgment from the evaluation of new information resulting in the recognition, derecognition, or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.The income tax expense of $32 million for the three months ended September 30, 2017, reflects an effective tax rate of 15%, which is higher than the effective tax rate of 14% for the three months ended September 30, 2016. The increase is due to lower discrete tax benefits recognized in the current quarter, partially offset by higher excess tax benefits from share-based payments.The income tax expense of $109 million for the nine months ended September 30, 2017, reflects an effective tax rate of 11%, which is lower than the effective tax rate of 12% for the nine months ended September 30, 2016. The decrease is due to higher excess tax benefits from share-based payments in the current period, partially offset by lower discrete tax benefits, primarily related to an audit settlement recognized in the prior period.The effective tax rate of 15% and 11% for the three and nine months ended September 30, 2017, respectively, is lower than the U.S. statutory rate of 35%, primarily due to foreign earnings taxed at lower statutory rates, the recognition of excess tax benefits from share-based payments, and the recognition of federal and California research and development credits, partially offset by an increase of reserves for uncertain tax positions.The Internal Revenue Service (“IRS”ASC”) is currently examining Activision Blizzard’s federal tax returns for the 2009, 2010, and 2011 tax years. During the second quarter of 2015, the Company transitioned the review of its transfer pricing methodology from the advanced pricing agreement review process to the IRS examination team. Their review could result in a different allocation of profits and losses under the Company’s transfer pricing agreements. Such allocation could have a positive or negative impact on our provision for uncertain tax positions for the period in which such a determination is reached and the relevant periods thereafter. The Company also has several state level and non-U.S. audits pending.As part of purchase price accounting for the King Acquisition, the Company assumed $74 million of uncertain tax positions, primarily related to the transfer pricing on King tax years occurring prior to the King Acquisition. The Company is currently in negotiations with the relevant jurisdictions and taxing authorities with respect to King’s transfer pricing, which could result in a different allocation of profits and losses between the relevant jurisdictions.Vivendi Games’ results for the period from January 1, 2008 through July 9, 2008, are included in the consolidated federal and certain foreign state and local income tax returns filed by Vivendi or its affiliates, while Vivendi Games’ results for the period from July 10, 2008 through December 31, 2008, are included in the consolidated federal and certain foreign, state and local income tax returns filed by Activision Blizzard. IRS Appeals proceedings concerning Vivendi Games’ tax return for the 2008 tax year were concluded during July 2016, but that year remains open to examination by other major taxing authorities. The resolution of the 2008 IRS Appeals process did not have a material impact to the Company’s condensed consolidated financial statements.Certain of our subsidiaries are under examination or investigation or may be subject to examination or investigation by tax authorities in various jurisdictions, including France. 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 period or periods in which the matters are resolved or 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.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.11.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):Certain of our unvested restricted stock units meet the definition of participating securities as they participate in earnings based on their rights to dividends or dividend equivalents. Therefore, we are required to use the two-class method in our computation of basic and diluted earnings per common share. For both the three and nine months ended September 30, 2017, on a weighted-average basis, we had outstanding unvested restricted stock units of less than 1 million shares of common stock that are participating in earnings. For the three and nine months ended September 30, 2016, on a weighted-average basis, we had outstanding unvested restricted stock units of 2 million and 3 million shares of common stock, respectively, that participated in earnings.The vesting of certain of our employee-related restricted stock units and options are 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 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 respective performance measures had not yet been met. Approximately 10 million shares are not included in the computation of diluted earnings per share for both the three and nine months ended September 30, 2016, as their respective performance measures had not yet been met.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 options to acquire shares of common stock were not included in the calculation of diluted earnings per common share for both the three and nine months ended September 30, 2017, and 1 million and 4 million options to acquire shares of common stock were not included in the calculation of diluted earnings per common share for the three and nine months ended September 30, 2016, respectively, as the effect of their inclusion would be anti-dilutive.12.Capital TransactionsRepurchase ProgramOn February 2, 2017, our Board of Directors authorized a stock repurchase program under which we are authorized to repurchase up to $1 billion of our common stock during the two-year period from February 13, 2017 through February 12, 2019. As of September 30, 2017, we have not repurchased any shares under this program.DividendsOn 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. On May 26, 2017, we made related dividend equivalent payments of less than $1 million to certain holders of restricted stock units.On February 2, 2016, our Board of Directors declared a cash dividend of $0.26 per common share. On May 11, 2016, we made an aggregate cash dividend payment of $192 million to shareholders of record at the close of business on March 30, 2016. On May 27, 2016, we made related dividend equivalent payments of $3 million to certain holders of restricted stock units.13.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.14.AcquisitionsKing Digital EntertainmentOn February 23, 2016, we completed the King Acquisition, purchasing all of King’s outstanding shares. As a result, King became a wholly-owned subsidiary of Activision Blizzard. King is a leading global developer and publisher of interactive entertainment content and services, particularly on mobile platforms, such as Android and iOS, and on online and social platforms, such as Facebook and the king.com websites. King’s results of operations since the King Closing Date are included in our condensed consolidated financial statements.We made this acquisition because we believe that the addition of King’s highly-complementary mobile business positions us as a global leader in interactive entertainment across console, PC, and mobile platforms, as well as positioning us for future growth.The aggregate purchase price of the King Acquisition was approximately $5.8 billion, which was paid on the King Closing Date and funded primarily with $3.6 billion of existing cash and $2.2 billion of cash from new debt issued by the Company. We identified and recorded assets acquired and liabilities assumed at their estimated fair values at the King Closing Date and allocated the remaining value of approximately $2.7 billion to goodwill.The final purchase price allocation was as follows (amounts in millions):February 23, 2016Estimated useful livesTangible assets and liabilities assumed:Cash and cash equivalents $1,151Accounts receivable162Other current assets72Property and equipment572 - 7 yearsDeferred income tax assets, net27Other assets47Accounts payable(9)Accrued expenses and other liabilities(272)Other liabilities(110)Deferred income tax liabilities, net(52)Intangible assetsInternally-developed franchises8453 - 5 yearsCustomer base6092 yearsDeveloped software5803 - 4 yearsTrade name467 yearsGoodwill2,675Total purchase price $5,828During the nine months ended September 30, 2016, the Company incurred $38 million of expenses related to the King Acquisition, which are included within “General and administrative” in the condensed consolidated statements of operations. In connection with the debt financing that occurred on the King Closing Date, we incurred $38 million of discounts and financing costs that were capitalized and recorded within “Long-term debt, net” on our condensed consolidated balance sheet.Share-Based CompensationIn connection with the King Acquisition, a majority of the outstanding King options and awards that were unvested as of the King Closing Date were converted into equivalent options and awards with respect to shares of the Company’s common stock, using an equity award exchange ratio calculated in accordance with the transaction agreement. As a result, replacement stock options and equity awards of 10 million and 3 million, respectively, were issued. The portion of the fair value related to pre-combination services of $76 million was included in the purchase price, while the remaining fair value will be recognized over the remaining service periods. As of December 31, 2016, the future expense for the converted King unvested stock options and equity awards was approximately $40 million, which will be recognized over a weighted average service period of approximately 1.6 years.The remaining portion of outstanding unvested awards that were assumed were replaced with deferred cash awards. The cash proceeds were placed in an escrow-like account, with the cash releases occurring as future services are rendered in accordance with the awards’ original vesting schedules. The cash associated with these awards is recorded in “Other current assets” and “Other assets” in our condensed consolidated balance sheet. The portion of the fair value related to pre-combination services of $22 million was included in the purchase price while the remaining fair value of approximately $9 million will be recognized over the remaining service periods.Identifiable Intangible Assets Acquired and GoodwillThe internally-developed franchises, customer base, developed software, and trade name intangible assets will be amortized to “Cost of revenues—subscription, licensing, and other revenues: Software royalties, amortization, and intellectual property licenses,” “Sales and marketing,” “Cost of revenues—subscription, licensing, and other revenues: Software royalties, amortization, and intellectual property licenses,” and “General and administrative,” respectively. The intangible assets will be amortized over their estimated useful lives in proportion to the economic benefits received.The $2.7 billion of goodwill recognized is primarily attributable to the benefits the Company expects to derive from accelerated expansion as an interactive entertainment provider in the mobile sector, future franchises, and technology, as well as the management team’s proven ability to create future games and franchises. Approximately $620 million of the goodwill is expected to be deductible for tax purposes in the U.S.King Net Revenue and EarningsThe amount of net revenue and earnings attributable to King in the Company’s condensed consolidated statement of operations during the three and nine months ended September 30, 2016, the period of the King Acquisition, are included in the table below. The amounts presented represent the net revenues and earnings after adjustments for purchase price accounting, inclusive of amortization of intangible assets, share-based payments, and deferral of revenues and related cost of revenues.
September 30, 2016
September 30, 2016Pro Forma Financial InformationThe unaudited financial information in the table below summarizes the combined results of operations of the Company and King for the nine months ended September 30, 2016, on a pro forma basis, as though the acquisition had occurred on January 1, 2015. The 2016 pro forma financial information presented includes the effects of adjustments related to amortization charges from acquired intangible assets, employee compensation from replacement equity awards issued in the King Acquisition and the profit-sharing bonus plan established as part of the King Acquisition, and interest expense from the new debt, among other adjustments. We also adjusted for Activision Blizzard and King non-recurring acquisition related costs of approximately $69 million for the nine months ended September 30, 2016.The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the King Acquisition, and any borrowings undertaken to finance the King Acquisition, had taken place at the beginning of the earliest period presented, nor does it intend to be a projection of future results.
September 30, 2016
September 30, 201615.Recently Issued Accounting PronouncementsRecently Adopted Accounting PronouncementsInventoryIn July 2015, the FASB issued new guidance related to the measurement of inventory which requires inventory within the scope of the guidance to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We adopted this new standard as of January 1, 2017, and applied it prospectively. The adoption of this guidance did not have a material impact on our financial statements.Recent Accounting Pronouncements Not Yet AdoptedRevenue RecognitionIn May 2014, the FASB issued new accounting guidance related to revenue recognition. The new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance, 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 to in exchange for those goods or services. This guidance will be effective for fiscal years and interim periods within those years beginning after December 15, 2017. We anticipate adopting the accounting standard on January 1, 2018, using the modified retrospective method, which recognizes the cumulative effect upon adoption as an adjustment to retained earnings at the adoption date.We believe the adoption of the new revenue recognition standard may have a significant impact in the following areas:· 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 current accounting standards, VSOE for undelivered elements is required. This requirement will be eliminated under the new standard. Accordingly, we will be required to recognize as revenue a portion of the sales price upon delivery of the software, as compared to the current requirement of recognizing the entire sales price ratably over an estimated service period. We expect this difference to primarily impact revenues from our Call of Duty franchise. Many of our other franchises, such as Destiny, Overwatch, World of Warcraft, and Candy Crush, are hosted service arrangements, and we do not expect any significant impact on the accounting for our sales of these games.· The accounting for certain of our software licensing arrangements. While the impacts of the new standard may differ on a contract-by-contract basis (the actual revenue recognition treatment required under the standard will depend on contract-specific terms), we expect that the new standard will generally result in earlier revenue recognition for these arrangements.We are continuing to evaluate the additional impacts this new accounting guidance may have on our financial statements and related disclosures, including the impacts of these changes to our processes and internal controls. We expect that the new disclosure requirements will require us to design and implement additional internal controls over financial reporting.In February 2016, the FASBFinancial Accounting Standards Board (“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 lessees will need to recognize a lease liability and a right-of-use (“ROU”) asset for theirits leases. The liability will be equalOn 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 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 liability, subjectlevel of services provided by the landlords of our leases. The operating lease ROU 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. Classification will be basedportfolio approach to effectively account for the operating lease ROU assets and liabilities.Operating lease ROU assets are presented in “Other assets” and operating lease liabilities are presented in “Accrued expenses and other current liabilities” and “Other liabilities” on criteria thatour condensed consolidated balance sheet.Finance lease ROU assets are largely similarpresented 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 effective January 1, 2019. We elected to those applied in currentapply an optional adoption method, which uses the effective date as the initial date of application on transition with no retrospective adjustments to prior periods. Additionally, we elected to apply the package of transition practical expedients which permitted us to, among other things, (1) not reassess if existing contracts contained leases under the new lease accounting. accounting standard and (2) carry forward our historical lease classifications.The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Earlyimpact from the adoption is permitted. The new standard must be adopted using a modified retrospective transition and will require application of the new guidancelease accounting standard to our condensed consolidated balance sheet at the beginning of the earliest comparative period presented. We are evaluating the impactJanuary 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 guidancestandard did not have an impact on our financial statements. Currently, we do not plan to early adopt this new standard.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 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 amendments related to equity investments without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. We are evaluating the impact of this new accounting guidance on our financial statements.Statement of Cash Flows-Restricted CashIn November 2016, the FASB issued new guidance related to the classification of restricted cash in thecondensed consolidated 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, 2018, and should be applied retrospectively. Early adoption is permitted.We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements. We expect there would be a significant impact to theoperations or condensed 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 King Acquisition and the subsequent release of that cash in 2016 in connection with the King Acquisition. Under this new standard, the restricted cash balance would be included in the beginning and ending total cash, cash equivalents, and restricted cash balances and, hence, would not be included as an investing activity in the statement of cash flows.Recent Accounting Pronouncements Not Yet AdoptedGoodwillIn January 2017, the FASB issued new guidance whichthat eliminates Step 2 from the goodwill impairment test. Instead, if anyan 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 do not currently expect this new accounting guidance to have an impact on our financial statements upon adoption.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 are utilized for existing internal-use software guidance. The capitalized costs are required to be amortized over the associated term of the arrangement, generally on a straight-line basis, with amortization of these costs presented in the same financial statement line item as other costs associated with the arrangement. The new standard is effective for fiscal years beginning after December 15, 2019, and can be applied retrospectively or prospectively. Early adoption is permitted. We are evaluating the impact, if any, of adopting this new accounting guidance on our consolidated financial statements.Derivatives and HedgingFinancial Instruments - Credit LossesIn August 2017,June 2016, the FASB issued new guidance related to the accounting for derivativescredit 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 hedging. The new guidance expandsforward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and refines hedge accountingrequires credit losses related to available-for-sale debt securities to be recorded through an allowance for both financial and non-financial risk components, alignscredit losses rather than as a reduction in the recognition and presentationamortized cost basis of the effectssecurities. These changes will generally result in earlier recognition 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.credit losses. The new standard is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. If early adopted, the new standard must generally2019, and will be applied on a modified retrospective basis, with the cumulative effect of adoption recorded as of the beginning of the fiscal year of adoption.an adjustment to retained earnings. We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements, and related disclosures. We expect, based onhowever, our current outstanding derivative instruments,preliminary conclusion is that the new guidance will not have a material impact on our financial statements.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, 2019 and December 31, 2018, inventory reserves were $13 million and $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, 2019 and December 31, 2018, capitalized intellectual property licenses were not material.Amortization of capitalized software development costs and intellectual property licenses was as follows (amounts in millions): For the Three Months Ended 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): 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.At September 30, 2019, future amortization of definite-lived intangible assets is estimated as follows (amounts in millions):For the years ending December 31, 2019 (remaining 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 are 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; andLevel 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): 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, 2019, our Cash Flow Hedges have remaining maturities of three months or less. Additionally, $2 million of net realized but unrecognized gains are recorded within “Accumulated other comprehensive income (loss)” at September 30, 2019 for Cash Flow Hedges that had settled but were deferred and will be amortized into earnings, along with the associated hedged revenues. Such amounts will be reclassified into earnings within the next 12 months.The amount of pre-tax net realized gains (losses) associated with our Cash Flow Hedges that were reclassified out of “Accumulated other comprehensive income (loss)” and into earnings was as follows (amounts in millions): For the Three Months Ended September 30, For the Nine Months Ended September 30, Statement of Operations Classification 2019 2018 2019 2018 Cash Flow Hedges $ 7 $ 3 $ 24 $ (11 ) Net revenues Foreign Currency Forward Contracts Not Designated as HedgesThe 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, 2019 and 2018, pre-tax net gains (losses) associated with these forward contracts were recorded in “General and administrative expenses” and were not material.Fair Value Measurements on a Non-Recurring 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, 2019 and 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, 2019 and the ending balance as of September 30, 2019, were $1.6 billion and $0.8 billion, respectively, including our current and non-current balances. For the nine months ended September 30, 2019, the additions to our deferred revenues balance were primarily due to cash payments received or due in advance of satisfying our performance obligations, while the reductions to our deferred revenues balance were primarily due to the recognition of revenues upon fulfillment of our performance obligations, both of which were in the ordinary course of business. During the three and nine months ended September 30, 2019, $0.1 billion and $1.4 billion of revenues, respectively, were recognized that were included in the deferred revenues balance at December 31, 2018. During the three and nine months ended September 30, 2018, $0.1 billion and $1.6 billion of revenues, respectively, were recognized that were included in the deferred revenues balance at January 1, 2018, as adjusted for the adoption of the new revenue standard in the prior year.As of September 30, 2019, the aggregate amount of contracted revenues allocated to our unsatisfied performance obligations is $2.5 billion, which includes our deferred revenues balances and amounts to be invoiced and recognized as revenue in future periods. We expect to recognize approximately $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.LeasesOur lease arrangements are primarily for: (1) corporate, administrative, and development studio offices; (2) data centers and server equipment; and (3) live event production equipment. Our existing leases have remaining lease terms ranging from one year to 10 years. In certain instances, such leases include one or more options to renew, with renewal terms that generally extend the lease term by one year to five years for each option. The exercise of lease renewal options is generally at our sole discretion. Additionally, the majority of our leases are classified as operating leases; our financing leases are not material.Components of our lease costs are as follows (amounts in millions): Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019 Operating leases Operating lease costs $ 19 $ 58 Variable lease costs 6 16 Supplemental information related to our operating leases is as follows (amounts in millions): Nine Months Ended September 30, 2019 Supplemental Operating Cash Flows Information Cash paid for amounts included in the measurement of lease liabilities $ 61 ROU assets obtained in exchange for new lease obligations 55 At September 30, 2019 Weighted Average Lease terms and discount rates Remaining lease term 5.15 years Discount rate 4.09 % Future undiscounted lease payments for our operating lease liabilities, and a reconciliation of these payments to our operating lease liabilities at September 30, 2019, are as follows (amounts in millions):For the years ending December 31, 2019 (remaining three months) $ 14 2020 74 2021 56 2022 48 2023 42 Thereafter 74 Total future lease payments $ 308 Less imputed interest (32 ) Total lease liabilities $ 276 As of September 30, 2019, we have entered into facility leases that have not yet commenced with future lease payments of approximately $57 million. These leases are expected to commence within the next 12 months and will have lease terms ranging from two years to five years.Operating lease ROU assets and liabilities recorded on our condensed consolidated balance sheet as of September 30, 2019, were as follows (amounts in millions): At September 30, 2019 Balance Sheet Classification ROU assets $ 238 Other assets Current lease liabilities $ 61 Accrued expenses and other current liabilities Non-current lease liabilities 215 Other liabilities $ 276 Total lease liabilities Future minimum lease payments as of December 31, 2018, prior to our adoption of the new lease accounting standard, were as follows:For the years ending December 31, 2019 $ 80 2020 70 2021 53 2022 45 2023 38 Thereafter 60 Total $ 346 11.DebtCredit FacilitiesAs of September 30, 2019 and December 31, 2018, we had $1.5 billion available under a revolving credit facility (the “Revolver”) pursuant to a credit agreement entered into on October 11, 2013 (as amended thereafter and from time to time, the “Credit Agreement”). To date, we have not drawn on the Revolver, and we were in compliance with the terms of the Credit Agreement as of September 30, 2019.Refer to Note 13 contained in our Annual Report on Form 10-K for the year ended December 31, 2018 for further details regarding the Credit Agreement, its key terms, and previous amendments made to it.Unsecured Senior NotesAt September 30, 2019 and December 31, 2018, we had the following unsecured senior notes outstanding:$650 million of 2.3% unsecured senior notes due September 2021 (the “2021 Notes”);$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”);$400 million of 3.4% unsecured senior notes due June 2027 (the “2027 Notes”); and$400 million of 4.5% unsecured senior notes due June 2047 (the “2047 Notes”, and together with the 2021 Notes, the 2022 Notes, the 2026 Notes, and the 2027 Notes, the “Notes”).The Notes are general senior obligations of the Company and rank pari passu in right of payment to all of the Company’s existing and future senior indebtedness, including the Revolver described above. The Notes are not secured and are effectively junior to any of the Company’s existing and future indebtedness that is secured to the extent of the value of the collateral securing such indebtedness. We were in compliance with the terms of the Notes as of September 30, 2019.Interest is payable semi-annually in arrears on March 15 and September 15 of each year for the 2021 Notes and the 2026 Notes, and payable semi-annually in arrears on June 15 and December 15 of each year for the 2022 Notes, the 2027 Notes, and the 2047 Notes. Accrued interest payable is recorded within “Accrued expenses and other liabilities” in our condensed consolidated balance sheets. As of September 30, 2019 and December 31, 2018, we had accrued interest payable of $14 million and $15 million, respectively, related to the Notes.Refer to Note 13 contained in our Annual Report on Form 10-K for the year ended December 31, 2018 for further details regarding key terms under our indentures that govern the Notes.Interest Expense and Financing 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 was $1 million and $5 million, respectively.A summary of our outstanding debt is as follows (amounts in millions): 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, 2019, the scheduled maturities and contractual principal repayments of our debt for each of the five succeeding years and thereafter are as follows (amounts in millions):For the years ending December 31, 2019 (remaining three months) $ — 2020 — 2021 650 2022 400 2023 — Thereafter 1,650 Total $ 2,700 With the exception of the 2047 Notes, using Level 2 inputs (i.e., observable market prices in less-than-active markets) at September 30, 2019, the carrying values of the Notes approximated their fair values, as the interest rates were similar to the current rates at which we could borrow funds over the selected interest periods. At September 30, 2019, based on Level 2 inputs, the fair value of the 2047 Notes was $454 million.Using Level 2 inputs at December 31, 2018, the carrying values of the 2021 Notes and the 2022 Notes approximated their fair values, as the interest rates were similar to the current rates at which we could borrow funds over the selected interest periods. At December 31, 2018, based on Level 2 inputs, the fair values of the 2026 Notes, the 2027 Notes, and the 2047 Notes were $800 million, $376 million, and $360 million, respectively.12.Accumulated Other Comprehensive Income (Loss)The components of accumulated other comprehensive income (loss) were as follows (amounts in millions): For the Nine Months Ended September 30, 2019 Foreign currency translation adjustments Unrealized gain (loss) on forward contracts Unrealized gain (loss) on available-for-sale securities Total Balance at December 31, 2018 $ (629 ) $ 23 $ 5 $ (601 ) Other comprehensive income (loss) before reclassifications (5 ) 28 3 26 Amounts reclassified from accumulated other comprehensive income (loss) into earnings — (24 ) (8 ) (32 ) Balance at September 30, 2019 $ (634 ) $ 27 $ — $ (607 ) For the Nine Months Ended September 30, 2018 Foreign currency translation adjustments Unrealized gain (loss) on forward contracts Unrealized gain (loss) on available-for-sale securities Total Balance at December 31, 2017 $ (623 ) $ (15 ) $ — $ (638 ) Cumulative impact from adoption of new revenue accounting standard 3 — — 3 Other comprehensive income (loss) before reclassifications (7 ) 14 4 11 Amounts reclassified from accumulated other comprehensive income (loss) into earnings — 11 — 11 Balance at September 30, 2018 $ (627 ) $ 10 $ 4 $ (613 ) 13.Operating Segments and Geographic RegionCurrently, we have 3 reportable segments—Activision, Blizzard, and King. Our operating segments are consistent with the manner in which our operations are reviewed and managed by our Chief Executive Officer, who is our chief operating decision maker (“CODM”). The CODM reviews segment performance exclusive of: the impact of the change in deferred revenues and related cost of revenues with respect to certain of our online-enabled games; share-based compensation expense; amortization of intangible assets as a result of purchase price accounting; fees and other expenses (including legal fees, expenses, and accruals) related to acquisitions, associated integration activities, and financings; certain restructuring and related costs; and certain other non-cash charges. The CODM does not review any information regarding total assets on an operating segment basis, and accordingly, no disclosure is made with respect thereto.Our operating segments are also consistent with our internal organizational structure, the way we assess operating performance and allocate resources, and the availability of separate financial information. We do not aggregate operating segments.Information on reportable segment net revenues and operating income for the three months ended September 30, 2019 and 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, 2019 and 2018, are presented below (amounts in millions): 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): Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 Reconciliation to consolidated net revenues: Segment net revenues $ 1,103 $ 1,538 $ 3,443 $ 4,195 Revenues from non-reportable segments (1) 113 128 245 246 Net effect from recognition (deferral) of deferred net revenues (2) 68 (146 ) 824 692 Elimination of intersegment revenues (3) (2 ) (8 ) (9 ) (14 ) Consolidated net revenues $ 1,282 $ 1,512 $ 4,503 $ 5,119 Reconciliation to consolidated income before income tax expense: Segment operating income $ 294 $ 485 $ 900 $ 1,275 Operating income (loss) from non-reportable segments (1) 5 7 10 (4 ) Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (2) 53 (89 ) 629 468 Share-based compensation expense (27 ) (55 ) (127 ) (166 ) Amortization of intangible assets (50 ) (83 ) (151 ) (279 ) Restructuring and related costs (4) (28 ) — (108 ) — Consolidated operating income 247 265 1,153 1,294 Interest and other expense (income), net (2 ) 13 (33 ) 67 Loss on extinguishment of debt — 40 — 40 Consolidated income before income tax expense $ 249 $ 212 $ 1,186 $ 1,187 (1) Includes other income and expenses from operating segments managed outside the reportable segments, including our Studios and Distribution businesses. Also includes unallocated corporate income and expenses. (2) Reflects the net effect from recognition (deferral) of deferred net revenues, along with related cost of revenues, on certain of our online-enabled products. (3) Intersegment revenues reflect licensing and service fees charged between segments. (4) Reflects restructuring initiatives, primarily severance and other restructuring-related costs. Net revenues by distribution channel, including a reconciliation to each of our reportable segment’s revenues, for the three months ended September 30, 2019 and 2018, were as follows (amounts in millions): Three Months Ended September 30, 2019 Activision Blizzard King Non-reportable segments Elimination of intersegment revenues (3) Total Net revenues by 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 nine months ended September 30, 2019 and 2018, were as follows (amounts in millions): 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 months ended September 30, 2019 and 2018, were as follows (amounts in millions): Three Months Ended September 30, 2019 Activision Blizzard King Non-reportable segments Elimination of intersegment revenues (2) Total Net revenues by geographic region: Americas $ 141 $ 204 $ 311 $ — $ (1 ) $ 655 EMEA (1) 79 124 137 113 (1 ) 452 Asia Pacific 32 89 54 — — 175 Total consolidated net revenues $ 252 $ 417 $ 502 $ 113 $ (2 ) $ 1,282 Change in deferred revenues: Americas $ (20 ) $ (11 ) $ (2 ) $ — $ — $ (33 ) EMEA (1) (16 ) (10 ) — — — (26 ) Asia Pacific (7 ) (2 ) — — — (9 ) Total change in deferred revenues $ (43 ) $ (23 ) $ (2 ) $ — $ — $ (68 ) Segment net revenues: Americas $ 121 $ 193 $ 309 $ — $ (1 ) $ 622 EMEA (1) 63 114 137 113 (1 ) 426 Asia Pacific 25 87 54 — — 166 Total segment net revenues $ 209 $ 394 $ 500 $ 113 $ (2 ) $ 1,214 Three Months Ended September 30, 2018 Activision Blizzard King Non-reportable segments Elimination of intersegment revenues (2) Total Net revenues by geographic region: Americas $ 214 $ 242 $ 309 $ 13 $ (4 ) $ 774 EMEA (1) 109 172 143 112 (2 ) 534 Asia Pacific 29 124 53 — (2 ) 204 Total consolidated net revenues $ 352 $ 538 $ 505 $ 125 $ (8 ) $ 1,512 Change in deferred revenues: Americas $ 33 $ 43 $ — $ — $ — $ 76 EMEA (1) 8 48 1 3 — 60 Asia Pacific 4 6 — — — 10 Total change in deferred revenues $ 45 $ 97 $ 1 $ 3 $ — $ 146 Segment net revenues: Americas $ 247 $ 285 $ 309 $ 13 $ (4 ) $ 850 EMEA (1) 117 220 144 115 (2 ) 594 Asia Pacific 33 130 53 — (2 ) 214 Total segment net revenues $ 397 $ 635 $ 506 $ 128 $ (8 ) $ 1,658 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 nine months ended September 30, 2019 and 2018, were as follows (amounts in millions): 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% of consolidated net revenues for both the three months ended September 30, 2019 and 2018. The Company’s net revenues in the U.K. were 13% of consolidated net revenues for both the three months ended September 30, 2019 and 2018. No other country’s net revenues exceeded 10% of consolidated net revenues for either the three months ended September 30, 2019 or 2018.The Company’s net revenues in the U.S. were 48% and 47% of consolidated net revenues for the nine months ended September 30, 2019 and 2018, respectively. The Company’s net revenues in the U.K. were 10% and 11% of consolidated net revenues for the nine months ended September 30, 2019 and 2018, respectively. No other country’s net revenues exceeded 10% of consolidated net revenues for either the nine months ended September 30, 2019 or 2018.Net revenues by platform, including a reconciliation to each of our reportable segment’s net revenues, for the three months ended September 30, 2019 and 2018, were as follows (amounts in millions): Three Months Ended September 30, 2019 Activision Blizzard King Non-reportable segments Elimination of intersegment revenues (3) Total Net revenues by platform: Console $ 214 $ 27 $ — $ — $ — $ 241 PC 29 286 28 — (2 ) 341 Mobile and ancillary (1) 9 42 474 — — 525 Other (2) — 62 — 113 — 175 Total consolidated net revenues $ 252 $ 417 $ 502 $ 113 $ (2 ) $ 1,282 Change in deferred revenues: Console $ (36 ) $ (9 ) $ — $ — $ — $ (45 ) PC (7 ) (14 ) — — — (21 ) Mobile and ancillary (1) — — (2 ) — — (2 ) Other (2) — — — — — — Total change in deferred revenues $ (43 ) $ (23 ) $ (2 ) $ — $ — $ (68 ) Segment net revenues: Console $ 178 $ 18 $ — $ — $ — $ 196 PC 22 272 28 — (2 ) 320 Mobile and ancillary (1) 9 42 472 — — 523 Other (2) — 62 — 113 — 175 Total segment net revenues $ 209 $ 394 $ 500 $ 113 $ (2 ) $ 1,214 Three Months Ended September 30, 2018 Activision Blizzard King Non-reportable segments Elimination of intersegment revenues (3) Total Net revenues by platform: Console $ 307 $ 40 $ — $ — $ — $ 347 PC 40 414 36 — (8 ) 482 Mobile and ancillary (1) 5 49 469 — — 523 Other (2) — 35 — 125 — 160 Total consolidated net revenues $ 352 $ 538 $ 505 $ 125 $ (8 ) $ 1,512 Change in deferred revenues: Console $ 29 $ (9 ) $ — $ — $ — $ 20 PC 16 101 — — — 117 Mobile and ancillary (1) — 7 1 — — 8 Other (2) — (2 ) — 3 — 1 Total change in deferred revenues $ 45 $ 97 $ 1 $ 3 $ — $ 146 Segment net revenues: Console $ 336 $ 31 $ — $ — $ — $ 367 PC 56 515 36 — (8 ) 599 Mobile and ancillary (1) 5 56 470 — — 531 Other (2) — 33 — 128 — 161 Total segment net revenues $ 397 $ 635 $ 506 $ 128 $ (8 ) $ 1,658 Net revenues by platform, including a reconciliation to each of our reportable segment’s net revenues, for the nine months ended September 30, 2019 and 2018, were as follows (amounts in millions): 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): 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 restructuring actions are in process and are largely expected to be completed by the end of 2019, although the timing of cash payments may continue into 2020.The following table summarizes accrued restructuring and related costs included in “Accrued expenses and other liabilities” in our condensed consolidated balance sheet (amounts in millions): Severance and employee related costs Facilities and related costs Other costs Total 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 are legally required, facilities costs (approximately 20% of the aggregate charge), and other asset write-downs and costs (approximately 25% of the aggregate charge). A majority of the total pre-tax charge associated with the restructuring will be paid in cash using amounts on hand and the outlays are expected to be largely incurred throughout 2019, with the remainder continuing into 2020.The total expected pre-tax restructuring charges related to the restructuring plan by segment, inclusive of amounts already incurred, are presented below (amounts in millions): Year Ending December 31, 2019 Activision $ 15 Blizzard 66 King 27 Other segments (1) 42 Total $ 150 (1) Includes charges related to operating segments managed outside the reportable segments, including our Studios and Distribution businesses. Also includes restructuring charges for our corporate and administrative functions. 15. Interest and Other Expense (Income), Net Interest and other expense (income), net is comprised of the following (amounts in millions): For the Three Months Ended September 30, For the Nine Months Ended September 30, 2019 2018 2019 2018 Interest income $ (20 ) $ (17 ) $ (61 ) $ (50 ) Interest expense from debt and amortization of debt discount and deferred financing costs 23 33 68 118 Unrealized gain on equity investment — — (38 ) — Other expense (income), net (5 ) (3 ) (2 ) (1 ) Interest and other expense (income), net $ (2 ) $ 13 $ (33 ) $ 67 16.Income TaxesWe account for our provision for income taxes in accordance with ASC 740, Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the interim period, taking into account year-to-date amounts and projected results for the full year. The provision for income taxes represents federal, foreign, state, and local income taxes. Our effective tax rate could be different from the statutory U.S. income tax rate due to: the effect of state and local income taxes; tax rates that apply to our foreign income (including U.S. tax on foreign income); research and development credits; and certain nondeductible expenses. Our effective tax rate could fluctuate significantly from quarter to quarter based on recurring and nonrecurring factors including, but not limited to: variations in the estimated and actual level of pre-tax income or loss by jurisdiction; changes in enacted tax laws and regulations, and interpretations thereof, including with respect to tax credits and state and local income taxes; developments in tax audits and other matters; recognition of excess tax benefits and tax deficiencies from share-based payments; and certain nondeductible expenses. Changes in judgment from the evaluation of new information resulting in the recognition, derecognition, or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.The income tax expense of $45 million for the three months ended September 30, 2019, reflects an effective tax rate of 18%, which is higher than the effective tax rate of (23)% for the three months ended September 30, 2018. The increase is primarily due to a discrete tax benefit recognized in the prior year in connection with adjustments made to the provisional amounts initially recorded in connection with tax reform legislation known as the Tax Cuts and Jobs Act enacted in December 22, 2017 (the “U.S. Tax Reform Act”), lower excess tax benefits from share-based payments in the current year, and an increase in U.S. tax on foreign earnings.The income tax expense of $208 million for the nine months ended September 30, 2019, reflects an effective tax rate of 18%, which is higher than the effective tax rate of 2% for the nine months ended September 30, 2018. The increase is due to a discrete tax benefit recognized in the prior year in connection with an audit settlement with the Internal Revenue Service (“IRS”), a discrete tax benefit recognized in the prior year in connection with adjustments made to the provisional amounts initially recorded in connection with the U.S. Tax Reform Act, and lower excess tax benefits from share-based payments in the current year. This increase was partially offset by a valuation allowance recorded in the prior year with regard to California research and development credit carryforwards (“CA R&D Credits”).The effective tax rate of 18% for both the three and nine months ended September 30, 2019, is lower than the U.S. statutory rate of 21%, primarily due to foreign earnings taxed at lower statutory rates as compared to domestic earnings, which is partially offset by U.S. tax on foreign earnings, and the recognition of federal research and development credits.Activision Blizzard’s 2009 through 2018 tax years remain open to examination by certain major taxing jurisdictions to which we are subject. The IRS is currently examining our federal tax returns for the 2012 through 2016 tax years. We also have several state and non-U.S. audits pending, including the French audit discussed below. In addition, we are currently seeking a multilateral agreement among the tax authorities in the U.K., Sweden, and other relevant jurisdictions with respect to King’s transfer pricing for tax years dating back to 2013. While the outcome of any discussions aimed at such an agreement remains uncertain, they could result in an agreement that changes the allocation of profits and losses between these and other relevant jurisdictions or a failure to reach an agreement that results in unilateral adjustments to the amount and timing of taxable income in the jurisdictions in which King operates.In December 2018, we received a decision from the Swedish Tax Agency (“STA”) informing us of an audit assessment of a Swedish subsidiary of King for the 2016 tax year (“Initial Decision”). The Initial Decision described the basis for issuing a transfer pricing assessment of approximately 3.5kr billion (approximately $359 million), primarily concerning an alleged intercompany asset transfer. On June 17, 2019, we received a reassessment from the STA (“Reassessment”) which changed the Initial Decision based on a revision of the transfer pricing approach reflected in King’s 2016 Swedish tax return and removal of the alleged intercompany asset transfer that was the basis of the Initial Decision. The STA also, at the same time, reassessed the 2017 tax year on the same transfer pricing basis as 2016. The transfer pricing approach reflected in the Reassessment for both 2016 and 2017 remains subject to further review by taxing authorities in other jurisdictions. In July 2019, the Company made a payment to the STA for the Reassessment for the 2016 and 2017 tax years, which did not result in a significant impact to our condensed consolidated financial statements.In December 2017, we received a Notice of Reassessment from the French Tax Authority (“FTA”) related to transfer pricing for intercompany transactions involving one of our French subsidiaries for the 2011 through 2013 tax years. The total assessment, including penalties and interest, was approximately €571 million (approximately $625 million). We disagree with the proposed assessment and continue to vigorously contest it. We believe our tax provisions at September 30, 2019, were appropriate. Until such time as this matter is ultimately resolved we could be subject to significant additional tax liabilities. In addition to the risk of additional tax for the 2011 through 2013 tax years, if the FTA were to seek adjustments of a similar nature for subsequent years, we could be subject to significant additional tax liabilities.In October 2019, we completed an intra-entity transfer of certain intellectual property rights to one of our subsidiaries in the U.K. The transfer did not result in a taxable gain; however, our U.K. subsidiary received a step-up in tax basis. We are currently assessing the tax impacts associated with this transfer, including its impact to deferred taxes. We expect to record a one-time benefit for the recognition of a deferred tax asset in the U.K. related to the amortizable tax basis in the transferred intellectual property, partially offset by a related deferred tax liability for U.S. taxes on foreign earnings. The net tax impact of this intra-entity asset transfer will be recorded in the quarter ending December 31, 2019. While this one-time impact may be material to our financial statements, we do not expect the transfer to materially affect cash taxes or operating cash flows in 2019.In addition, certain of our subsidiaries are under examination or investigation, or may be subject to examination or investigation, by tax authorities in various jurisdictions. These proceedings may lead to adjustments or proposed adjustments to our taxes or provisions for uncertain tax positions. Such proceedings may have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations in the earlier of the period or periods in which the matters are resolved and in which appropriate tax provisions are taken into account in our financial statements. If we were to receive a materially adverse assessment from a taxing jurisdiction, we would plan to vigorously contest it and consider all of our options, including the pursuit of judicial remedies.We regularly assess the likelihood of adverse outcomes resulting from these examinations and monitor the progress of ongoing discussions with tax authorities in determining the appropriateness of our tax provisions. The final resolution of the Company’s global tax disputes is uncertain. There is significant judgment required in the analysis of disputes, including the probability determination and estimation of the potential exposure. Based on current information, in the opinion of the Company’s management, the ultimate resolution of these matters is not expected to have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations, except as noted above.17.Computation of Basic/Diluted Earnings Per Common ShareThe following table sets forth the computation of basic and diluted earnings per common share (amounts in millions, except per share data): For the Three Months Ended September 30, For the Nine Months Ended September 30, 2019 2018 2019 2018 Numerator: Consolidated net income $ 204 $ 260 $ 978 $ 1,162 Denominator: Denominator for basic earnings per common share—weighted-average common shares outstanding 767 763 766 761 Effect of potential dilutive common shares under the treasury stock method—employee stock options and awards 4 8 4 10 Denominator for basic earnings per common share—weighted-average dilutive common shares outstanding 771 771 770 771 Basic earnings per common share $ 0.27 $ 0.34 $ 1.28 $ 1.53 Diluted earnings per common share $ 0.26 $ 0.34 $ 1.27 $ 1.51 The vesting of certain of our employee-related restricted stock units and options is contingent upon the satisfaction of pre-defined performance measures. The shares underlying these equity awards are included in the weighted-average dilutive common shares only if the performance measures are met as of the end of the reporting period. Additionally, potential common shares are not included in the denominator of the diluted earnings per common share calculation when the inclusion of such shares would be anti-dilutive.Weighted-average shares excluded from the computation of diluted earnings per share were as follows (amounts in millions): For the Three Months Ended September 30, For the Nine Months Ended September 30, 2019 2018 2019 2018 Restricted stock units and options with performance measures not yet met 4 6 3 6 Anti-dilutive employee stock options 6 1 6 2 18.Capital TransactionsRepurchase ProgramOn January 31, 2019, our Board of Directors authorized a stock repurchase program under which we are authorized to repurchase up to $1.5 billion of our common stock from February 14, 2019, until the earlier of February 13, 2021, and a determination by the Board of Directors to discontinue the repurchase program. As of September 30, 2019, we have not repurchased any shares under this program.DividendsOn February 12, 2019, our Board of Directors declared a cash dividend of $0.37 per common share. On May 9, 2019, we made an aggregate cash dividend payment of $283 million to shareholders of record at the close of business on March 28, 2019.On February 8, 2018, our Board of Directors declared a cash dividend of $0.34 per common share. On May 9, 2018, we made an aggregate cash dividend payment of $259 million to shareholders of record at the close of business on March 30, 2018.19.Commitments and 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 across all of the major gaming platforms, includingon video game consoles, personal computers (“PC”)s), and mobile devices. We also operate esports leagues and events and create film and television content based on our intellectual property. The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries.The Company was originally incorporated in California in 1979 and was reincorporated in Delaware in December 1992. We are the result ofIn connection with the 2008 business combination (the “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. In connection with the consummation of the Business Combination, Activision, Inc. wasVivendi 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.”The King AcquisitionOn February 23, 2016 (the “King Closing Date”), we acquired King Digital Entertainment, a leading interactive mobile entertainment company (“King”), by purchasing all of its outstanding shares (the “King Acquisition”). We made this acquisition because we believe that the addition of King’s highly complementary mobile business positions us as a global leader in interactive entertainment across mobile, console, and PC platforms, as well as positioning us for future growth. The aggregate purchase price of approximately $5.8 billion was funded primarily with $3.6 billion of existing cash and $2.2 billion of cash from new debt issued by the Company. King’s results of operations since the King Closing Date are included in our condensed consolidated financial statements.Our SegmentsAs part of the continued implementation of our esports strategy, we instituted changes to our internal organization and reporting structure such that the Major League Gaming (“MLG”) business now operates as a division of Blizzard Entertainment, Inc. (“Blizzard”). As such, commencing with the second quarter of 2017, MLG, which was previously a separate operating segment, is now a component of the Blizzard operating segment. MLG is responsible for the operations of the Overwatch LeagueTM, along with other esports events, and will also continue to serve as a multi-platform network for Activision Blizzard esports content.Based on our organizational structure, we conduct our business through three reportable segments, as follows:(i) Activision Publishing, Inc.Activision Publishing, Inc. (“Activision”), is a leading global developer and publisher of interactive software products and entertainment content, particularly infor the console gaming.platform. Activision primarily delivers content through retail and digital channels, including full-game and in-game sales, as well as licenses ofby licensing software to third-party or related-party companies that distribute Activision products. Activision develops, markets, and sells products which are principallyprimarily based on our internally-developedinternally 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; Destiny,platforms. Also, on October 1, 2019, in collaboration with Tencent, Activision released Call of Duty: Mobile for the mobile platform, including for Google Inc.’s (“Google”) Android and Apple Inc.’s (“Apple”) iOS.In 2010, Activision entered into an online universe of first-person action gameplay (which we call a “shared-world shooter”exclusive relationship with Bungie, Inc. (“Bungie”) for console and PC platforms; and Skylanders®, a franchise geared towards children that brings physical toys to life digitallypublish games in the game, primarilyDestiny 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 console platforms.(ii) Blizzard Entertainment, Inc.Blizzard Entertainment, Inc. (“Blizzard”) is a leading global developer and publisher of interactive software products and entertainment content, particularly infor the PC gaming.platform. Blizzard primarily delivers content through retail and digital channels, including subscriptions, full-game, and in-game sales, as well as licenses ofby 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, across all Blizzard games, and the creation of user-generated content for Blizzard’s games. As noted above,content. Blizzard also includes the activities of the Overwatch LeagueTM, the first major global professional esports league with city-based teams, and our MLGMajor League Gaming (“MLG”) business, which is devoted to esports.Blizzard’s key product franchises include: World of Warcraft®, a subscription-based massive multi-player online role-playing game for the PC;PC platform; StarCraft®, a real-time strategy franchise for the PC franchise;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; 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 asplatform, including for Google’s Android and Apple’s iOS. King also distributes its content and services on online social platforms, such as Facebook and the king.com websites.PC platform, primarily via Facebook. King’s games are free-to-play,free to play; however, players can acquire in-game items, either with virtual currency the players purchase, or directly using real currency.King’s key product franchises, all of which are for the PCmobile and mobilePC platforms, include: Candy Crush™, which features “match three” games; Farm Heroes™, which also features “match three” games; Pet Rescue™, which is a “clicker” game; 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 October 2017, released the second 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 ResultsDuringFor the three months ended September 30, 2017:·2019:consolidated net revenues increased 3%decreased 15% to $1.62$1.28 billion, whileand consolidated operating income decreased 13%7% to $257$247 million, as compared to consolidated net revenues of $1.57$1.51 billion and consolidated operating income of $294$265 million for the three months ended September 30, 2016;·2018;revenues from digital online channels were $1.35$1.01 billion, or 84%79% of consolidated net revenues, and were comparableas compared to the $1.34$1.28 billion, or 86%84% of consolidated net revenues, for the three months ended September 30, 2016;·2018;operating margin was 15.9%19.3%, which includes $28 million in restructuring and related costs, as compared with 18.8%to 17.5% for the three months ended September 30, 2016, with the lower margin primarily due to an increased percentage of revenues coming from our lower-margin Distribution business and higher personnel costs to support the growth of our business and expanding areas of opportunity;·2018;consolidated net income decreased 6%22% to $188$204 million, as compared to $199$260 million for the three months ended September 30, 2016;· consolidated2018; net income for the 2018 period included $15$72 million of excessnet tax benefits from share-based payments,discrete tax items primarily related to updates to our accounting for the Tax Cuts and Jobs Act (see “Consolidated Results” discussion below for additional details); anddiluted earnings per common share decreased 24% to $0.26, as compared to $12 million$0.34 for the three months ended September 30, 2016; and· diluted earnings per common share decreased 4% to $0.25, as compared to $0.26 for the three months ended September 30, 2016.During2018.For the nine months ended September 30, 2017:·2019:consolidated net revenues increased 8%decreased 12% to $4.97$4.50 billion, and consolidated operating income increased 10%decreased 11% to $1.09$1.15 billion, as compared to consolidated net revenues of $4.59$5.12 billion and consolidated operating income of $987 million$1.29 billion for the nine months ended September 30, 2016;·2018;revenues from digital online channels increased 19% to $4.05were $3.49 billion, which was 81%or 78% of consolidated net revenues, as compared to $3.41$4.00 billion, which was 74%or 78% of consolidated net revenues, for the nine months ended September 30, 2016;·2018;operating margin was 21.9%25.6%, which was comparable with 21.5%includes $108 million in restructuring and related costs, as compared to 25.3% for the nine months ended September 30, 2016;·2018;cash flows generated from operating activities were $1.06 billion, a decrease$913 million, an increase of 19%15%, as compared to $1.30$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, 2016;· consolidated2018; net income increased 20%for the 2018 period included $97 million of net tax benefits from several discrete tax items (see “Consolidated Results” discussion below for additional details); anddiluted earnings per common share decreased 16% to $858 million,$1.27, as compared to $713 million$1.51 for the nine months ended September 30, 2016;· consolidated net income included $97 million of excess tax benefits from share-based payments, as compared to $63 million for the nine months ended September 30, 2016; and· diluted earnings per common share increased 19% to $1.12, as compared to $0.94 for the nine months ended September 30, 2016.Since certain of our games are hosted online or include significant online functionality that represents an essential component of gameplay and, as a result, a more-than-inconsequential separate deliverable,performance obligation, we initially defer the software-related revenuestransaction 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, 2017,2019, include a net effect of $284$68 million and $132$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, 2017,2019, include a net effect of $458$824 million and $370$629 million, respectively, from the recognition of deferred net revenues and related cost of revenues.Content Release HighlightsGames and downloadable content that were released duringEvent HighlightsDuring the three months ended September 30, 2017, include:· Activision’s Absolution,2019, Activision released thirdpre-expansion version of the game, and the latest expansions to Hearthstone—Saviors of UldumTMand Tombs of TerrorTM .Operating MetricsThe following operating metrics are key performance indicators that we use to evaluate our business.Net bookings and In-game net bookingsWe monitor net bookings as a key operating metric in evaluating the performance of our business. Net bookings is the net amount of products and services sold digitally or sold-in physically in the period, and includes license fees, merchandise, and publisher incentives, among others. Net bookings is equal to net revenues excluding the impact from deferrals. In-game net bookings primarily includes the net amount of downloadable content packand microtransactions sold during the period, and is equal to in-game net revenues excluding the impact from deferrals.Net bookings and in-game net bookings were as follows (amounts in millions): 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 2019 vs. Q3 2018The decrease in net bookings for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, was primarily due to:• a decrease in Blizzard 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 (reflecting our sale of the publishing rights for Destiny to Bungie in December 2018), and (2) lower net bookings from the Call of Duty: Infinite Warfare™;· Activision’s Duty franchise catalog titles.YTD Q3 2019 vs. YTD Q3 2018The decrease in net bookings for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was primarily due to:• a decrease in Blizzard net bookings of $484 million driven by (1) lower net bookings from World of Warcraft, primarily due to the 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 bookingsQ3 2019 vs. Q3 2018The decrease in in-game net bookings for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, was primarily due to a decrease in Blizzard and Activision in-game net bookings of $183 million and $113 million, respectively, due to the same drivers discussed for net bookings above.YTD Q3 2019 vs. YTD Q3 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 primarily due to:• a decrease in Blizzard in-game net bookings of $400 million driven by (1) lower in-game net bookings from World of Warcraft, primarily due to the launch of World of Warcraft: Battle for Azeroth, and (2) lower in-game net bookings from Overwatch and Hearthstone; anda decrease in Activision in-game net bookings of $254 million driven by (1) lower in-game net bookings from the Destiny 2,franchise and (2) lower in-game net bookings from the sequel to Destiny;· Activision’s Retribution on PlayStation 4, the fourth downloadable content pack for Call of Duty: Infinite Warfare; and· Blizzard’s Knights of the Frozen Throne™, the latest expansion to Hearthstone.Monthly Active Users: Measuring the Size of Our User BaseWe monitor monthly active users (“MAUs”) as a key measure of the overall size of our user base. MAUs are the number of individuals who playedaccessed 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 playsaccesses two of our games would be counted as two users. In addition, due to technical limitations, for Activision and King, an individual who playsaccesses the same game on two platforms or devices in the relevant period would be counted as two users. For Blizzard, an individual who playsaccesses 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):
2017
2017
2016
2016 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 2311 million, or 6%3%, for the three months ended September 30, 2017,2019, as compared to the three months ended June 30, 2017.2019, primarily driven by a decrease in average MAUs for King. The decrease in King’s average MAUs is primarily due to decreases across franchises reflectingfrom the maturity of King’s titles, as well as a decrease in Bubble Witch 3 Saga MAUs during the current quarter given the launch of the title earlier in 2017.Candy Crush franchise. The decreaseslight increase in Blizzard’s average MAUs is due primarily to loweran increase in average MAUs for the HeroesWorld of the Storm franchise, in part due to content and feature releases during the prior quarter without comparable releases in the current quarter.Average MAUs decreased by 9829 million, or 20%8%, for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016.2018. The year-over-year decrease in King’s average MAUs is due to decreases across King’s franchises that are largely attributableto:• 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 for Activision, primarily due to the maturityabsence of King’s titlesDestiny MAUs in our operating metric and less engaged users leavinglower average MAUs from the network.• 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 has grown, on average, 19%18% annually over the last four calendar years.from 2015 to 2018. The industry continues to benefit from additional players entering the market as interactive entertainment becomes more commonplace across age groups and as more developing regions increasingly gain access to this form of entertainment.Further, theThe wide adoption of smart phones globally and the free-to-play business model on those platforms has increased the total addressable marketaudience for gaming significantly. Smart phones and associated free-to-play games have introducedsignificantly by introducing gaming to new age groups and new regions and allowedallowing gaming to occur more widely outside the home. Mobile gaming is now estimated to be larger than console and PC gaming, and continues to grow at a significant rate. King is a leading developer of mobile and free-to-play games. In addition,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 playeradditional engagement and investment in our franchises outside of game purchases. These opportunities include esports, film and television, and consumer products.games. Our efforts to build these additionaladjacent 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, and as announced duringOverwatch League, which recently completed its second season. Additionally, we have sold the third quarter of 2017, we completed the sale offirst 12 teams for the OverwatchCall of Duty League. The Overwatch League is the first major global professional esports league with city-based teams. The first preseason game is expected to occur in December 2017, with the inaugural season starting in January 2018.Concentration of Sales Among the Most Popular FranchisesThe concentration of retail revenues among key titles has continued as a trend in the overall interactive softwareentertainment industry. According to The NPD Group, the top 10 titles accounted for 32%38% of the retail sales in the U.S. interactive entertainment industry in 2016.2018. Similarly, a significant portion of our revenues have historically has 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 69%58% of our consolidated net revenues, revenues—and a significantly higher percentage of our operating income, income—for 2016.The top titles in the industry are also becoming more consistent as players and revenues concentrate more heavily in established franchises. Each of the top 10 console franchises in 2016 was a previously established franchise. Similarly, according to U.S rankings for the Apple App Store and Google Play Store, per App Annie Intelligence as of September 2017, the top 10 mobile games have an average tenure of 27 months.In addition to investing in, and developing sequels and content for, our top titles,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. There is no guarantee investments like these will result in established franchises. Additionally, to diversify our portfolio of key franchises and increase our presence inon the mobile market, on February 23,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 tofurther 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.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 (amounts in dollarsmillions) and as a percentage of total net revenues, except for cost of revenues, which are presented as a percentage of associated revenues (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 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 for the three and nine months ended September 30, 2017 and 2016 (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 20172019 vs. Q3 2016The increasedecrease in consolidated net revenues and in-game net revenues for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, 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 in Activision revenues recognized of $100 million, primarily due to lower revenues recognized from the continued strength of Call of Duty: Black Ops III, driven by the downloadable content pack, Zombies Chronicles, which was released in May 2017, and continued strength of microtransactions;· higher revenues from the Candy CrushDestiny franchise driven by in-game events and features, such as the live events across the franchise that coincided with the broadcasting(reflecting our sale of the game show; and· revenues from Crash BandicootTM N. Sane Trilogy,which was releasedpublishing rights for Destiny to Bungie in June 2017.The increase was partially offset by:· lower revenues recognized from Overwatch, which was released in May 2016;· lower revenues recognized from World of Warcraft, driven by the release of World of Warcraft: LegionTM in August 2016, with no comparable release in 2017; and· lower revenues recognized from Call of Duty: Infinite Warfare (which, when referred to herein, is inclusive of Call of Duty: Modern Warfare® Remastered), which was released in November 2016, as compared to the performance of Call of Duty: Black Ops III, the comparable 2015 title.YTD Q3 20172019 vs. YTD Q3 2016The increasedecrease in consolidated net revenues and in-game net revenues for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to:· higher revenues from King titles as the current period includes King• 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 for the full year-to-date period, whilethree months ended September 30, 2019, as compared to the comparable prior period only included Kingthree months ended September 30, 2018, was primarily due to a decrease in Blizzard and Activision in-game revenues recognized of $121 million and $116 million, respectively, due to the same drivers discussed for consolidated net revenues above.YTD Q3 2019 vs. YTD Q3 2018The decrease in in-game net revenues for the partial period followingnine months ended September 30, 2019, as compared to the King Closing Date, as well as highernine 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 from the Candy Crush franchise,recognized of $219 million, primarily due to lower in-game events and features;· revenues recognized from the continued strength of Call of Duty: Black Ops III, driven by the downloadable content pack, Zombies Chronicles, and continued strength of microtransactions;· higher revenues recognized from Overwatch; and· revenues from Crash Bandicoot N. Sane Trilogy.The increase was partially offset by lower revenues recognized from Call of Duty: Infinite Warfare, as compared to the performance of Call of Duty: Black Ops III.Change in Deferred Revenues RecognizedQ3 20172019 vs. Q3 2016The decreaseincrease in net deferred revenues recognized for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, was primarily due to the deferral(1) an increase of revenues associated with the Destiny franchise, due to the release of Destiny 2 $120 million in September 2017, the revenues from which are largely deferred and will be recognized in future periods over an estimated service period. The decrease was partially offset by net deferred revenues recognized from World of Warcraft, as comparedBlizzard, primarily due to the prior year period including a net deferral of revenues in the comparable prior period due to the releasefrom World of Warcraft, driven by World of Warcraft: Legion Battle for Azeroth, which was released in August 2016.YTD Q3 20172019 vs. YTD Q3 2016The increase in net deferred revenues recognized for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to:·to an increase of $237 million in net deferred revenues recognized from Overwatch, as compared to a net deferral of revenues in the comparable prior periodBlizzard, primarily due to thehigher net deferred revenues recognized for Overwatch $122 million in May 2016; and· net deferred revenues recognized from World of Warcraft, as compared to a net deferral of revenues in the comparable prior periodActivision, primarily due to the release of World of Warcraft: Legion in August 2016.The increase was partially offset by:· a net deferral of revenues for the Destiny franchise due to the release of Destiny 2, as compared to net deferred revenues recognized in the comparable prior period; and· lower net deferred revenues recognized from the Call of Duty franchise, primarily due to the performance of Call of Duty: Infinite Warfare, as compared to Call of Duty: Black Ops III.Foreign Exchange ImpactChanges in foreign exchange rates had a positive impact of $28 million and a negative impact of $34$27 million and $133 million on Activision Blizzard’sour consolidated net revenues for the three and nine months ended September 30, 2017,2019, respectively, as compared to the impact on net revenues forsame period in the three and nine months ended September 30, 2016.previous year. The changes are primarily due to changes in the value of the U.S. dollar relative to the Euroeuro 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 organizationorganizational structure, the way we assess operating performance and allocate resources, and the availability of separate financial information. We do not aggregate operating segments. As discussed in the “Business Overview” above, commencing with the second quarter of 2017, we made changes to our operating segments which reflect the changes in our organization and reporting structure. Our MLG business, which was previously included in the non-reportable “Other segments,” is now presented within the BlizzardInformation on reportable operating segment. Prior period amounts have been revised to reflect this change. This change had no impact on consolidatedsegment net revenues orand operating income.Information onincome for the reportable segmentsthree and reconciliationsnine months ended September 30, 2019 and 2018, are presented below (amounts in millions): 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 from external customers and consolidated income before income tax expense for the three and nine months ended September 30, 2017 and 2016, are presented in the table below (amounts in millions):
September 30,
September 30,
(Decrease)
(Decrease)(1) Includes other income and expenses from operating segments managed outside the reportable segments, including our Studios and Distribution businesses. Also includes unallocated corporate income and expenses.(2) Reflects fees and other expenses, such as legal, banking, and professional services fees, related to the King Acquisition and associated integration activities, inclusive of related debt financings.(3) Reflects restructuring charges, primarily severance costs.(4) Reflects a non-cash accounting charge to reclassify certain cumulative translation gains (losses) into earnings due to the substantial liquidation of certain of our foreign entities. 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 20172019 vs. Q3 2016The increasedecrease in Activision’s net revenues for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, was primarily due to:· higherlower revenues from the Destiny franchise driven by(reflecting our sale of the release of publishing rights for Destiny 2to Bungie in September 2017December 2018);·lower revenues from the continued strength of Call of Duty: Black Ops III, driven by the downloadable content pack, Zombies Chronicles, which was released in May 2017,Duty franchise catalog titles; and continued strength of microtransactions; and· revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017.• 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 from Call of Duty: Infinite Warfare, which was released in November 2016, as compared to Call of Duty: Black Ops III, the comparable 2015 title.• 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 20172019 vs. YTD Q3 2016The increasedecrease in Activision’s net revenues for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due toto:lower revenues from the same drivers Destiny franchise;lower revenues from Call of Duty franchise catalog titles;• lower revenues from Call of Duty: Black Ops 4, which was released in October 2018, as compared to Call of Duty: WWII,which was released in November 2017; and• lower revenues from Crash Bandicoot N. Sane Trilogy.The decrease was partially offset by revenues from Sekiro: Shadows Die Twice, which was released in March 2019,and partially offsetting factors as for the three months ended September 30, 2017, as discussed above.BlizzardQ3 20172019 vs. Q3 2016The decrease in Blizzard’s net revenues for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, was primarily due to:· lower revenues from World of Warcraft, driven by the release of World of Warcraft: Legion in August 2016, with no comparable release in 2017; and· lower revenues from Overwatch, which was released in May 2016.• 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:·by higher revenues from Hearthstone; and· higher revenues from Diablo III, primarily due to the release of Rise of the Necromancer™, a downloadable content pack for Diablo III which was released in June 2017.YTD Q3 20172019 vs. YTD Q3 2016The decrease in Blizzard’s net revenues for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to the same drivers as for the three months ended September 30, 2017, as discussed above.• 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 20172019 vs. Q3 2016The increase in 2018King’s net revenues for the three months ended September 30, 2017, as compared2019, were roughly equal to net revenues for the three months ended September 30, 2016, was primarily due to higher2018, as lower in-game revenues from the Candy Crush franchise drivenplayer purchases were largely offset by in-game events and features.YTD Q3 20172019 vs. YTD Q3 2016The increase in 2018King’s net revenues for the nine months ended September 30, 2017, as compared2019, were roughly equal to net revenues for the nine months ended September 30, 2016, was primarily2018 due to the current period including King revenues for the full year-to-date period, while the comparable prior period only included King revenues for the partial period following the King Closing Date, as well as higher revenues from the Candy Crush franchise, due to in-game eventssame driver and features.Segment Income from OperationsActivisionQ3 20172019 vs. Q3 2016The increasedecrease in Activision’s operating income for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, was primarily due to the higherlower revenues, as discussed above. The increasedecrease was partially offset by higher amortizationlower operating costs associated with the Destiny franchise (reflecting our sale of capitalized software costs and higher product costs primarily duethe publishing rights for Destiny to the release of Destiny 2Bungie in September 2017, along with higher sales and marketing costs to support that release.YTD Q3 20172019 vs. YTD Q3 2016The increasedecrease in Activision’s operating income for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to the higherto:lower revenues, as discussed aboveabove; and lower costs associated with the Skylanders franchise, as there will not be a new release titlean increase in 2017. bad debt provisions.The increasedecrease was partially offset by lower cost of revenues and operating costs, primarily associated with the same factors discussed above as forDestiny franchise, which were partially offset by costs related to the three months ended September 30, 2017.BlizzardQ3 20172019 vs. Q3 2016The decrease in Blizzard’s operating income for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, was primarily due to the lower revenues, as discussed above. The decrease wasis 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 capitalized software development costs due to the releasetiming of World of Warcraft: Legion in August 2016, with no comparable release in 2017.YTD Q3 20172019 vs. YTD Q3 2016The decrease in Blizzard’s operating income for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to the lower revenues, as discussed above, along with higher product development costs resulting from lower capitalization of software development costs due to the timing of game development cycles.above. The decrease wasis 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 marketing costs for Overwatch and World of Warcraft: Legion, due to their respective launches in 2016, with no comparable releases in 2017; and· lower amortization of capitalized software costs due to the release of Overwatch and World of Warcraft: Legion in 2016.KingQ3 20172019 vs. Q3 2016The increase in King’s operating income for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, despite the slight decrease in revenues, was primarily due to the higher revenues discussed above, along with to:lower service provider fees, primarily digital storefront fees (e.g. fees retained by Apple and Google for our sales on their platforms); and marketing costs from the Farm Heroes franchise given the launch of Farm Heroes Super SagaTM at the end of June 2016 with no comparable launch in the current period.lower product development costs.YTD Q3 20172019 vs. YTD Q3 2016The increase in 2018King’s operating income for the nine months ended September 30, 2017,2019, was flat as compared to the nine months ended September 30, 2016, was primarily2018, due to the current period including King’s results of operationsto: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 Apple and Google for the full year-to-date period, while the comparable prior period only included King’s results of operations for the partial period following the King Closing Date.lower personnel costs.Foreign Exchange ImpactChanges in foreign exchange rates had a positivenegative impact of $34$20 million and $1$92 million on reportable segment net revenues for the three and nine months ended September 30, 2017,2019, respectively, as compared to the impact on reportable segment net revenues forsame periods in the three and nine months ended September 30, 2016.previous year. The changes are primarily due to changes in the value of the U.S. dollar relative to the Euroeuro and the British pound.Consolidated ResultsNet Revenues by Distribution ChannelThe following table details our consolidated net revenues by distribution channel for the three and nine months ended September 30, 2017 and 2016 (amounts in millions):
(decrease)
(decrease)The increase (decrease) in deferred revenues recognized by distribution channel for the three and nine months ended September 30, 2017 and 2016, was as follows (amounts in millions):
(decrease)
(decrease)(1) Net revenues from “Digital online channels” include revenues from digitally-distributed subscriptions, licensing royalties, value-added services, downloadable content, microtransactions, and products.(2) Net revenues from “Other” include revenues from our Studios and Distribution businesses, as well as revenues from MLG. 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 RevenuesNet RevenuesQ3 20172019 vs. Q3 2016Net2018The decrease in net revenues from digital online channels for the three months ended September 30, 2017, were comparable2019, as compared to the three months ended September 30, 2016. This2018, was primarily due to increases in revenues driven by:·to:lower revenues recognized from the continued strengthDestiny franchise (reflecting our sale of Call of Duty: Black Ops III, driven by the downloadable content pack, Zombies Chronicles, which was releasedpublishing rights for Destiny to Bungie in May 2017,December 2018); and continued strength of microtransactions; and· higher revenues from the Candy Crush franchise, driven by in-game events and features.The increase was partially offset by:· lower revenues recognized from Call of Duty: Infinite Warfare, which was released in November 2016, as compared to the performance of Call of Duty: Black Ops III, the comparable 2015 title;· lower revenues recognized from Overwatch, which was released in May 2016; and· lower revenues recognized from World of Warcraft, driven by the release of World of Warcraft: Legion in August 2016, with no comparable release in 2017.• lower revenues recognized from World of Warcraft.YTD Q3 20172019 vs. YTD Q3 2016The increasedecrease in net revenues from digital online channels for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to:· higher revenues from King titles, as the current period includes King revenues for the full year-to-date period, while the comparable prior period only included King revenues for the partial period following the King Closing Date, as well as higher revenues from the Candy Crush franchise due to in-game events and features;·lower revenues recognized from the continued strength of Call of Duty: Black Ops III, driven by the downloadable content pack, Zombies Chronicles,Destiny franchise; and continued strength of microtransactions; and· higher revenues recognized from Overwatch.The increase was partially offset by lower revenues recognized from Call of Duty: Infinite Warfare, as compared to the performance of Call of Duty: Black Ops III, the comparable 2015 title.Change in Deferred Revenues RecognizedQ3 2017 vs. Q3 2016The increase in net deferred revenues recognized from digital online channels for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, was primarily due to net deferred revenues recognized from World of Warcraft, as compared to a net deferral of revenues in the comparable prior period due to the release of World of Warcraft: Legion in August 2016. The increase was partially offset by a net deferral of revenues associated with new releases during the current period, including the release of Destiny 2 in September 2017 and Knights of the Frozen Throne, the latest expansion to Hearthstone, in August 2017.YTD Q3 2017 vs. YTD Q3 2016The increase in net deferred revenues recognized from digital online channels for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, was primarily due to:· net deferred revenues recognized from Overwatch, as compared to a net deferral of revenues in the comparable prior period due to the release of Overwatch in May 2016;· net deferred revenues recognized from World of Warcraft, as compared to a net deferral of revenues in the comparable prior period due to the release of World of Warcraft: Legion in August 2016; and· higher deferred revenues recognized from the Call of Duty franchise (the weaker performance of Call of Duty: Infinite Warfare digital content in the current period as compared to Call of Duty: Blacks Ops III in the prior period has resulted in less deferrals of revenues from digital content in 2017 as compared to 2016 and, as a result, higher deferred revenues recognized in the current period).The increase was partially offset by a deferral of revenues associated with the release of Destiny 2 in September 2017 and Knights of the Frozen Throne in August 2017.• lower revenues recognized from Overwatch.Retail Channel Net RevenuesNet RevenuesQ3 20172019 vs. Q3 2016The increase in net revenues from retail channels for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, was primarily due to revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017. The increase was partially offset by:· lower revenues recognized from the Call of Duty franchise, primarily due to the performance of Call of Duty: Infinite Warfare, as compared to the performance of Call of Duty: Black Ops III, the comparable 2015 title; and· lower revenues recognized from Overwatch, which was released in May 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 20172019 vs. YTD Q3 2016The decrease in net revenues from retail channels for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to:• lower revenues recognized from Call of Duty: Black Ops 4, which was released in October 2018, as compared to Call of Duty: WWII, which was released in November 2017;lower revenues recognized from the CallDestiny franchise (reflecting our sale of Duty franchise, primarily duethe publishing rights for Destiny to the performance of Call of Duty: Infinite Warfare, as compared to the performance of Call of Duty: Black Ops III. Bungie in December 2018); and• lower revenues from Crash Bandicoot N. Sane Trilogy, which was released on the Xbox One, PC, and Nintendo Switch in June 2018.The decrease was partially offset by revenues from Crash Bandicoot N. Sane Trilogy.Change in Deferred Revenues RecognizedQ3 2017 vs. Q3 2016The decrease in net deferred revenues recognized from retail channels for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, was primarily due to:· the deferral of revenues associated with the Destiny franchise given the release of Destiny 2 in September 2017; and· lower net deferred revenues recognized from Call of Duty: Infinite Warfare, as compared to Call of Duty: Black Ops III.YTD Q3 2017 vs. YTD Q3 2016The decrease in net deferred revenues recognized from retail channels for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, was primarily due to was primarily due to:· lower deferred revenues recognized from Call of Duty: Infinite Warfare, as compared to Call of Duty: Black Ops III; and· the deferral of revenues associated with the Destiny franchise, given the release of Destiny 2 in September 2017.The decrease was partially offset by net deferred revenues recognized from Overwatch, as compared to a net deferral of revenues in the comparable prior period, due to the release of Overwatch 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 for the three and nine months ended September 30, 2017 and 2016 (amounts in millions):
(decrease)
(decrease)(1) 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 20172019 vs. Q3 2016Net2018The decrease in net revenues infrom the Americas region for the three months ended September 30, 2017, were comparable2019, as compared to the three months ended September 30, 2016. Net revenues were comparable2018, was primarily due to increases in revenues from:·lower revenues recognized from the continued strengthDestiny franchise (reflecting our sale of Call of Duty: Black Ops III, driven by the downloadable content pack, Zombies Chronicles, which was releasedpublishing rights for Destiny to Bungie in May 2017, and continued strength of microtransactions; and· higher revenues from the Candy Crush franchise, driven by in-game events and features.The increases were offset by:· lower revenues recognized from Overwatch, which was released in May 2016; and· lower revenues recognized from Call of Duty: Infinite Warfare, which was released in November 2016, as compared to the performance of Call of Duty: Black Ops III, the comparable 2015 title.YTD Q3 20172019 vs. YTD Q3 2016The increasedecrease in net revenues infrom the Americas region for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to:· higher revenues from King titles, as the current period includes King’s revenues for the full year-to-date period, while the comparable prior period only included King’s revenues for the partial period following the King Closing Date, as well as higher revenues from the Candy Crush franchise due to in-game events and features;·lower revenues recognized from the continued strength of Call of Duty: Black Ops III, driven by the downloadable content pack, Zombies Chronicles, and continued strength of microtransactions; and· higher revenues recognized from Overwatch.The increases were partially offset by lower revenues recognized from Call of Duty: Infinite Warfare, as compared to the performance of Call of Duty: Black Ops III.EMEAQ3 20172019 vs. Q3 2016The increasedecrease in net revenues infrom the EMEA region for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, was primarily due to:· revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017;·lower revenues recognized from the continued strength of Call of Duty: Black Ops III, driven by the downloadable content pack, Zombies Chronicles, which was released in May 2017,Destiny franchise; and continued strength of microtransactions;· higher revenues from our Distribution business; and· higher revenues from the Candy Crush franchise.The increases were offset by lower revenues recognized from Call of Duty: Infinite Warfare, which was released in November 2016, as compared to the performance of Call of Duty: Black Ops III, the comparable 2015 title.• lower revenues recognized from World of Warcraft.YTD Q3 20172019 vs. YTD Q3 2016The increasedecrease in net revenues infrom the EMEA region for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due toto:lower revenues recognized from the same driversDestiny franchise; and partially offsetting factors as those for the three months ended September 30, 2017, as discussed above.• 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 20172019 vs. Q3 2016The decrease in net revenues infrom the Asia Pacific region for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, was primarily due to lower revenues recognized from Overwatch, which was released in May 2016Hearthstone.YTD Q3 20172019 vs. YTD Q3 2016The increasedecrease in net revenues infrom the Asia Pacific region for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to higherlower revenues recognized from Overwatch, given the nine months ended September 30, 2017, benefited from the recognition of prior year deferred revenues generated during the launch year of Overwatch, most of which were recognized during the first six months of 2017.Net Revenues by PlatformThe following tables detailtable details our consolidated net revenues by platform for the three and nine months ended September 30, 2017 and 2016 (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. 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 20172019 vs. Q3 2016The increasedecrease in net revenues from the console platform for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, was primarily due to:· revenues recognized from the continued strength of Call of Duty: Black Ops III, driven by the downloadable content pack, Zombies Chronicles, which was released in May 2017, and continued strength of microtransactions;· revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017; and· higherlower revenues recognized from the Destiny franchise driven by(reflecting our sale of the release ofpublishing rights for Destiny 2to Bungie in September 2017.The increase was partially offset by December 2018);lower revenues recognized from the Call of Duty: Infinite WarfareDuty 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 November 2016, as compared to the performance of Call of Duty: Black Ops III, the comparable 2015 title.• 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 20172019 vs. YTD Q3 2016The decrease in net revenues from the console platform for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to to:lower revenues recognized from the Destiny franchise;lower revenues recognized from Call of Duty: Infinite Warfare, as compared to the performance of Call of Duty: Black Ops III. Duty franchise catalog 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:· revenues recognized from the continued strength of Call of Duty: Black Ops III, driven by the downloadable content pack, Zombies Chronicles, and continued strength of microtransactions;· revenues from Crash Bandicoot N. Sane Trilogy; and· higher revenues recognized from OverwatchMay 2016.PCQ3 20172019 vs. Q3 2016The decrease in net revenues from the PC platform for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, was primarily due 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; and· lower revenues recognized from World of Warcraft, driven by the release of World of Warcraft: Legion in August 2016, which drove higher subscription revenues in the prior period, with no comparable release in 2017.YTD Q3 20172019 vs. YTD Q3 2016The increasedecrease in net revenues from the PC platform for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to:· higherlower revenues recognized from Overwatch, given the nine months ended September 30, 2017, benefited from the recognition of prior year deferred revenues generated during the launch year of Overwatch, most of which were recognized during the first six months of 2017; and· higher revenues recognized from World of Warcraft.• lower revenues recognized from Overwatch; and• lower revenues recognized from Hearthstone.Mobile and AncillaryQ3 20172019 vs. Q3 2016The increase in net2018Net revenues from mobile and ancillary for the three months ended September 30, 2017,2019, were roughly flat as compared to net revenues for the three months ended September 30, 2016, was primarily due to higher revenues from the Candy Crush franchise, driven by in-game events and features.YTD Q3 20172019 vs. YTD Q3 2016The increase in net2018Net revenues from mobile and ancillary for the nine months ended September 30, 2017,2019, were roughly flat as compared to net revenues for the nine months ended September 30, 2016, was primarily due to higher revenues from King titles as the current period includes King’s revenues for the full year-to-date period, while the comparable prior period only included King’s revenues for the partial period following the King Closing Date, as well as higher revenues from the Candy Crush franchise due to in-game events and features.Costs and ExpensesCost of RevenuesThe following tables detailtable details the components of cost of revenues in dollars (amounts in millions) and as a percentage of associated net revenues for the three and nine months ended September 30, 2017 and 2016 (amounts in millions):
Ended
September 30,
2017
net revenues
Ended
September 30,
2016
net revenues
(Decrease)
Ended
September 30,
2017
Ended
September 30,
2016
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 20172019 vs. Q3 2016The increase in product costs for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, was primarily due toin line with the increase in product sales for the period, including from our relatively 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, 2017, was comparable2019, as compared to the three months ended September 30, 2016.YTD Q3 20172019 vs. YTD Q3 2016The decrease in product costs for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due toin line with the decrease in product sales for the period. This was partially offset by higher product costs resulting from the increased revenues of our relatively lower-margin Distribution business.The decrease in software royalties, amortization, and intellectual property licenses related to product sales for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to:· lower developer royalties andto a decrease of $56 million in software amortization associated withand royalties from Activision, driven by the Destiny franchise, due to the timing of releases;· lower software amortization associated with Guitar Hero® Live, which was released in October 2015, with no comparable release in 2016; and· lower software amortization associated with Overwatch, which was released in May 2016.Thefranchise. This decrease was partially offset by:• higher software amortization and royalties for Call of Duty: Black Ops 4, which was released in October 2018, as compared to Call of Duty: WWII, which was released in November 2017; and• software amortization and royalties from Sekiro: Shadows Die Twice, which was released in March 2019, with no comparable release in 2018.The decrease from Activision was partially offset by higheran increase of $12 million in software amortization and royalties from Blizzard, driven by the release of World of Warcraft: LegionBattle for Azeroth, which was released in August 2016.Cost of Revenues—Subscription, Licensing, and Other Revenues:Q3 20172019 vs. Q3 2016The increasedecrease in game operations and distribution costs for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, was primarily due to higher platforma decrease of $18 million in service provider fees associated with the increase in revenues from King.The decrease in software royalties, amortization, and intellectual property licenses related to subscription, licensing, and other revenues for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, was primarily due to lowerto:a decrease of $34 million in amortization of internally-developed franchise intangible assets acquired inas part of our acquisition of King;lower software amortization and royalties from Activision of $14 million, driven by the King Acquisition.• 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 20172019 vs. YTD Q3 2016The increasedecrease in game operations and distribution costs for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to higher online costs and platforma decrease of $50 million in service provider fees associated with revenues from King,such as the current period includes King’s costsdigital storefront fees (e.g. fees retained by Apple and Google for a full year-to-date period, while the comparable prior period only included King’s revenuesour sales on their platforms), payment processor fees, and associated costs for the partial period following the King Closing Date.The increasedecrease in software royalties, amortization, and intellectual property licenses related to subscription, licensing, and other revenues for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to to:a full year-to-date perioddecrease of $83 million in amortization of internally-developed franchise intangible assets acquired inas part of our acquisition of King;lower software amortization and royalties from Activision of $22 million, driven by the King Acquisition, while the comparable prior period only included a partial period of amortization of internally-developed franchise intangible assets following the King Closing Date.• 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)
2017
consolidated
net revenues
2016
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 20172019 vs. Q3 2016The increasedecrease in product development costs for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, was primarily due to higherto:lower product development costs resulting fromfor existing and upcoming title releases of $33 million, primarily due to lower capitalization of softwarepersonnel costs; andlower product development costs from the Destiny franchise (reflecting our sale of the publishing rights for Destiny to Bungie in the current period due to the timing of game development cycles. The increase was partially offset by lower accrued bonuses for Blizzard.YTD Q3 20172019 vs. YTD Q3 2016The increasedecrease in product development costs for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to:· higher Blizzardlower product development costs resulting fromfor existing and upcoming title releases of $66 million, primarily due to lower capitalization of softwarepersonnel costs; andlower product development costs due tofrom the timing of game development cycles; and· increased costs related to King, as the current period includes a full year-to-date period of costs, while the comparable prior period only included King’s costs for the partial period following the King Closing Date.The increase was partially offset by lower accrued bonuses for Activision and Blizzard.Sales and Marketing (amounts in millions)
2017
consolidated
net revenues
2016
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 20172019 vs. Q3 2016Sales2018The decrease in sales and marketing expenses for the three months ended September 30, 2017, were comparable2019, as compared to the three months ended September 30, 2016, as the higher sales2018, was primarily due to a decrease of $81 million in marketing spending and personnel costs, primarily associated with lower marketing costs for the Destiny, franchise associated with the release of Destiny 2 in September 2017 were offset by lower sales and marketing costs for:·World of Warcraft,, driven by World of Warcraft: Legion, which was released in August 2016, with no comparable release in 2017;· King, due to the launch of Farm Heroes Super Saga at the end of June 2016 with no comparable launch in 2017; and· the Call of Duty franchise, primarily as the prior year included our Call of Duty XP event without a comparable event in the current period.YTD Q3 20172019 vs. YTD Q3 2016The increasedecrease in sales and marketing expenses for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to:· increased• 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 assetsasset acquired in theas part of our acquisition of King, Acquisition and increased sales and marketing costs to support King’s titles, as the current period includes a full year-to-date periodasset was fully amortized during the first quarter of costs, while the comparable prior period only included King’s costs for the partial period following the King Closing Date; and· higher sales and marketing costs for the Destiny franchise, given the release of Destiny 2.The increase was partially offset by lower sales and marketing costs for Overwatch and World of Warcraft: Legion, due to their launches in the prior year.General and Administrative (amounts in millions)
2017
consolidated
net revenues
2016
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 20172019 vs. Q3 2016The increasedecrease in general and administrative expenses for the three months ended September 30, 2017,2019, as compared to the three months ended September 30, 2016,2018, was primarily due to increaseda $22 million decrease in personnel costs, including stock-based compensation expense, to support the growth of our business and expanding areas of opportunity.YTD Q3 20172019 vs. YTD Q3 2016The increasedecrease in general and administrative expenses for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016,2018, was primarily due to:· increasedto a $69 million decrease in personnel costs.Restructuring and related costs (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 supporta Board-authorized restructuring plan under which the growthCompany aims to refocus its resources on its largest opportunities and remove unnecessary levels of our businesscomplexity and expanding areasduplication from certain parts of opportunity;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 inclusion in the current period of a non-cash accounting charge to reclassify certain losses included in our cumulative translation adjustments into earnings due to the substantial liquidation of certain of our foreign entities.The increase was partially offset by lower transaction costs, as thethree and nine months ended September 30, 2016,2019, relate primarily to severance costs, write-downs of lease facility assets, and the write-downs of other assets that will no longer be used. Refer to Note 14 of the notes to the condensed consolidated financial statements included the King Acquisition.Interest and Other Expense (Income), Net (amounts in millions)
2017
consolidated
net revenues
2016
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 2019 vs. Q3 2018The decrease in interest and other expense (income), net, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, was primarily due to an $11 million decrease in interest expense and amortization of deferred financing costs associated with our debt obligations, due to a decrease in our total debt outstanding as a result of our debt redemptions and repayment activities during 2018.YTD Q3 2019 vs. YTD Q3 2018The decrease in interest and other expense (income), net, for the nine months ended September 30, 2017,2019, as compared to the three and nine months ended September 30, 2016,2018, was primarily due toto:a $49 million decrease in interest expense and amortization of deferred financing costs associated with our lowerdebt obligations, reflecting a decrease in our total outstanding debt and lower interest rates on our current debt instrumentsoutstanding as a result of our refinancingdebt redemptions and repayment activities during 2018;a $38 million gain recognized as a result of adjusting a cost-method equity investment to fair value, with no comparable activity in 2016the prior period (refer to Note 8 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q); and 2017. See further discussion below under “Liquidityan $11 million increase in interest income due to our cash and Capital Resources.”Income Tax Expense (amounts in millions)
2017
income
2016
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 expense of $32$45 million for the three months ended September 30, 2017,2019, reflects an effective tax rate of 15%18%, which is higher than the effective tax rate of 14%(23)% for the three months ended September 30, 2016.2018. The increase is primarily due to lowera discrete tax benefitsbenefit recognized in the current quarter, partially offset by higher excessprior year in connection with adjustments made to the provisional amounts initially recorded in connection with tax benefits from share-based payments.The income tax expense of $109 million forreform legislation known as the nine months ended September 30,Tax Cuts and Jobs Act enacted in December 22, 2017 reflects an effective tax rate of 11%(the “U.S. Tax Reform Act”), which is lower than the effective tax rate of 12% for the nine months ended September 30, 2016. The decrease is due to higher excess tax benefits from share-based payments in the current period, partially offset by loweryear, 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 benefits, primarily related to an audit settlementbenefit recognized in the prior period.The effective tax rate of 15% and 11%18% for both the three and nine months ended September 30, 2017, respectively,2019, is lower than the U.S. statutory rate of 35%21%, primarily due to foreign earnings taxed at 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 and California research and development credits, partially offset by an increase of reserves for uncertain tax positions.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 inthat apply to our foreign jurisdictions,income (including U.S. tax on foreign income), research and development credits, and certain nondeductible expenses. Our effective tax rate could fluctuate significantly from quarter to quarter based on recurring and nonrecurring factors including, but not limited to: variations in the estimated and actual level of pre-tax income or loss by jurisdiction; changes in the mix of income by tax jurisdiction (as taxes are levied at relatively lower statutory rates in foreign regions and relatively higher statutory rates in the U.S.); research and development credits; changes in enacted tax laws and regulations, rulings, 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 1016 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.flows, which, we believe, in combination with our existing balance of cash and cash equivalents and short-term investments of $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- and long-termshort-term investments, and cash flows provided by operating activities. With our cash and cash equivalents and short-term investments of $3.7 billion at September 30, 2017, and the expected cash flows provided by our operating activities, we believe that we have sufficient liquidity to meet daily operations for the foreseeable future. We also believe that we have sufficient working capital ($3.0 billion at September 30, 2017) to finance our operational and financing requirements for at least the next 12 months. Additionally, we have the availability of a $250 million revolving credit facility.As of September 30, 2017,2019, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $2.3 billion, as compared to $1.9$1.4 billion as of December 31, 2016. If the2018. These cash and cash equivalents held outside of the U.S.balances are needed in the futuregenerally available for our operationsuse in the U.S., we would accrue and pay the required U.S. taxessubject in some cases to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.Furthermore, ourcertain restrictions.Our cash provided from operating activities is somewhat impacted by seasonality. Working capital needs are impacted by weekly sales, which are generally highest in the fourth quarter due to seasonal and holiday-related sales patterns. OnWe consider, on a continuing basis, we consider 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 driversdriver of net cash flows associated with our operating activities includeis 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, 2017,2019, was $1.1 billion,$913 million, as compared to $1.3 billion$791 million for the nine months ended September 30, 2016.2018. The decreaseincrease was primarily due to changes in our working capital resulting from the timing of collections and payments and lower cash spent to support the launchesDestiny franchise (reflecting our sale of our games, as the prior period included cash flows from two major launches—Overwatchpublishing rights for Destiny to Bungie in May 2016 and World of Warcraft: Legion in August 2016—while the current period included cash flows from only one major launch—Destiny 2—which did not occur until September 2017. The decreaseDecember 2018). This increase was partially offset by:· higherby lower net income and a decrease in non-cash adjustments to net income, primarily due to lower amortization on intangible assets related to King and lower amortization of capitalized software development costs and intellectual property licenses for the nine months ended September 30, 2017,2019, as compared to the nine months ended September 30, 2016, along with larger adjustments to net income for non-cash charges, primarily associated with the amortization of the acquired intangibles in the King Acquisition; and· changes in our working capital due to the timing of collections and payments.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, 2017,2019, was $156$79 million, as compared to $1.2 billion for the nine months ended September 30, 2016. The decrease in thenet cash used was primarily due to cash used for the King Acquisition in the nine months ended September 30, 2016, with no comparable transaction in the current period. The decrease was partially offset by purchasesinvesting activities of available-for-sale investments of $80$160 million for the nine months ended September 30, 2017, with no comparable transaction2018. The increase was primarily due to $153 million of cash proceeds from the maturities of available-for-sale investments, as compared to purchases of available-for-sale investments of $59 million in the priorprior-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, 2017,2019, was $640$251 million, as compared to net cash provided by financing activities of $2.1$2.0 billion for the nine months ended September 30, 2016.2018. The changedecrease was primarily attributeddue to our debt financing activities. Forrepayments, inclusive of premium payments, of $1.8 billion during the nine months ended September 30, 2017, we had net debt repayments2018, with no comparable repayment activity in the nine months ended September 30, 2019. The Company paid dividends of $500$283 million during the nine months ended September 30, 2019, as compared to approximately $2.3 billion$259 million during the prior-year period.Effect of net debt proceedsForeign Exchange Rate ChangesChanges in foreign exchange rates had a negative impact of $24 million on our cash and cash equivalents and restricted cash for the nine months ended September 30, 2016. The cash flows used in financing activities for the nine months ended September 30, 2017, were partially offset by higher proceeds from stock option exercises of $150 million,2019, as compared to $86a negative impact of $15 million for the nine months ended September 30, 2016.Effect of Foreign Exchange Rate ChangesChanges in foreign exchange rates had a positive impact of $72 million and a negative impact of $23 million on our cash and cash equivalents for the nine months ended September 30, 2017 and 2016, respectively.2018. The change was primarily due to changes in the value of the U.S. dollar relative to the Euroeuro and the British pound.DebtAs ofAt both September 30, 2019 and December 31, 2016,2018, our total outstanding debt was $4.9$2.7 billion, bearing interest at a weighted average rate of 2.92%3.18%.On February 3, 2017, we entered into a sixth amendment (the “Sixth Amendment”) to our credit agreement, which was originally executed on October 11, 2013 (as amended thereafter and from time to time, the “Credit Agreement”). The Sixth Amendment: (i) provided for a new tranche of term loans “A” in an aggregate principal amount of $2.55 billion (the “2017 TLA”) and (ii) released each of our subsidiary guarantors from their respective guarantees provided under the Credit Agreement. All proceeds of the 2017 TLA, together with additional cash on hand of $139 million, were used to fully retire the term loans then outstanding (the “2016 TLA”) under the Credit Agreement, including all accrued and unpaid interest thereon. The terms of the 2017 TLA, other than the absence of the subsidiary guarantees, are generally the same as the terms of the 2016 TLA. The fees incurred as a result of the Sixth Amendment were not material. The 2017 TLA will mature on August 23, 2021.On May 26, 2017, in a public underwritten offering, we issued three series of unsecured senior notes—$400 million of 2.6% unsecured senior notes due June 2022, $400 million of 3.4% unsecured senior notes due June 2027, and $400 million of 4.5% unsecured senior notes due June 2047. The proceeds from these unsecured senior notes, together with cash on hand, were used to make a prepayment of $1.2 billion on our 2017 TLA.During the nine months ended September 30, 2017, we reduced our total outstanding long-term debt by $500 million. This included $139 million of cash used to retire the 2016 TLA, as discussed above, along with a prepayment on the 2017 TLA of $361 million. The prepayment made on our 2017 TLA satisfied the remaining required quarterly principal repayments for the entire term of the Credit Agreement.As a result of the above activities, our total outstanding debt as of September 30, 2017, was $4.4 billion, bearing interest at a weighted average rate of 3.52%. A summary of our outstanding debt as of September 30, 2017, is as follows (amounts in millions):
Amount
Discount and
Deferred Financing
Costs
AmountA summary of our debt as of December 31, 2016, was as follows (amounts in millions):
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 711 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 2, 2017,12, 2019, our Board of Directors approveddeclared a cash dividend of $0.30$0.37 per common share. On May 10, 2017,9, 2019, we made an aggregate cash dividend payment of $226$283 million to shareholders of record at the close of business on March 30, 2017. On May 26, 2017, we made related dividend equivalent payments of less than $1 million to certain holders of restricted stock units.Capital ExpendituresFor the year ending December 31, 2017,2019, we anticipate total capital expenditures of approximately $135$130 million, primarily for leasehold improvements, computer hardware, and software purchases. During the nine months ended September 30, 2017,2019, capital expenditures were $86$79 million.Off-Balance Sheet ArrangementsAt each of September 30, 20172019 and December 31, 2016,2018, 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 including Revenue Arrangements with Multiple Deliverables;·Recognition;•Income Taxes;•Allowances for Returns and Price Protection;· Allowance for Inventory Obsolescence;·•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, 2017,2019, there were no significant changes to the above critical accounting policies and estimates. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016,2018, for a more complete discussion of our 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 153 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.Recently Adopted Accounting PronouncementsInventoryIn July 2015,LeasesAs noted in Note 2 of the Financial Accounting Standards Board (“FASB”) issued new guidance relatednotes to the measurementcondensed consolidated financial statements included in Item 1 of inventorythis Quarterly Report on Form 10-Q, we adopted the new lease accounting standard effective January 1, 2019. We elected to apply an optional adoption method, which requires inventory withinuses the scope of the guidance to be measured at the lower of cost and net realizable value. Net realizable value is definedeffective date as the estimated selling prices ininitial date of application on transition with no retrospective adjustments to prior periods. Additionally, we elected to apply the ordinary coursepackage of business, less reasonably predictable costs of completion, disposal, and transportation. We adopted thistransition practical expedients which permitted us to, among other things, (1) not reassess if existing contracts contained leases under the new standard as of January 1, 2017, and applied it prospectively. The adoption of this guidance did not have a material impact on our financial statements.Recent Accounting Pronouncements Not Yet AdoptedRevenue RecognitionIn May 2014, the FASB issued new accounting guidance related to revenue recognition. The new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance, 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 to in exchange for those goods or services. This guidance will be effective for fiscal years and interim periods within those years beginning after December 15, 2017. We anticipate adopting thelease accounting standard, on January 1, 2018, usingand (2) carry forward our historical lease classifications.For additional discussion regarding the modified retrospective method, which recognizes the cumulative effect upon adoption as an adjustment to retained earnings at the adoption date.We believe theimpact of our adoption of the new revenue recognitionlease accounting standard may have a significant impact in the following areas:· The accounting forto 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 current accounting standards, VSOE for undelivered elements is required. This requirement will be eliminated under the new standard. Accordingly, we will be required to recognize as revenue a portioncondensed consolidated balance sheet, see Note 3 of the sales price upon delivery of the software, as compared to the current requirement of recognizing the entire sales price ratably over an estimated service period. We expect this difference to primarily impact revenues from our Call of Duty franchise. Many of our other franchises, such as Destiny, Overwatch, World of Warcraft, and Candy Crush, are hosted service arrangements, and we do not expect any significant impact on the accounting for our sales of these games.· The accounting for certain of our software licensing arrangements. While the impacts of the new standard may differ on a contract-by-contract basis (the actual revenue recognition treatment required under the standard will depend on contract-specific terms), we expect that the new standard will generally result in earlier revenue recognition for these arrangements.We are continuing to evaluate the additional impacts this new accounting guidance may have on our financial statements and related disclosures, including the impacts of these changes to our processes and internal controls. We expect that the new disclosure requirements will require us to design and implement additional internal controls over financial reporting.LeasesIn 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 lessees will need to recognize a lease liability and a right-of-use asset for their leases. The liability will be equal to the present value of lease payments. The asset will be based on the 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. Classification will be based on criteria that are largely similar to those applied in current lease accounting. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and will require application of the new guidance at the beginning of the earliest comparative period presented. We are evaluating the impact of this new accounting guidance on our financial statements. Currently, we do not plan to early adopt this new standard.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, 2018, and should be applied retrospectively. Early adoption is permitted.We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements. We expect there would be a significant impactnotes to the condensed consolidated financial 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 King Acquisition and the subsequent release of that cash in 2016 in connection with the King Acquisition. Under this new standard, the restricted cash balance would be included in the beginning and ending total cash, cash equivalents, and restricted cash balances and, hence, would not be included as an investing activity in the statementItem 1 of cash flows.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,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 Not Designated as HedgesAt September 30, 2017 and December 31, 2016, we did not have any outstanding foreign currency forward contracts not designated as hedges.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, 2017, the gross notional amount of outstanding2019, our Cash Flow Hedges was approximately $328 million. The fair value of these contracts, all of which have remaining maturities of 15three months or less, was $10 million of net unrealized losses. At September 30, 2017, we had approximately $6less. Additionally, $2 million of net realized but unrecognized lossesgains are recorded within “Accumulated other comprehensive income (loss)” associated with contractsat September 30, 2019 for Cash Flow Hedges that had settled but were deferred and will be amortized into earnings, along with the associated hedged revenues.revenues. Such amounts will be reclassified into earnings within the next 12 months.At December 31, 2016, the gross notional amount of outstanding Cash Flow Hedges was approximately $346 million. The fair value of these contracts was $22 million of net unrealized gains as of December 31, 2016.During the three and nine months ended September 30, 2017 and 2016, there was no ineffectiveness relating to our Cash Flow Hedges and the amount of pre-tax net realized gains (losses) associated with these contractsour Cash Flow Hedges that were reclassified out of “Accumulated other comprehensive income (loss)” and into earnings was as follows (amounts in millions): For the Three Months Ended September 30, For the Nine Months Ended September 30, Statement of Operations Classification 2019 2018 2019 2018 Cash Flow Hedges $ 7 $ 3 $ 24 $ (11 ) Net revenues 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, 2019 and 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, 2017,2019, a hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in a theoretical decline of our net income of approximately $95$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, and variable rateas our outstanding debt under the Credit Agreement. We do not currently use derivative financial instruments to manage interest rate risk. As of September 30, 2017, and December 31, 2016, a hypothetical interest rate change on our variable rate debt of one percent (100 basis points) would have changed interest expense on an annual basis by approximately $10 million and $27 million, respectively. This estimate does not include a change in interest income from our investment portfolio that may result from such a hypothetical interest rate change, nor does it include the effects of other actions that we may take in the future to mitigate this risk, or any changes in our financial structure. Refer to Note 7 of the notes to condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for disclosures regarding interest rates associated with our debt obligations.2017,2019, our $3.58 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, 2017,2019, 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 Securities and Exchange Commission’s rules and forms,forms; and (2) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. A control system, no matter how well designed and operated, can provide only reasonable assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports. Inherent limitations to any system of disclosure controls and procedures include, but are not limited to, the possibility of human error and the circumvention or overriding of such controls by one or more persons. In addition, we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, and our system of controls may therefore not achieve its desired objectives under all possible future events.Evaluation of Disclosure Controls and 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, 2017,2019, 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, 2017,2019, 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, 2017.2019. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at September 30, 2017,2019, 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, 2016.2018.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 10.1*10.2*Form of Notice of Performance Share Unit Award Regarding Operating Income to Robert A. Kotick.10.3*10.4*Notice of Stock Option Award, dated as of August 7, 2017, to Dennis Durkin.10.5*Notice of Stock Option Award, dated as of August 7, 2017, to Spencer Neumann.31.1Document.104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). *Indicates a management contract or compensatory plan, contract or arrangement in which a director or executive officer of the Company participates.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, 2017 and December 31, 2016, (ii) condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and September 30, 2016, (iii) condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2017 and September 30, 2016, (iv) condensed consolidated statements of cash flows for the nine months ended September 30, 2017 and September 30, 2016; (v) condensed consolidated statement of changes in shareholders’ equity for the nine months ended September 30, 2017; 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 2, 2017ACTIVISION BLIZZARD, INC./s/ SPENCER NEUMANN/s/ STEPHEN WEREBSpencer NeumannStephen WerebDennis Durkin Chief Financial Officer, andChief Accounting Officer andofActivision Blizzard, Inc.71