SECURITIES AND EXCHANGE COMMISSION
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2017
March 31, 2020 ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-15839
ACTIVISION BLIZZARD, INC. (Exact name of registrant as specified in its charter)
Delaware
| | 95-4803544
|
| |
| | |
Delaware | | 95-4803544 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | |
3100 Ocean Park Boulevard | Santa Monica, CA | CA |
| 90405 |
| |
|
(Address of principal executive offices) | | (Zip Code) |
(310)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common Stock, par value $0.000001 per share | | ATVI | | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. |
| | | | | | | |
Large Accelerated Filerx | ☒ | | Non-accelerated Filer | ☐ | | Accelerated Filero | ☐ |
| | | | | | | |
Non-accelerated filer o (Do not check if a smaller reporting company)
| | | | | | Smaller reporting companyo | ☐ |
| | |
| | | | Emerging growth companyo | ☐ |
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, 2017April 28, 2020 was
756,099,455.770,485,455.
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,“aims,” “believes,” “may,” “might,” “expects,” “intends,”
“intends as,“seeks,” “anticipates,” “estimate,” “future,” “positioned,” “potential,” “project,” “remain,” “scheduled,” “set to,” “subject to,”
“upcoming”“upcoming,” and other similar
words and expressions to help identify forward-looking statements. Forward-looking statements are subject to business and economic risks, reflect management’s current expectations, estimates, and projections about our business, and are inherently uncertain and difficult to predict.
The company cautions
We caution that a number of important factors,
many of which are beyond our control, 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 levelsthe ongoing global impact of
Activision Blizzard, Inc.’sa novel strain of coronavirus which emerged in December 2019 (“COVID-19”) (including, without limitation, the potential for significant short- and long-term global unemployment and economic weakness and a resulting impact on global discretionary spending; potential strain on the retailers and distributors who sell our physical product to customers; effects on our ability to release our content in a timely manner; the impact of large-scale intervention by the Federal Reserve and other central banks around the world, including the impact on interest rates; and volatility in foreign exchange rates); our ability to consistently deliver popular, high-quality titles
products, and services;in a timely manner, which has been made more difficult as a result of the COVID-19 pandemic; concentration of revenue among a small number of
titles; Activision Blizzard, Inc.’sfranchises; our ability to
predict consumer preferences,satisfy the expectations of consumers with respect to our brands, games, services, and/or business practices; our ability to attract, retain and motivate skilled personnel; rapid changes in technology and industry standards; competition, including
interestfrom other forms of entertainment; increasing importance of revenues derived from digital distribution channels; risks associated with the retail sales business model; the continued growth in
specific genresthe scope and
preferences among platforms;complexity of our business, including 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;
substantial influence of third-party platform providers over our products and costs; risks associated with transitions to next-generation consoles; success and availability of video game consoles manufactured by third parties; risks associated with the free-to-play business model, including dependence on a relatively small number of consumers for a significant portion of revenues and profits from any given game; our ability to realize the expected financial and operational benefits of, and effectively implement and manage, our previously announced restructuring actions; our ability to quickly adjust our cost structure in response to sudden changes in demand; risks and costs associated with legal proceedings; intellectual property claims; changes in tax rates or exposure to additional tax liabilities, as well as the outcome of current or future tax disputes; our ability to sell products at assumed pricing levels; 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 availabilityseasonality in the sale of
new hardware (including peripherals) and related software;our products; counterparty risks relating to customers, licensees, licensors, and
manufacturers; maintenancemanufacturers, which have been magnified as a result of
relationshipsthe COVID-19 pandemic; risks associated with
key personnel, customers, financing providers, licensees, licensors, manufacturers, vendors,our use of open source software; piracy and
third-party developers, includingunauthorized copying of our products; insolvency or business failure of any of our partners, which has been magnified as a result of the
ability to attract, retain,COVID-19 pandemic; risks and
develop key personnel and developers that can create high-quality titles,uncertainties of conducting business outside the United States (“U.S.”); increasing regulation of our business, products, and
services; risks relatingdistribution in key territories; compliance with continually evolving laws and regulations concerning data privacy; reliance on servers and networks to
the expansion into new businesses, including theoperate our games and our proprietary online gaming service; 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,
2016.2019 and this Quarterly Report on Form 10-Q.
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 INFORMATION
Item 1. Financial Statements
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except share data)
| | At September 30,
2017 | | At December 31,
2016 |
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 |
|
| | | | | | | |
| | At March 31, 2020 | | At December 31, 2019 |
| Assets | |
| | |
|
| Current assets: | |
| | |
|
| Cash and cash equivalents | $ | 5,906 |
| | $ | 5,794 |
|
| Accounts receivable, net of allowances of $87 and $132, at March 31, 2020 and December 31, 2019, respectively | 590 |
| | 848 |
|
| Software development | 293 |
| | 322 |
|
| Other current assets | 330 |
| | 328 |
|
| Total current assets | 7,119 |
| | 7,292 |
|
| Software development | 90 |
| | 54 |
|
| Property and equipment, net | 236 |
| | 253 |
|
| Deferred income taxes, net | 1,234 |
| | 1,293 |
|
| Other assets | 664 |
| | 658 |
|
| Intangible assets, net | 498 |
| | 531 |
|
| Goodwill | 9,763 |
| | 9,764 |
|
| Total assets | $ | 19,604 |
| | $ | 19,845 |
|
| | | | |
| Liabilities and Shareholders’ Equity | |
| | |
|
| Current liabilities: | |
| | |
|
| Accounts payable | $ | 158 |
| | $ | 292 |
|
| Deferred revenues | 1,064 |
| | 1,375 |
|
| Accrued expenses and other liabilities | 1,338 |
| | 1,248 |
|
| Total current liabilities | 2,560 |
| | 2,915 |
|
| Long-term debt, net | 2,675 |
| | 2,675 |
|
| Deferred income taxes, net | 458 |
| | 505 |
|
| Other liabilities | 890 |
| | 945 |
|
| Total liabilities | 6,583 |
| | 7,040 |
|
Commitments and contingencies (Note 16) |
|
| |
|
|
| Shareholders’ equity: | | | |
| Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,199,021,144 and 1,197,436,644 shares issued at March 31, 2020 and December 31, 2019, respectively | — |
| | — |
|
| Additional paid-in capital | 11,213 |
| | 11,174 |
|
| Less: Treasury stock, at cost, 428,676,471 shares at March 31, 2020 and December 31, 2019 | (5,563 | ) | | (5,563 | ) |
| Retained earnings | 7,999 |
| | 7,813 |
|
| Accumulated other comprehensive loss | (628 | ) | | (619 | ) |
| Total shareholders’ equity | 13,021 |
| | 12,805 |
|
| Total liabilities and shareholders’ equity | $ | 19,604 |
| | $ | 19,845 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in millions, except per share data)
| | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, |
| | 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 March 31, |
| | | 2020 | | 2019 |
| Net revenues | | | | |
| Product sales | | $ | 543 |
| | $ | 656 |
|
| Subscription, licensing, and other revenues | | 1,245 |
| | 1,169 |
|
| Total net revenues | | 1,788 |
| | 1,825 |
|
| | | | | |
| Costs and expenses | | | | |
|
| Cost of revenues—product sales: | | | | |
| Product costs | | 119 |
| | 152 |
|
| Software royalties, amortization, and intellectual property licenses | | 82 |
| | 111 |
|
| Cost of revenues—subscription, licensing, and other revenues: | | | | |
| Game operations and distribution costs | | 258 |
| | 239 |
|
| Software royalties, amortization, and intellectual property licenses | | 46 |
| | 61 |
|
| Product development | | 238 |
| | 249 |
|
| Sales and marketing | | 243 |
| | 207 |
|
| General and administrative | | 167 |
| | 179 |
|
| Restructuring and related costs | | 23 |
| | 57 |
|
| Total costs and expenses | | 1,176 |
| | 1,255 |
|
| | | | | |
| Operating income | | 612 |
| | 570 |
|
Interest and other expense (income), net (Note 12) | | 8 |
| | 3 |
|
| Income before income tax expense | | 604 |
| | 567 |
|
| Income tax expense | | 99 |
| | 120 |
|
| Net income | | $ | 505 |
| | $ | 447 |
|
| | | | | |
| Earnings per common share | | | | |
|
| Basic | | $ | 0.66 |
| | $ | 0.58 |
|
| Diluted | | $ | 0.65 |
| | $ | 0.58 |
|
| | | | | |
| Weighted-average number of shares outstanding | | | | |
|
| Basic | | 769 |
| | 764 |
|
| Diluted | | 774 |
| | 770 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in millions)
| | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, |
| | 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 Three Months Ended March 31, |
| | | 2020 | | 2019 |
| Net income | | $ | 505 |
| | $ | 447 |
|
| | | | | |
| Other comprehensive income (loss): | | | | |
| Foreign currency translation adjustment, net of tax | | (14 | ) | | 2 |
|
| Unrealized gains (losses) on forward contracts designated as hedges, net of tax | | 1 |
| | 2 |
|
| Unrealized gains (losses) on investments, net of tax | | 4 |
| | (5 | ) |
| Total other comprehensive loss | | $ | (9 | ) | | $ | (1 | ) |
| Comprehensive income | | $ | 496 |
| | $ | 446 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
| | 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 |
(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 Three Months Ended March 31, |
| | 2020 | | 2019 |
| Cash flows from operating activities: | |
| | |
|
| Net income | $ | 505 |
| | $ | 447 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
|
| Deferred income taxes | 11 |
| | 86 |
|
| Depreciation and amortization | 62 |
| | 87 |
|
| Non-cash operating lease cost | 16 |
| | 17 |
|
| Amortization of capitalized software development costs and intellectual property licenses (1) | 77 |
| | 104 |
|
| Share-based compensation expense (2) | 43 |
| | 63 |
|
| Other | — |
| | 30 |
|
| Changes in operating assets and liabilities: | | | |
|
| Accounts receivable, net | 249 |
| | 438 |
|
| Software development and intellectual property licenses | (85 | ) | | (46 | ) |
| Other assets | (11 | ) | | (38 | ) |
| Deferred revenues | (334 | ) | | (582 | ) |
| Accounts payable | (132 | ) | | (91 | ) |
| Accrued expenses and other liabilities | (253 | ) | | (65 | ) |
| Net cash provided by operating activities | 148 |
| | 450 |
|
| | | | |
| Cash flows from investing activities: | | | |
|
| Proceeds from maturities of available-for-sale investments | — |
| | 13 |
|
| Purchases of available-for-sale investments | (9 | ) | | — |
|
| Capital expenditures | (19 | ) | | (18 | ) |
| Net cash used in investing activities | (28 | ) | | (5 | ) |
| | | | |
| Cash flows from financing activities: | | | |
|
| Proceeds from issuance of common stock to employees | 26 |
| | 30 |
|
| Tax payment related to net share settlements on restricted stock units | (19 | ) | | (6 | ) |
| Net cash provided by financing activities | 7 |
| | 24 |
|
| Effect of foreign exchange rate changes on cash and cash equivalents | (15 | ) | | 2 |
|
| Net increase in cash and cash equivalents and restricted cash | 112 |
| | 471 |
|
| Cash and cash equivalents and restricted cash at beginning of period | 5,798 |
| | 4,229 |
|
| Cash and cash equivalents and restricted cash at end of period | $ | 5,910 |
| | $ | 4,700 |
|
| |
| (1) | Excludes deferral and amortization of share-based compensation expense. |
| |
| (2) | Includes the net effects of capitalization, deferral, and amortization of share-based compensation expense. |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the NineThree Months Ended September 30, 2017March 31, 2020 and March 31, 2019
(Amounts and shares in millions, except per share data)
| | Common Stock | | Treasury Stock | | Additional
Paid-In | | Retained | | Accumulated
Other
Comprehensive | | Total
Shareholders’ |
| | 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Treasury Stock | | Additional
Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total
Shareholders’
Equity |
| | Shares | | Amount | | Shares | | Amount | | | | |
| Balance at December 31, 2019 | 1,197 |
| | $ | — |
| | (429 | ) | | $ | (5,563 | ) | | $ | 11,174 |
| | $ | 7,813 |
| | $ | (619 | ) | | $ | 12,805 |
|
| Cumulative impact from adoption of new credit loss standard | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Components of comprehensive income: | | | | | | | | | | | | | | | |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 505 |
| | — |
| | 505 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9 | ) | | (9 | ) |
| Issuance of common stock pursuant to employee stock options | 1 |
| | — |
| | — |
| | — |
| | 27 |
| | — |
| | — |
| | 27 |
|
| Issuance of common stock pursuant to restricted stock units | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Restricted stock surrendered for employees’ tax liability | — |
| | — |
| | — |
| | — |
| | (31 | ) | | — |
| | — |
| | (31 | ) |
| Share-based compensation expense related to employee stock options and restricted stock units | — |
| | — |
| | — |
| | — |
| | 43 |
| | — |
| | — |
| | 43 |
|
| Dividends ($0.41 per common share) | — |
| | — |
| | — |
| | — |
| | — |
| | (316 | ) | | — |
| | (316 | ) |
| Balance at March 31, 2020 | 1,199 |
| | $ | — |
| | (429 | ) | | $ | (5,563 | ) | | $ | 11,213 |
| | $ | 7,999 |
| | $ | (628 | ) | | $ | 13,021 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.Description of Business and Basis of Consolidation and Presentation Activision Blizzard, Inc. is a leading global developer and publisher of interactive entertainment content and services. We develop and distribute content and services
across all of the major gaming platforms, includingon video game consoles, personal computers (“PC”
)s), and mobile devices.
We also operate esports leagues and offer digital advertising within our content. The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries.
The Company was originally incorporated in California in 1979 and was reincorporated in Delaware in December 1992.
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.
, pursuant to which we acquired Blizzard Entertainment, Inc. (“
Vivendi Games”Blizzard”),
an indirect wholly-owned subsidiary of Vivendi. In connection with the consummation of the Business Combination, Activision, Inc. waswe 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 Acquisition
On February 23, 2016, (the “King Closing Date”), we acquired King Digital Entertainment plc, a leading interactive mobile entertainment company (“King”("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.
shares.
Our Segments
As 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 haveActivision also establishedincludes the activities of the Call of Duty LeagueTM, a long-term allianceglobal professional esports league with Bungie to publish its game universe, Destiny.city-based teams.
Activision’s key product franchises include:franchise is Call of Duty®, a first-person shooteraction title for the console and PC platforms; Destiny, an online universeplatforms and, following the October 1, 2019 launch of first-person action gameplay (which we call a “shared-world shooter”Call of Duty: Mobile, the mobile platform, including for Google Inc.’s (“Google”) for consoleAndroid and PC platforms; and Skylanders®, a franchise geared towards children that brings physical toys to life digitally in the game, primarily for console platforms.Apple Inc.’s (“Apple”) iOS.
(ii) 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,subscription, 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 our MLG business, which is devoted to esports.the Overwatch League
TM, a global professional esports league with city-based teams.
Blizzard’s key product franchises include: World of Warcraft®, a subscription-based massive multi-player online role-playing game for the PC; StarCraft®, a real-time strategy 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 shooteraction title for the PC and console platforms.
(iii) King 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.currency, and we continue to focus on in-game advertising as a growing source of additional revenue.
King’s key product
franchises, all of which are for the PC and mobile platforms, include:franchise is Candy Crush™, which features “match three”
games; Farm Heroes™, which also features “match three” games; Pet Rescue™, which is a “clicker” game;games for the mobile and
Bubble Witch™, which features “bubble shooter” games.PC platforms.
We also engage in other businesses that do not represent reportable segments,
including:· the Activision Blizzard Studios (“Studios”) business, which is devoted to creating original film and television content based on our library of globally recognized intellectual properties, and which, in October 2017, released the second season of the animated TV series Skylanders™ Academy on Netflix; and
·including the Activision Blizzard Distribution (“Distribution”) business, which consists of operations in Europe that provide warehousing, logistics, and sales distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.
Basis of Consolidation and Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission
(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,
2016.2019.
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes.
Generally, making these estimates and developing our assumptions requires consideration of forecasted information, which, in context of the COVID-19 pandemic, involves additional uncertainty. While there was no material impact to our estimates in the current period, in future periods, facts and circumstances (including, without limitation, the impact of the ongoing global COVID-19 pandemic) could change and impact our estimates. Additionally, actual results could differ from these estimates and assumptions. In the opinion of management, all adjustments
(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 yearprior-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 InvestingInformation
As of March 31, 2020 and
Financing activitiesFor the nine months ended September 30, 2016,2019, we had non-cash purchase price considerationthe following amounts associated with investing and financing activities recorded within “Accrued expenses and other liabilities”:
dividends payable of $89$316 million and $283 million, respectively; and
accrued withholding tax payments related to vestednet share settlements on restricted stock units of $12 million and unvested stock options$40 million, respectively.
The beginning and
awards that were assumedending cash and
replaced with Activision Blizzard equity or deferred cash
awards in the King Acquisition. Refer to Note 14 for further discussion.2.Inventories, Net
Inventories, net, consistequivalents and restricted cash reported within our condensed consolidated statement of the followingcash flows included restricted cash amounts as follows (amounts in millions):
| | 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,
|
| | | | | | | |
| | At March 31, |
| | 2020 | | 2019 |
| Beginning restricted cash | $ | 4 |
| | $ | 4 |
|
| Ending restricted cash | 4 |
| | 4 |
|
2.Recently Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Cloud Computing Arrangements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued new guidance related to a customer’s accounting for implementation costs incurred in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract. The new guidance requires customers to capitalize implementation costs for these arrangements by applying the same criteria that are utilized for existing internal-use software guidance. The capitalized costs are required to be amortized over the associated term of the arrangement, generally on a straight-line basis, with amortization of these costs presented in the same financial statement line item as other costs associated with the arrangement. We adopted the new standard under a prospective approach during the first quarter of 2020 and it did not have a material impact on our condensed consolidated financial statements.
Goodwill
In January 2017, the FASB issued new guidance that eliminates Step 2 from the goodwill impairment test. Instead, if an entity forgoes a Step 0 test, that entity will be required to perform its annual or interim goodwill impairment test by (1) comparing the fair value of a reporting unit, as determined in Step 1 from the goodwill impairment test, with its carrying amount and (2) recognizing an impairment charge, if any, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. We adopted the new standard under a prospective approach during the first quarter of 2020 and it did not have a material impact on our condensed consolidated financial statements.
Financial Instruments - Credit Losses
In June 2016, the FASB issued new guidance related to accounting for credit losses on financial instruments. The update replaces the existing incurred loss impairment model under current GAAP with a methodology that reflects a current expected credit losses model which requires the use of historical and forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will generally result in earlier recognition of credit losses. We adopted the new standard under a modified retrospective basis, with the cumulative effect of adoption recorded as an adjustment to retained earnings during the first quarter of 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Simplifying the Accounting for Income Taxes
In December 31, 2016, inventory reserves were $21 million2019, the FASB issued new guidance which is intended to simplify various aspects of accounting for income taxes by removing certain exceptions to the general principles in Topic 740 for recognizing deferred taxes for investments, performing an intraperiod allocation and $45 million, respectively.calculating income taxes in interim periods
. The amendment also clarifies and amends certain areas of existing guidance to reduce complexity and improve consistency in the application of Topic 740. The new standard is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. Generally, the topics must be applied prospectively upon adoption, with the exception of certain topics which are required to be applied on a retrospective or modified retrospective basis. We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements.
3.Software Development and Intellectual Property Licenses The following table summarizes the components of our capitalized software development costs (amounts in millions):
| | At September 30, 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 | |
|
| | | | | | | |
| | At March 31, 2020 | | At December 31, 2019 |
| Internally-developed software costs | $ | 354 |
| | $ | 345 |
|
| Payments made to third-party software developers | 29 |
| | 31 |
|
| Total software development costs | $ | 383 |
| | $ | 376 |
|
As of
September 30, 2017both March 31, 2020 and December 31,
2016,2019, capitalized intellectual property licenses were not
material to our condensed consolidated balance sheets.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, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
Amortization of capitalized software development costs and intellectual property licenses | | $ | 34 | | $ | 47 | | $ | 206 | | $ | 260 | |
| | | | | | | | | | | | | |
|
| | | | | | | | |
| | | For the Three Months Ended March 31, |
| | | 2020 | | 2019 |
| Amortization of capitalized software development costs and intellectual property licenses | | $ | 83 |
| | $ | 110 |
|
Intangible assets, net, consist of the following (amounts in millions):
| | At September 30, 2017 | |
| | Estimated useful
lives | | Gross carrying
amount | | Accumulated
amortization | | Net carrying
amount | |
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
lives | | Gross carrying
amount | | Accumulated
amortization | | Net carrying
amount | |
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 | |
|
| | | | | | | | | | | | | | | |
| | At March 31, 2020 |
| | Estimated useful lives | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
| Acquired definite-lived intangible assets: | | | | | |
| | |
| | |
|
| Internally-developed franchises | 3 | - | 11 years | | $ | 1,154 |
| | $ | (1,116 | ) | | $ | 38 |
|
| Developed software | 2 | - | 5 years | | 601 |
| | (599 | ) | | 2 |
|
| Trade names | 7 | - | 10 years | | 54 |
| | (31 | ) | | 23 |
|
| Other | 1 | - | 15 years | | 19 |
| | (17 | ) | | 2 |
|
| Total definite-lived intangible assets | | | | | $ | 1,828 |
| | $ | (1,763 | ) | | $ | 65 |
|
| | | | | | | | | | |
| Acquired indefinite-lived intangible assets: | | | | | |
| | |
| | |
|
| Activision trademark | Indefinite | | |
| | |
| | 386 |
|
| Acquired trade names | Indefinite | | |
| | |
| | 47 |
|
| Total indefinite-lived intangible assets | | | | | |
| | |
| | $ | 433 |
|
| Total intangible assets, net | | | | | | | | | $ | 498 |
|
|
| | | | | | | | | | | | | | | |
| | At December 31, 2019 |
| | Estimated useful lives | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
| Acquired definite-lived intangible assets: | | | | | |
| | |
| | |
|
| Internally-developed franchises | 3 | - | 11 years | | $ | 1,154 |
| | $ | (1,105 | ) | | $ | 49 |
|
| Developed software | 2 | - | 5 years | | 601 |
| | (579 | ) | | 22 |
|
| Trade names | 7 | - | 10 years | | 54 |
| | (30 | ) | | 24 |
|
| Other | 1 | - | 15 years | | 19 |
| | (16 | ) | | 3 |
|
| Total definite-lived intangible assets | | | | | $ | 1,828 |
| | $ | (1,730 | ) | | $ | 98 |
|
| | | | | | | | | | |
| Acquired indefinite-lived intangible assets: | | | | | |
| | |
| | |
|
| Activision trademark | Indefinite | | |
| | |
| | 386 |
|
| Acquired trade names | Indefinite | | |
| | |
| | 47 |
|
| Total indefinite-lived intangible assets | | | | | |
| | |
| | $ | 433 |
|
| Total intangible assets, net | | | | | | | | | $ | 531 |
|
Amortization expense of
our intangible assets was
$188$33 million and
$573$55 million for the three
and nine months ended
September 30, 2017,March 31, 2020 and 2019, 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,March 31, 2020, future amortization of definite-lived intangible assets is estimated as follows (amounts in millions):
2017 (remaining three months) | | $ | 186 | |
2018 | | 364 | |
2019 | | 216 | |
2020 | | 72 | |
2021 | | 11 | |
Thereafter | | 10 | |
Total | | $ | 859 | |
|
| | | |
| For the years ending December 31, | |
| 2020 (remaining nine months) | $ | 42 |
|
| 2021 | 11 |
|
| 2022 | 7 |
|
| 2023 | 2 |
|
| 2024 | 1 |
|
| Thereafter | 2 |
|
| Total | $ | 65 |
|
The changes in the carrying amount of goodwill by reportable segment
for the nine months ended September 30, 2017, are as follows (amounts in millions):
| | 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 | |
(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.
|
| | | | | | | | | | | | | | | |
| | Activision | | Blizzard | | King | | Total |
| Balance at December 31, 2019 | $ | 6,898 |
| | $ | 190 |
| | $ | 2,676 |
| | $ | 9,764 |
|
| Other | (1 | ) | | — |
| | — |
| | (1 | ) |
| Balance at March 31, 2020 | $ | 6,897 |
| | $ | 190 |
| | $ | 2,676 |
| | $ | 9,763 |
|
6.Fair Value MeasurementsFinancial Accounting Standards Board (“FASB”)
The FASB literature regarding fair value measurements for certain assets and liabilities establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value are as follows:
·
Level 1—Quoted prices in active markets for identical assets or liabilities;
·
Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data; and
·
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
Fair Value Measurements on a Recurring Basis
The table below segregates all of our financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date (amounts in millions):
| | | | Fair Value Measurements at September 30, 2017
Using | | |
| | As of
September 30,
2017 | | 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 | | $ | 3,355 | | $ | 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
Using | | | |
| | As of
December 31,
2016 | | 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 | | $ | 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 | | | |
ARS represented the only Level 3 investment held by the Company as of December 31, 2016. During the nine months ended September 30, 2017, we sold our ARS investment. The realized gain on the sale of this investment was not material.
|
| | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at March 31, 2020 Using | | |
| | As of March 31, 2020 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance Sheet Classification |
| Financial Assets: | | | | | | | | | |
| Recurring fair value measurements: | |
| | |
| | |
| | |
| | |
| Money market funds | $ | 5,576 |
| | $ | 5,576 |
| | $ | — |
| | $ | — |
| | Cash and cash equivalents |
| Foreign government treasury bills | 32 |
| | 32 |
| | — |
| | — |
| | Cash and cash equivalents |
| U.S. treasuries and government agency securities | 74 |
| | 74 |
| | — |
| | — |
| | Other current assets |
| Foreign currency forward contracts designated as hedges | 7 |
| | — |
| | 7 |
| | — |
| | Other current assets and Other assets |
| Total recurring fair value measurements | $ | 5,689 |
| | $ | 5,682 |
| | $ | 7 |
| | $ | — |
| | |
| | | | | | | | | | |
| Financial Liabilities: | | | | | | | | | |
| Foreign currency forward contracts designated as hedges | $ | (1 | ) | | $ | — |
| | $ | (1 | ) | | $ | — |
| | Accrued expenses and other liabilities |
|
| | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at December 31, 2019 Using | | |
| | As of December 31, 2019 | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) | | Balance Sheet Classification |
| Financial Assets: | | | | | | | | | |
| Recurring fair value measurements: | |
| | |
| | |
| | |
| | |
| Money market funds | $ | 5,320 |
| | $ | 5,320 |
| | $ | — |
| | $ | — |
| | Cash and cash equivalents |
| Foreign government treasury bills | 37 |
| | 37 |
| | — |
| | — |
| | Cash and cash equivalents |
| U.S. treasuries and government agency securities | 65 |
| | 65 |
| | — |
| | — |
| | Other current assets |
| Total recurring fair value measurements | $ | 5,422 |
| | $ | 5,422 |
| | $ | — |
| | $ | — |
| | |
| | | | | | | | | | |
| Financial Liabilities: | | | | | | | | | |
| Foreign currency forward contracts not designated as hedges | $ | (2 | ) | | $ | — |
| | $ | (2 | ) | | $ | — |
| | Accrued expenses and other liabilities |
| Foreign currency forward contracts designated as hedges | $ | (2 | ) | | $ | — |
| | $ | (2 | ) | | $ | — |
| | Accrued expenses and other liabilities |
Foreign Currency Forward Contracts
Foreign Currency Forward Contracts Not Designated as Hedges
At 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
The total gross notional amountamounts and fair values of outstandingour Cash Flow Hedges was approximately $328 million. The fair value of these contracts, all of whichare as follows (amounts in millions):
|
| | | | | | | | | | | | | |
| | As of March 31, 2020 | | As of December 31, 2019 |
| | Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
| Foreign Currency: | | | | | |
| Buy USD, Sell Euro | $ | 646 |
| $ | 6 |
| | $ | 350 |
| $ | (2 | ) |
At March 31, 2020, our Cash Flow Hedges have remaining maturities of 1520 months or less, was $10 million of net unrealized losses. At September 30, 2017, we had approximately $6less. Additionally, $3 million of net realized but unrecognized lossesgains are recorded within “Accumulated other comprehensive income (loss)” associated with contractsat March 31, 2020 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.
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 March 31, | | Statement of Operations Classification |
| | | 2020 | 2019 | |
| Cash Flow Hedges | | $ | 9 |
| $ | 11 |
| | Net revenues |
Foreign Currency Forward Contracts Not Designated as Hedges
The gross notional amounts and fair values of our foreign currency forward contracts not designated as hedges are as follows (amounts in millions):
|
| | | | | | | | | |
| | As of March 31, 2020 | | As of December 31, 2019 |
| | Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
| Foreign Currency: |
|
| |
|
|
| Buy USD, Sell GBP | 25 |
| — |
| | 25 |
| (2 | ) |
For the three months ended March 31, 2020 and 2019, pre-tax net gains (losses) associated with these forward contracts were recorded in “General and administrative expenses” and were not material.
Fair Value Measurements on a Non-Recurring Basis
We measure the fair value of certain assets on a non-recurring basis, generally annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
During 2019, we recorded an upward adjustment of $38 million to an investment in equity securities, which had historically been carried at cost, based on an observable and orderly transaction in the common stock of the investee. As of both March 31, 2020 and December 31, 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, 2017March 31, 2020 and
2016,2019, there were no impairment charges related to assets that are measured on a non-recurring basis.
7.Deferred revenues
We record deferred revenues when cash payments are received or due in advance of the fulfillment of our associated performance obligations. The opening balance of deferred revenues as of January 1, 2020 and the ending balance as of March 31, 2020, were $1.4 billion and $1.1 billion, respectively, including our current and non-current balances. For the three months ended March 31, 2020, the additions to our deferred revenues balance were primarily due to cash payments received or due in advance of satisfying our performance obligations, while the reductions to our deferred revenues balance were primarily due to the recognition of revenues upon fulfillment of our performance obligations, both of which were in the ordinary course of business. During the three months ended March 31, 2020 and March 31, 2019, $0.8 billion and $0.9 billion of revenues, respectively, were recognized that were included in the deferred revenues balance at the beginning of the period.
As of March 31, 2020, the aggregate amount of contracted revenues allocated to our unsatisfied performance obligations is $2.3 billion, which includes our deferred revenues balances and amounts to be invoiced and recognized as revenue in future periods. We expect to recognize approximately $1.2 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.
As of March 31, 2020 and December 31,
2016,2019, we had
outstanding term loans “A” of approximately $2.7$1.5 billion
(the “2016 TLA”) and $250 million available under a revolving credit facility (the “Revolver”) pursuant to a credit agreement
executedentered into on October 11, 2013 (as amended thereafter and from time to time, the “Credit Agreement”).
On February 3, 2017, To date, 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 withhave not drawn on 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%. Wewe were in compliance with the terms of the Credit FacilitiesAgreement 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.
March 31, 2020.
Refer to Note
1113 contained in our Annual Report on Form 10-K for the year ended December 31,
20162019 for further details regarding the Credit Agreement,
its key terms, and
previous amendments made to
the Credit Agreement.it.
At
March 31, 2020 and December 31,
2016,2019, 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
$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;
$400 million of 2.6% unsecured senior notes due June 2022 (the “2022 Notes”), $400;
$850 million of 3.4% unsecured senior notes due September 2026 (the “2026 Notes”);
$400 million of 3.4% unsecured senior notes due June 2027 (the “2027 Notes”),; and $400
$400 million of 4.5% unsecured senior notes due June 2047 (the “2047 Notes”, and together with the 2021 Notes, the 2022 Notes, the
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 FacilitiesRevolver described above. The Notes are not secured and are effectively subordinatedjunior to any of the Company’s existing and future indebtedness that is secured. The Company wassecured to the extent of the value of the collateral securing such indebtedness. We were in compliance with the terms of each of the Notes as of September 30, 2017.March 31, 2020.
Interest is payable semi-annually in arrears on March 15 and September 15 of each year for the 2021 Notes
and 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
the 2047 Notes. Accrued interest payable is recorded within “Accrued expenses and other liabilities” in our condensed consolidated balance sheets. As of
September 30, 2017March 31, 2020 and December 31,
2016,2019, we had accrued interest payable of
$18$14 million and
$25$15 million, respectively, related to the Notes.
Refer to Note
1113 contained in our Annual Report on Form 10-K for the year ended December 31,
20162019 for further details regarding
our key terms under our indentures that govern the
2021 Notes, the 2023 Notes, and the 2026 Notes.
Interest Expense and Financing Costs
Fees and discounts associated with the issuance of our debt instruments are recorded as debt discount, which reduces their respective carrying values, and is amortized over their respective terms. Amortization expense is recorded 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
outstanding debt is as follows (amounts in millions):
| | At September 30, 2017 | |
| | Gross Carrying
Amount | | Unamortized
Discount and
Deferred Financing
Costs | | Net Carrying
Amount | |
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
Amount | | Unamortized
Discount and
Deferred Financing
Costs | | Net Carrying
Amount | |
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 | |
|
| | | | | | | | | | | |
| | At March 31, 2020 |
| | 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 |
| | (7 | ) | | 843 |
|
| 2027 Notes | 400 |
| | (5 | ) | | 395 |
|
| 2047 Notes | 400 |
| | (9 | ) | | 391 |
|
| Total long-term debt | $ | 2,700 |
| | $ | (25 | ) | | $ | 2,675 |
|
|
| | | | | | | | | | | |
| | At December 31, 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 |
| | (7 | ) | | 843 |
|
| 2027 Notes | 400 |
| | (5 | ) | | 395 |
|
| 2047 Notes | 400 |
| | (9 | ) | | 391 |
|
| Total long-term debt | $ | 2,700 |
| | $ | (25 | ) | | $ | 2,675 |
|
As of
September 30, 2017,March 31, 2020, 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 year ending December 31, | | | |
2017 (remaining three months) | | $ | — | |
2018 | | — | |
2019 | | — | |
2020 | | — | |
2021 | | 1,640 | |
Thereafter | | 2,800 | |
Total | | $ | 4,440 | |
|
| | | |
| For the years ending December 31, | |
|
| 2020 (remaining nine months) | $ | — |
|
| 2021 | 650 |
|
| 2022 | 400 |
|
| 2023 | — |
|
| 2024 | — |
|
| Thereafter | 1,650 |
|
| Total | $ | 2,700 |
|
With the exception of the
20232026 and the 2047 Notes, using Level 2 inputs (i.e., observable market prices in less-than-active markets)
, at March 31, 2020 and December 31, 2019, the carrying values of
our debt instrumentsthe Notes approximated their fair
value as of September 30, 2017,values, as the interest rates
arewere similar to
the current rates at which we
cancould 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 DecemberMarch 31, 2016, the carrying value of the 2016 TLA approximated its fair value, based on Level 2 inputs. At December 31, 2016,2020, based on Level 2 inputs, the fair values of the 20212026 and 2047 Notes 2023were $907 million and $501 million, respectively. At December 31, 2019, based on Level 2 inputs, the fair values of the 2026 Notes and 2026the 2047 Notes were $635 million, $818$893 million and $808$456 million, respectively.
8.
9.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):
| | For the Nine Months Ended September 30, 2017 | |
| | Foreign currency
translation
adjustments | | Unrealized gain
(loss) on forward
contracts | | Unrealized gain
(loss) on available-
for-sale securities | | 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
translation
adjustments | | Unrealized gain
(loss) on forward
contracts | | Unrealized gain
(loss) on available-
for-sale securities | | 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) | |
Income taxes were not provided for foreign currency translation items as these are considered indefinite investments in non-U.S. subsidiaries.
9.
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, 2020 |
| | Foreign currency translation adjustments | | Unrealized gain (loss) on forward contracts | | Unrealized gain (loss) on available-for-sale securities | | Total |
| Balance at December 31, 2019 | $ | (624 | ) | | $ | 8 |
| | $ | (3 | ) | | $ | (619 | ) |
| Other comprehensive income (loss) before reclassifications | (12 | ) | | 10 |
| | 4 |
| | 2 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) into earnings | (2 | ) | | (9 | ) | | — |
| | (11 | ) |
| Balance at March 31, 2020 | $ | (638 | ) | | $ | 9 |
| | $ | 1 |
| | $ | (628 | ) |
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, 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 | 2 |
| | 13 |
| | (6 | ) | | 9 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) into earnings | — |
| | (11 | ) | | 1 |
| | (10 | ) |
| Balance at March 31, 2019 | $ | (627 | ) | | $ | 25 |
| | $ | — |
| | $ | (602 | ) |
10.Operating Segments and Geographic RegionCurrently, we
We have
three3 reportable
segments.segments—Activision, Blizzard, and King. Our operating segments are consistent with the manner in which our operations are reviewed and managed by our Chief Executive Officer, who is our chief operating decision maker (“CODM”). The CODM reviews segment performance exclusive of: the impact of the change in deferred revenues and related cost of revenues with respect to certain of our online-enabled games; share-based compensation expense; amortization of intangible assets as a result of purchase price accounting; fees and other expenses (including legal fees, expenses, and accruals) related to acquisitions, associated integration activities, and financings; certain restructuring
and related costs; and
certain other non-cash charges. The CODM does not review any information regarding total assets on an operating segment basis, and accordingly, no disclosure is made with respect thereto.
Our operating segments are also consistent with our internal 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 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”
Information on reportable operating segment. Prior period amounts have been revised to reflect this change. The change had no impact on consolidatedsegment net revenues orand operating income.Information onincome for the reportable segmentsthree months ended March 31, 2020 and reconciliations2019, are presented below (amounts in millions):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Activision | | Blizzard | | King | | Total |
| Segment Net Revenues | | | | | | | |
| Net revenues from external customers | $ | 519 |
| | $ | 437 |
| | $ | 498 |
| | $ | 1,454 |
|
| Intersegment net revenues (1) | — |
| | 15 |
| | — |
| | 15 |
|
| Segment net revenues | $ | 519 |
| | $ | 452 |
| | $ | 498 |
| | $ | 1,469 |
|
| | | | | | | | |
| Segment operating income | $ | 184 |
| | $ | 197 |
| | $ | 156 |
| | $ | 537 |
|
| | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | Activision | | Blizzard | | King | | Total |
| Segment Net Revenues | | | | | | | |
| Net revenues from external customers | $ | 317 |
| | $ | 339 |
| | $ | 529 |
| | $ | 1,185 |
|
| Intersegment net revenues (1) | — |
| | 5 |
| | — |
| | 5 |
|
| Segment net revenues | $ | 317 |
| | $ | 344 |
| | $ | 529 |
| | $ | 1,190 |
|
| | | | | | | | |
| Segment operating income | $ | 73 |
| | $ | 55 |
| | $ | 178 |
| | $ | 306 |
|
| |
| (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
forare presented in the
three and nine months ended September 30, 2017 and 2016, are presentedtable below (amounts in millions):
| | For the Three Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | Net revenues | | Operating income and income
before income tax expense |
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
before income tax expense |
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 |
(1)
|
| | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2020 | | 2019 |
| Reconciliation to consolidated net revenues: | | | | |
| Segment net revenues | | $ | 1,469 |
| | $ | 1,190 |
|
| Revenues from non-reportable segments (1) | | 68 |
| | 73 |
|
| Net effect from recognition (deferral) of deferred net revenues (2) | | 266 |
| | 567 |
|
| Elimination of intersegment revenues (3) | | (15 | ) | | (5 | ) |
| Consolidated net revenues | | $ | 1,788 |
| | $ | 1,825 |
|
| | | | | |
| Reconciliation to consolidated income before income tax expense: | | | | |
| Segment operating income | | $ | 537 |
| | $ | 306 |
|
| Operating income (loss) from non-reportable segments (1) | | 3 |
| | (3 | ) |
| Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (2) | | 171 |
| | 441 |
|
| Share-based compensation expense | | (43 | ) | | (63 | ) |
| Amortization of intangible assets | | (33 | ) | | (54 | ) |
| Restructuring and related costs (4) | | (23 | ) | | (57 | ) |
| Consolidated operating income | | 612 |
| | 570 |
|
| Interest and other expense (income), net | | 8 |
| | 3 |
|
| Consolidated income before income tax expense | | $ | 604 |
| | $ | 567 |
|
| |
| (1) | Includes other income and expenses from operating segments managed outside the reportable segments, including our Distribution business. Also includes unallocated corporate income and expenses. |
| |
| (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, which include severance and other restructuring-related costs. |
Net revenues by distribution channel, 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, relateda reconciliation 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 certaineach of our foreign entities.
reportable segment’s revenues, for the three months ended March 31, 2020 and 2019, were as follows (amounts in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
| Net revenues by distribution channel: | | | | | | | | | | | |
| Digital online channels (1) | $ | 548 |
| | $ | 409 |
| | $ | 499 |
| | $ | — |
| | $ | (15 | ) | | $ | 1,441 |
|
| Retail channels | 212 |
| | 9 |
| | — |
| | — |
| | — |
| | 221 |
|
| Other (2) | 20 |
| | 31 |
| | — |
| | 75 |
| | — |
| | 126 |
|
| Total consolidated net revenues | $ | 780 |
| | $ | 449 |
| | $ | 499 |
| | $ | 75 |
| | $ | (15 | ) | | $ | 1,788 |
|
| | | | | | | | | | | | |
| Change in deferred revenues: | | | | | | | | | | | |
| Digital online channels (1) | $ | (93 | ) | | $ | 8 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | (86 | ) |
| Retail channels | (168 | ) | | (4 | ) | | — |
| | — |
| | — |
| | (172 | ) |
| Other (2) | — |
| | (1 | ) | | — |
| | (7 | ) | | — |
| | (8 | ) |
| Total change in deferred revenues | $ | (261 | ) | | $ | 3 |
| | $ | (1 | ) | | $ | (7 | ) | | $ | — |
| | $ | (266 | ) |
| | | | | | | | | | | | |
| Segment net revenues: | | | | | | | | | | | |
| Digital online channels (1) | $ | 455 |
| | $ | 417 |
| | $ | 498 |
| | $ | — |
| | $ | (15 | ) | | $ | 1,355 |
|
| Retail channels | 44 |
| | 5 |
| | — |
| | — |
| | — |
| | 49 |
|
| Other (2) | 20 |
| | 30 |
| | — |
| | 68 |
| | — |
| | 118 |
|
| Total segment net revenues | $ | 519 |
| | $ | 452 |
| | $ | 498 |
| | $ | 68 |
| | $ | (15 | ) | | $ | 1,522 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
| Net revenues by distribution channel: | | | | | | | | | | | |
| Digital online channels (1) | $ | 466 |
| | $ | 406 |
| | $ | 526 |
| | $ | — |
| | $ | (5 | ) | | $ | 1,393 |
|
| Retail channels | 297 |
| | 16 |
| | — |
| | — |
| | — |
| | 313 |
|
| Other (2) | — |
| | 39 |
| | — |
| | 80 |
| | — |
| | 119 |
|
| Total consolidated net revenues | $ | 763 |
| | $ | 461 |
| | $ | 526 |
| | $ | 80 |
| | $ | (5 | ) | | $ | 1,825 |
|
| | | | | | | | | | | | |
| Change in deferred revenues: | | | | | | | | | | | |
| Digital online channels (1) | $ | (217 | ) | | $ | (114 | ) | | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | (328 | ) |
| Retail channels | (229 | ) | | (4 | ) | | — |
| | — |
| | — |
| | (233 | ) |
| Other (2) | — |
| | 1 |
| | — |
| | (7 | ) | | — |
| | (6 | ) |
| Total change in deferred revenues | $ | (446 | ) | | $ | (117 | ) | | $ | 3 |
| | $ | (7 | ) | | $ | — |
| | $ | (567 | ) |
| | | | | | | | | | | | |
| Segment net revenues: | | | | | | | | | | | |
| Digital online channels (1) | $ | 249 |
| | $ | 292 |
| | $ | 529 |
| | $ | — |
| | $ | (5 | ) | | $ | 1,065 |
|
| Retail channels | 68 |
| | 12 |
| | — |
| | — |
| | — |
| | 80 |
|
| Other (2) | — |
| | 40 |
| | — |
| | 73 |
| | — |
| | 113 |
|
| Total segment net revenues | $ | 317 |
| | $ | 344 |
| | $ | 529 |
| | $ | 73 |
| | $ | (5 | ) | | $ | 1,258 |
|
| |
| (1) | Net revenues from “Digital online channels” include revenues from digitally-distributed subscriptions, downloadable content, microtransactions, and products, as well as licensing royalties. |
| |
| (2) | Net revenues from “Other” include revenues from our Distribution business, the Overwatch League, and the Call of Duty League. |
| |
| (3) | Intersegment revenues reflect licensing and service fees charged between segments. |
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,
including a reconciliation to each of our reportable segment’s net revenues, for the three months ended March 31, 2020 and 2019, were as follows (amounts in millions):
| | 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 | |
(1) Consists of the Europe, Middle East, and Africa geographic regions.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total |
| Net revenues by geographic region: | | | | | | | | | | | |
| Americas | $ | 472 |
| | $ | 172 |
| | $ | 311 |
| | $ | — |
| | $ | (7 | ) | | $ | 948 |
|
| EMEA (1) | 239 |
| | 121 |
| | 136 |
| | 75 |
| | (5 | ) | | 566 |
|
| Asia Pacific | 69 |
| | 156 |
| | 52 |
| | — |
| | (3 | ) | | 274 |
|
| Total consolidated net revenues | $ | 780 |
| | $ | 449 |
| | $ | 499 |
| | $ | 75 |
| | $ | (15 | ) | | $ | 1,788 |
|
| | | | | | | | | | | | |
| Change in deferred revenues: | | | | | | | | | | | |
| Americas | $ | (146 | ) | | $ | 2 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | (143 | ) |
| EMEA (1) | (96 | ) | | 3 |
| | (1 | ) | | (7 | ) | | — |
| | (101 | ) |
| Asia Pacific | (19 | ) | | (2 | ) | | (1 | ) | | — |
| | — |
| | (22 | ) |
| Total change in deferred revenues | $ | (261 | ) | | $ | 3 |
| | $ | (1 | ) | | $ | (7 | ) | | $ | — |
| | $ | (266 | ) |
| | | | | | | | | | | | |
| Segment net revenues: | | | | | | | | | | | |
| Americas | $ | 326 |
| | $ | 174 |
| | $ | 312 |
| | $ | — |
| | $ | (7 | ) | | $ | 805 |
|
| EMEA (1) | 143 |
| | 124 |
| | 135 |
| | 68 |
| | (5 | ) | | 465 |
|
| Asia Pacific | 50 |
| | 154 |
| | 51 |
| | — |
| | (3 | ) | | 252 |
|
| Total segment net revenues | $ | 519 |
| | $ | 452 |
| | $ | 498 |
| | $ | 68 |
| | $ | (15 | ) | | $ | 1,522 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total |
| Net revenues by geographic region: | | | | | | | | | | | |
| Americas | $ | 458 |
| | $ | 207 |
| | $ | 326 |
| | $ | — |
| | $ | (3 | ) | | $ | 988 |
|
| EMEA (1) | 243 |
| | 148 |
| | 144 |
| | 80 |
| | (1 | ) | | 614 |
|
| Asia Pacific | 62 |
| | 106 |
| | 56 |
| | — |
| | (1 | ) | | 223 |
|
| Total consolidated net revenues | $ | 763 |
| | $ | 461 |
| | $ | 526 |
| | $ | 80 |
| | $ | (5 | ) | | $ | 1,825 |
|
| | | | | | | | | | | | |
| Change in deferred revenues: | | | | | | | | | | | |
| Americas | $ | (267 | ) | | $ | (54 | ) | | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | (318 | ) |
| EMEA (1) | (146 | ) | | (47 | ) | | — |
| | (7 | ) | | — |
| | (200 | ) |
| Asia Pacific | (33 | ) | | (16 | ) | | — |
| | — |
| | — |
| | (49 | ) |
| Total change in deferred revenues | $ | (446 | ) | | $ | (117 | ) | | $ | 3 |
| | $ | (7 | ) | | $ | — |
| | $ | (567 | ) |
| | | | | | | | | | | | |
| Segment net revenues: | | | | | | | | | | | |
| Americas | $ | 191 |
| | $ | 153 |
| | $ | 329 |
| | $ | — |
| | $ | (3 | ) | | $ | 670 |
|
| EMEA (1) | 97 |
| | 101 |
| | 144 |
| | 73 |
| | (1 | ) | | 414 |
|
| Asia Pacific | 29 |
| | 90 |
| | 56 |
| | — |
| | (1 | ) | | 174 |
|
| Total segment net revenues | $ | 317 |
| | $ | 344 |
| | $ | 529 |
| | $ | 73 |
| | $ | (5 | ) | | $ | 1,258 |
|
| |
| (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
43%47% and 49% of consolidated net revenues for
both the three months ended
September 30, 2017March 31, 2020 and
2016.2019, respectively. The Company’s net revenues in the U.K. were
12%9% and 10% of consolidated net revenues for the three months ended
September 30, 2017March 31, 2020 and
2016,2019, respectively. No other country’s net revenues exceeded 10% of consolidated net revenues for
either the three months ended
September 30, 2017March 31, 2020 or
2016.The Company’s net2019.
Net revenues
in the U.S. were 46%by platform, including a reconciliation to each 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 consolidatedour reportable segment’s net revenues, for the
ninethree months ended
September 30, 2017 or 2016.Net revenues by platformMarch 31, 2020 and 2019, were as follows (amounts in millions):
| | 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 | |
(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.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
| Net revenues by platform: | | | | | | | | | | | |
| Console | $ | 567 |
| | $ | 27 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 594 |
|
| PC | 126 |
| | 362 |
| | 25 |
| | — |
| | (15 | ) | | 498 |
|
| Mobile and ancillary (1) | 67 |
| | 29 |
| | 474 |
| | — |
| | — |
| | 570 |
|
| Other (2) | 20 |
| | 31 |
| | — |
| | 75 |
| | — |
| | 126 |
|
| Total consolidated net revenues | $ | 780 |
| | $ | 449 |
| | $ | 499 |
| | $ | 75 |
| | $ | (15 | ) | | $ | 1,788 |
|
| | | | | | | | | | | | |
| Change in deferred revenues: | | | | | | | | | | | |
| Console | $ | (223 | ) | | $ | (8 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (231 | ) |
| PC | (37 | ) | | 19 |
| | (1 | ) | | — |
| | — |
| | (19 | ) |
| Mobile and ancillary (1) | (1 | ) | | (7 | ) | | — |
| | — |
| | — |
| | (8 | ) |
| Other (2) | — |
| | (1 | ) | | — |
| | (7 | ) | | — |
| | (8 | ) |
| Total change in deferred revenues | $ | (261 | ) | | $ | 3 |
| | $ | (1 | ) | | $ | (7 | ) | | $ | — |
| | $ | (266 | ) |
| | | | | | | | | | | | |
| Segment net revenues: | | | | | | | | | | | |
| Console | $ | 344 |
| | $ | 19 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 363 |
|
| PC | 89 |
| | 381 |
| | 24 |
| | — |
| | (15 | ) | | 479 |
|
| Mobile and ancillary (1) | 66 |
| | 22 |
| | 474 |
| | — |
| | — |
| | 562 |
|
| Other (2) | 20 |
| | 30 |
| | — |
| | 68 |
| | — |
| | 118 |
|
| Total segment net revenues | $ | 519 |
| | $ | 452 |
| | $ | 498 |
| | $ | 68 |
| | $ | (15 | ) | | $ | 1,522 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
| Net revenues by platform: | | | | | | | | | | | |
| Console | $ | 635 |
| | $ | 42 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 677 |
|
| PC | 124 |
| | 342 |
| | 33 |
| | — |
| | (5 | ) | | 494 |
|
| Mobile and ancillary (1) | 4 |
| | 38 |
| | 493 |
| | — |
| | — |
| | 535 |
|
| Other (2) | — |
| | 39 |
| | — |
| | 80 |
| | — |
| | 119 |
|
| Total consolidated net revenues | $ | 763 |
| | $ | 461 |
| | $ | 526 |
| | $ | 80 |
| | $ | (5 | ) | | $ | 1,825 |
|
| | | | | | | | | | | | |
| Change in deferred revenues: | | | | | | | | | | | |
| Console | $ | (386 | ) | | $ | (12 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (398 | ) |
| PC | (59 | ) | | (90 | ) | | — |
| | — |
| | — |
| | (149 | ) |
| Mobile and ancillary (1) | (1 | ) | | (16 | ) | | 3 |
| | — |
| | — |
| | (14 | ) |
| Other (2) | — |
| | 1 |
| | — |
| | (7 | ) | | — |
| | (6 | ) |
| Total change in deferred revenues | $ | (446 | ) | | $ | (117 | ) | | $ | 3 |
| | $ | (7 | ) | | $ | — |
| | $ | (567 | ) |
| | | | | | | | | | | | |
| Segment net revenues: | | | | | | | | | | | |
| Console | $ | 249 |
| | $ | 30 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 279 |
|
| PC | 65 |
| | 252 |
| | 33 |
| | — |
| | (5 | ) | | 345 |
|
| Mobile and ancillary (1) | 3 |
| | 22 |
| | 496 |
| | — |
| | — |
| | 521 |
|
| Other (2) | — |
| | 40 |
| | — |
| | 73 |
| | — |
| | 113 |
|
| Total segment net revenues | $ | 317 |
| | $ | 344 |
| | $ | 529 |
| | $ | 73 |
| | $ | (5 | ) | | $ | 1,258 |
|
| |
| (1) | Net revenues from “Mobile and ancillary” include revenues from mobile devices, as well as non-platform specific game-related revenues, such as standalone sales of physical merchandise and accessories. |
| |
| (2) | Net revenues from “Other” include revenues from our Distribution business, the Overwatch League, and the Call of Duty League. |
| |
| (3) | Intersegment revenues reflect licensing and service fees charged between segments. |
Long-lived assets by geographic region
at September 30, 2017 and December 31, 2016, were as follows (amounts in millions):
| | 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 | |
(1)
|
| | | | | | | |
| | At March 31, 2020 | | At December 31, 2019 |
| Long-lived assets (1) by geographic region: | |
| | |
|
| Americas | $ | 312 |
| | $ | 322 |
|
| EMEA | 133 |
| | 142 |
|
| Asia Pacific | 18 |
| | 21 |
|
| Total long-lived assets by geographic region | $ | 463 |
| | $ | 485 |
|
| |
| (1) | The only long-lived assets that we classify by region are our long-term tangible fixed assets, which consist of property, plant, and equipment assets, and our lease ROU assets; all other long-term assets are not allocated by location. |
11.Restructuring
During 2019, we began implementing our previously announced restructuring plan aimed at refocusing our resources on our largest opportunities and removing unnecessary levels of complexity from certain parts of our business. We have been:
increasing our investment in development for our largest, internally-owned franchises—across upfront releases, in-game content, mobile, and geographic expansion;
reducing certain non-development and administrative-related costs across our business; and
integrating our global and regional sales and “go-to-market,” partnerships, and sponsorships capabilities across the business, which we believe will enable us to provide better opportunities for talent, and greater expertise and scale on behalf of our business units.
The only long-livedrestructuring actions remain in progress as we continue to focus on these goals and execute against our plan in 2020.
The following table summarizes accrued restructuring and related costs included in “Accrued expenses and other liabilities” in our condensed consolidated balance sheet and the cumulative charges incurred (amounts in millions):
|
| | | | | | | | | | | | | | | |
| | Severance and employee-related costs | | Facilities and related costs | | Other costs | | Total |
| Balance at December 31, 2019 | $ | 32 |
| | $ | — |
| | $ | 3 |
| | $ | 35 |
|
| Costs charged to expense | 23 |
| | — |
| | — |
| | 23 |
|
| Cash payments | (6 | ) | | — |
| | (2 | ) | | (8 | ) |
| Balance at March 31, 2020 | $ | 49 |
| | $ | — |
| | $ | 1 |
| | $ | 50 |
|
| | | | | | | | |
| Cumulative charges incurred through March 31, 2020 | $ | 99 |
| | $ | 29 |
| | $ | 32 |
| | $ | 160 |
|
Total restructuring and related costs by segment are (amounts in millions):
|
| | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Activision | $ | 2 |
| | $ | 9 |
|
| Blizzard | 21 |
| | 26 |
|
| King | (1 | ) | | 8 |
|
| Other segments (1) | 1 |
| | 14 |
|
| Total | $ | 23 |
| | $ | 57 |
|
| |
| (1) | Includes charges related to operating segments managed outside the reportable segments, including our Distribution business. Also includes restructuring charges for our corporate and administrative functions. |
We expect to incur aggregate pre-tax restructuring charges of approximately $190 million associated with the restructuring plan. Approximately $50 million of these charges are expected to be incurred in 2020 as we complete the execution of the restructuring plan, as discussed above. These charges will primarily relate to severance and employee-related costs (approximately 60% of the aggregate charge), including, in many cases, amounts above those that are legally required, facilities and related costs (approximately 20% of the aggregate charge), and other costs (approximately 20% of the aggregate charge), including charges for restructuring related fees and the write-down of assets that we classifyfrom canceled projects. 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 continue throughout 2020.
The total charges incurred through March 31, 2020 and total expected pre-tax restructuring charges related to the restructuring plan by regionsegment, inclusive of amounts already incurred, are our long-term tangible fixed assets, which consistpresented below (amounts in millions):
|
| | | | | | |
| | Total Charges Incurred Through March 31, 2020 | Total Expected Charges |
| Activision | $ | 21 |
| $ | 25 |
|
| Blizzard | 94 |
| 105 |
|
| King | 19 |
| 20 |
|
| Other segments (1) | 26 |
| 40 |
|
| Total | $ | 160 |
| $ | 190 |
|
| |
| (1) | Includes charges related to operating segments managed outside the reportable segments, including our Distribution business. Also includes restructuring charges for our corporate and administrative functions. |
| |
| 12. | Interest and Other Expense (Income), Net |
Interest and other expense (income), net is comprised of property, plant, and equipment assets; all other long-term assets are not allocated by location.the following (amounts in millions):
|
| | | | | | | | |
| | | For the Three Months Ended March 31, |
| | | 2020 | | 2019 |
| Interest income | | $ | (16 | ) | | $ | (21 | ) |
| Interest expense from debt and amortization of debt discount and deferred financing costs | | 23 |
| | 23 |
|
| Other expense (income), net | | 1 |
| | 1 |
|
| Interest and other expense (income), net | | $ | 8 |
| | $ | 3 |
|
13.Income Taxes��
The Company accounts
We account for itsour 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 differscould be different from the statutory U.S. income tax rate due toto: the effect of state and local income taxes,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. The income tax expense of
$32$99 million for the three months ended
September 30, 2017,March 31, 2020 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%16%, which is lower than the effective tax rate of 12%21% for the ninethree months ended September 30, 2016.March 31, 2019. The decrease is primarily due to higher excessa discrete tax benefits from share-based paymentsbenefit recognized in the current period, partially offset by lower discreteyear in connection with the remeasurement of a U.S. deferred tax benefits, primarilyasset related to foreign earnings resulting from an audit settlement recognized in the prior period.
intra-group asset transfer.
The effective tax rate of 15% and 11%16% for the three and nine months ended September 30, 2017, respectively,March 31, 2020 is lower than the U.S. statutory rate of 35%21%, primarily due to lower U.S. taxes on foreign earnings, taxed at lower statutory rates, the recognitionremeasurement of excessa U.S. deferred tax benefits from share-based payments,asset related to foreign earnings, and the recognition of federal and California research and development credits, partially offsetcredits.
Activision Blizzard’s tax years after 2008 remain open to examination by
an increase of reserves for uncertain tax positions.certain major taxing jurisdictions to which we are subject. The Internal Revenue Service (“IRS”)IRS is currently examining Activision Blizzard’sour federal tax returns for the 2009, 2010, and 20112012 through 2016 tax years. During the second quarterWe also have several state and non-U.S. audits pending. In addition, King’s pre-acquisition tax returns remain open in various jurisdictions, primarily as a result of 2015, the Company transitioned the review of its transfer pricing methodology frommatters. We anticipate resolving King’s transfer pricing for both pre- and post-acquisition tax years through a collaborative multilateral process with the advanced pricing agreement reviewtax authorities in the relevant jurisdictions, which include the U.K. and Sweden. While the outcome of this process to the IRS examination team. Their reviewremains uncertain, it could result in a different allocation of profits and losses underan agreement that changes 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 these and other relevant jurisdictions or a failure to reach an agreement that results in unilateral adjustments to the relevant jurisdictions.
Vivendi Games’ resultsamount 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
period2016 tax year (“Initial Decision”). The Initial Decision described the basis for issuing a transfer pricing assessment of approximately 3.5kr billion (approximately $352 million), primarily concerning an alleged intercompany asset transfer. On June 17, 2019, we received a reassessment from
January 1, 2008 through July 9, 2008, are includedthe STA (the “Reassessment”) which changed the Initial Decision based on a revision of the transfer pricing approach reflected in King’s 2016 Swedish tax return and removal of the alleged intercompany asset transfer that was the basis of the Initial Decision. The STA also, at the same time, reassessed the 2017 tax year on the same transfer pricing basis as 2016. The transfer pricing approach reflected in the
consolidated federalReassessment for both 2016 and
certain foreign state and local income tax returns filed2017 remains subject to further review by
Vivendi or its affiliates, while Vivendi Games’ resultstaxing authorities in other jurisdictions. In July 2019, the Company made a payment to the STA 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 returnReassessment for the
20082016 and 2017 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 processyears, which did not
haveresult in a
materialsignificant impact to
the Company’sour condensed consolidated financial statements.
Certain
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 $632 million). In December 2019, the Company reached a settlement with the FTA for the 2011 through 2018 tax years, resulting in the recognition of $54 million of tax expense in the period ended December 31, 2019, and a tax payment of €161 million (approximately $178 million), including interest and penalties, in January 2020.
In addition, certain of our subsidiaries are under examination or investigation, or may be subject to examination or investigation, by tax authorities in various
jurisdictions, including France.jurisdictions. These proceedings may lead to adjustments or proposed adjustments to our taxes or provisions for uncertain tax positions. Such proceedings may have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations in the
earlier of the period or periods in which the matters are resolved
orand in which appropriate tax provisions are taken into account in our financial statements. If we were to receive a materially adverse assessment from a taxing jurisdiction, we would plan to vigorously contest it and consider all of our options, including the pursuit of judicial remedies.
We regularly assess the likelihood of adverse outcomes resulting from these examinations and monitor the progress of ongoing discussions with tax authorities in determining the appropriateness of our tax provisions. The final resolution of the Company’s global tax disputes is uncertain. There is significant judgment required in the analysis of disputes, including the probability determination and estimation of the potential exposure. Based on current information, in the opinion of the Company’s management, the ultimate resolution of these matters is not expected to have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations, except as noted above.
11.
14.Computation of Basic/Diluted Earnings Per Common Share The following table sets forth the computation of basic and diluted earnings per common share (amounts in millions, except per share data):
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 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 | |
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.
|
| | | | | | | | |
| | | For the Three Months Ended March 31, |
| | | 2020 | | 2019 |
| Numerator: | | | | |
| Consolidated net income | | $ | 505 |
| | $ | 447 |
|
| Denominator: | | |
| | |
|
| Denominator for basic earnings per common share—weighted-average common shares outstanding | | 769 |
| | 764 |
|
| Effect of potential dilutive common shares under the treasury stock method—employee stock options and awards | | 5 |
| | 6 |
|
| Denominator for basic earnings per common share—weighted-average dilutive common shares outstanding | | 774 |
| | 770 |
|
| | | | | |
| Basic earnings per common share | | $ | 0.66 |
| | $ | 0.58 |
|
| Diluted earnings per common share | | $ | 0.65 |
| | $ | 0.58 |
|
The vesting of certain of our employee-related restricted stock units and options
areis 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.PotentialAdditionally, potential common shares are not included in the denominator of the diluted earnings per common share calculation when the inclusion of such shares would be anti-dilutive. Therefore, approximately 1 million options to acquire
Weighted-average shares
of common stock were not included inexcluded from the
calculationcomputation 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 includedas follows (amounts 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.millions):
|
| | | | | | |
| | | For the Three Months Ended March 31, |
| | | 2020 | | 2019 |
| Restricted stock units and options with performance measures not yet met | | 3 |
| | 3 |
|
| Anti-dilutive employee stock options | | 6 |
| | 6 |
|
On
February 2, 2017,January 31, 2019, our Board of Directors authorized a stock repurchase program under which we are authorized to repurchase up to
$1$1.5 billion of our common stock
during the two-year period from February
14, 2019, until the earlier of February 13,
2017 through February 12, 2019.2021, and a determination by the Board of Directors to discontinue the repurchase program. As of
September 30, 2017,March 31, 2020, we have not repurchased any shares under this program.
On February 2, 2017,6, 2020, our Board of Directors approveddeclared a cash dividend of $0.30$0.41 per common share. Such dividend is payable on May 6, 2020, to shareholders of record at the close of business on April 15, 2020. We have recorded $316 million of dividends payable in “Accrued expenses and other liabilities” on our condensed consolidated balance sheet as of March 31, 2020.
On February 12, 2019, our Board of Directors declared a cash dividend of $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.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.
13.28, 2019.
16.Commitments and Contingencies
We are party to routine claims, suits, investigations, audits, and other proceedings arising from the ordinary course of business, including with respect to intellectual property rights, contractual claims, labor and employment matters, regulatory matters, tax matters, unclaimed property matters, compliance matters, and collection matters. In the opinion of management, after consultation with legal counsel, such routine claims and lawsuits are not significant, and we do not expect them to have a material adverse effect on our business, financial condition, results of operations, or liquidity.
14.Acquisitions
King Digital Entertainment
On 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, 2016
|
| Estimated useful lives
|
|
Tangible assets and liabilities assumed:
| | | | | |
Cash and cash equivalents
| | $
| 1,151
| | | |
Accounts receivable
| | 162
| | | |
Other current assets
| | 72
| | | |
Property and equipment
| | 57
| | 2 - 7 years
| |
Deferred income tax assets, net
| | 27
| | | |
Other assets
| | 47
| | | |
Accounts payable
| | (9)
| | | |
Accrued expenses and other liabilities
| | (272)
| | | |
Other liabilities
| | (110)
| | | |
Deferred income tax liabilities, net
| | (52)
| | | |
Intangible assets
| | | | | |
Internally-developed franchises
| | 845
| | 3 - 5 years
| |
Customer base
| | 609
| | 2 years
| |
Developed software
| | 580
| | 3 - 4 years
| |
Trade name
| | 46
| | 7 years
| |
Goodwill
| | 2,675
| | | |
Total purchase price
| | $
| 5,828
| | | |
During 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 Compensation
In 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 Goodwill
The 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 Earnings
The 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.
(in millions) | | For the Three Months Ended
September 30, 2016 | | For the Nine Months Ended
September 30, 2016 | |
Net revenues | | $ | 447 | | $ | 1,088 | |
Net loss | | $ | (72) | | $ | (171) | |
Pro Forma Financial Information
The 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.
(in millions) | | For the Three Months Ended
September 30, 2016 | | For the Nine Months Ended
September 30, 2016 | |
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 | |
15.Recently Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Inventory
In 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 Adopted
Revenue Recognition
In 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.
Leases
In 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.
Financial Instruments
In 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 Cash
In 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 impact to the 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.
Goodwill
In January 2017, the FASB issued new guidance which eliminates Step 2 from the goodwill impairment test. Instead, if any entity forgoes a Step 0 test, an entity will be required to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit, as determined in Step 1 from the goodwill impairment test, with its carrying amount and recognize an impairment charge, if any, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new standard is effective for fiscal years beginning after December 15, 2019 and should be applied prospectively. Early adoption is permitted. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption. We are evaluating the impact, if any, of adopting this new accounting guidance on our consolidated financial statements.
Derivatives and Hedging
In August 2017, the FASB issued new guidance related to the accounting for derivatives and hedging. The new guidance expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedged items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of a hedge’s effectiveness. The new standard is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. If early adopted, the new standard must generally be applied as of the beginning of the fiscal year of adoption. We are evaluating the impact of this new accounting guidance on our financial statements and related disclosures. We expect, based on our current outstanding derivative instruments, the new guidance will not have a material impact on our financial statements.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Activision 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 offer digital advertising within our content. The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries.
The Company was originally incorporated in California in 1979 and was reincorporated in Delaware in December 1992.
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.,
an indirect wholly-owned subsidiary of Vivendi. In connection with the consummation of the Business Combination, Activision,pursuant to which we acquired Blizzard Entertainment, Inc.
was(“Blizzard”), 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 Acquisition
On February 23, 2016, (the “King Closing Date”), we acquired King Digital Entertainment plc, a leading interactive mobile entertainment company (“King”("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.
shares.
Our Segments
As 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 haveActivision also establishedincludes the activities of the Call of Duty LeagueTM, a long-term allianceglobal professional esports league with Bungie to publish its game universe, Destiny.city-based teams.
Activision’s key product franchises include:franchise is Call of Duty®, a first-person shooteraction title for the console and PC platforms; Destiny, an online universeplatforms and, following the October 1, 2019 launch of first-person action gameplay (which we call a “shared-world shooter”Call of Duty: Mobile, the mobile platform, including for Google Inc.’s (“Google”) for consoleAndroid and PC platforms; and Skylanders®, a franchise geared towards children that brings physical toys to life digitally in the game, primarily for console platforms.Apple Inc.’s (“Apple”) iOS.
(ii) 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 our MLG business, which is devoted to esports.the Overwatch League
TM, a global professional esports league with city-based teams.
Blizzard’s key product franchises include: World of Warcraft®, a subscription-based massive multi-player online role-playing game for the PC; StarCraft®, a real-time strategy 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 shooteraction title for the PC and console platforms.
(iii) King 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.currency, and we continue to focus on in-game advertising as a growing source of revenue.
King’s key product franchises, all of which are for the PC and mobile platforms, include:franchise is Candy Crush™CrushTM, which features “match three” games; Farm Heroes™, which also features “match three” games; Pet Rescue™, which is a “clicker” game;games for the mobile and Bubble Witch™, which features “bubble shooter” games.PC platforms.
We also engage in other businesses that do not represent reportable segments,
including:· the Activision Blizzard Studios (“Studios”) business, which is devoted to creating original film and television content based on our library of globally recognized intellectual properties, and which, in October 2017, released the second season of the animated TV series Skylanders™ Academy on Netflix; and
·including the Activision Blizzard Distribution (“Distribution”) business, which consists of operations in Europe that provide warehousing, logistics, and sales distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.
Impacts of the Global COVID-19 Pandemic
In December 2019, a novel strain of coronavirus (“COVID-19”) emerged and has since extensively impacted global health and the economic environment. On February 28, 2020, the World Health Organization (“WHO”) raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. In an effort to contain the spread of COVID-19, domestic and international governments around the world enacted various measures, including orders to close all businesses not deemed “essential,” and quarantine orders for individuals to stay in their homes or places of residence, and practice social distancing when engaging in essential activities. We anticipate that these actions and the global health crisis caused by COVID-19 will negatively impact business activities and financial markets across the globe.
The full extent of the impact of the COVID-19 pandemic on our business, reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, or stock price will depend on numerous evolving factors that we are not able to fully predict at this time. However, we believe that given our strong balance sheet, with cash and cash equivalents and short-term investments of $6.0 billion as of March 31, 2020, and the fact that our business has increasingly shifted to digital channels, we have substantial flexibility as we navigate through the uncertain environment and near-term implications of COVID-19. Further, we anticipate in the near term that our business could see an increase in demand for our products and services as a result of the stay-at-home orders enacted in various regions, as players have more time to engage with our games. We began to see early indications of this trend towards the end of the first quarter of 2020, with the performance from some of our franchises further strengthening in March as populations sheltered at home in many regions of the world and turned to our content for entertainment and social connection. For instance, in the latter part of the quarter, we noted an even greater demand for Call of Duty: Modern Warfare® and its associated content, which was also benefiting from the launch of Call of Duty: Warzone in March 2020. Additionally, our Blizzard and King operating segments experienced an increase in monthly active users for certain franchises during the month of March. The sustainability of these early trends and long-term implications to our business is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time. See Item 1A “Risk Factors” within Part II of this Quarterly Report on Form 10-Q for additional details on risks and uncertainties regarding the impacts of the global COVID-19 pandemic on our business, reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, and stock price.
In an effort to protect the health and safety of our employees, the majority of our workforce is currently working from home and we have placed restrictions on non-essential business travel. We have implemented business continuity plans and have increased support and resources to enable our employees to work remotely and thus far our business has been able to operate with minimal disruption. The global COVID-19 pandemic remains a rapidly evolving situation. We will continue to actively monitor the developments of the pandemic and may take further actions that could alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our employees, customers, partners and shareholders. It is not clear what effects any such potential actions may have on our business, including the effects on our employees, players and consumers, customers, partners, game development and content pipelines, or on our reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, or stock price.
Business Results and Highlights
For the three months ended
September 30, 2017:·March 31, 2020:
consolidated net revenues
increased 3%decreased 2% to
$1.62$1.79 billion, while consolidated operating income
decreased 13%increased 7% to
$257$612 million, as compared to consolidated net revenues of
$1.57$1.83 billion and consolidated operating income of
$294$570 million for the three months ended
September 30, 2016;·March 31, 2019;
revenues from digital online channels were
$1.35$1.44 billion, or
84%81% of consolidated net revenues,
and were comparableas compared to
the $1.34$1.39 billion, or
86%76% of consolidated net revenues, for the three months ended
September 30, 2016;·March 31, 2019;
operating margin was
15.9%34.2%,
which includes $23 million in restructuring and related costs, as compared
with 18.8%to 31.2%, which included $57 million in restructuring and related costs, 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;·March 31, 2019;
consolidated net income
decreased 6%increased 13% to
$188$505 million, as compared to
$199$447 million for the three months ended
September 30, 2016;· consolidated net income included $15 million of excess tax benefits from share-based payments,March 31, 2019;
diluted earnings per common share increased 12% to $0.65, as compared to $12$0.58 for the three months ended March 31, 2019; and
cash flows from operating activities were $148 million, a decrease of 67%, as compared to $450 million 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.
During the nine months ended September 30, 2017:
· consolidated net revenues increased 8% to $4.97 billion and consolidated operating income increased 10% to $1.09 billion, as compared to consolidated net revenues of $4.59 billion and consolidated operating income of $987 million for the nine months ended September 30, 2016;
· revenues from digital online channels increased 19% to $4.05 billion, which was 81% of consolidated net revenues, as compared to $3.41 billion, which was 74% of consolidated net revenues, for the nine months ended September 30, 2016;
· operating margin was 21.9%, which was comparable with 21.5% for the nine months ended September 30, 2016;
· cash flows generated from operating activities were $1.06 billion, a decrease of 19%, as compared to $1.30 billion for the nine months ended September 30, 2016;
· consolidated net income increased 20% to $858 million, as compared to $713 million 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.
March 31, 2019.
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 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,March 31, 2020, include a net effect of
$284$266 million and
$132 million, respectively, from the deferral of net revenues and related cost of revenues. Net revenues and operating income for the nine months ended September 30, 2017, include a net effect of $458 million and $370$171 million, respectively, from the recognition of deferred net revenues and related cost of revenues.
Additionally, for the three months ended March 31, 2020 and 2019, 11% and 14%, respectively, of total net revenues recognized were from revenue sources that were recognized at a “point-in-time,” while “over-time and other” revenues were 89% and 86%, respectively, of total net revenues. Revenues recognized at a “point-in-time” are primarily comprised of the portion of revenue from software products that is recognized when the customer takes control of the product (i.e., upon delivery of the software product) and revenues from our Distribution business. “Over-time and other revenues” are primarily comprised of revenue associated with the online functionality of our games, in-game purchases, and subscriptions.
Content Release
and Event Highlights
Games and downloadableother major content that were releasedreleases during the three months ended September 30, 2017, include:·March 31, 2020, include Activision’s Absolution, the third downloadable content pack for
Call of Duty: Infinite Warfare™;· Activision’s Destiny 2Warzone
, an all-new free-to-play experience from the sequelworld of Call of Duty:Modern Warfarefor the console and PC platforms, and Blizzard’s Warcraft® III: ReforgedTM, a re-imagining of Blizzard’s real-time strategy game. Additionally, the Call of Duty League began its first season in January 2020, and the Overwatch League began its third season in February 2020.
Operating Metrics
The following operating metrics are key performance indicators that we use to
Destiny;· Activision’s Retributionevaluate our business. The key drivers of changes in our operating metrics are presented in the order of significance.
Net bookings and In-game net bookings
We monitor net bookings as a key operating metric in evaluating the performance of our business because it enables an analysis of performance based on PlayStation 4, the fourthtiming of actual transactions with our customers and provides more timely indications of trends in our operating results. Net bookings is the net amount of products and services sold digitally or sold-in physically in the period, and includes license fees, merchandise, and publisher incentives, among others. Net bookings is equal to net revenues excluding the impact from deferrals. In-game net bookings primarily includes the net amount of downloadable content 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):
|
| | | | | | | | | | | |
| | March 31, 2020 | | March 31, 2019 | | Increase (Decrease) |
| Net bookings | $ | 1,522 |
| | $ | 1,258 |
| | $ | 264 |
|
| In-game net bookings | $ | 956 |
| | $ | 794 |
| | $ | 162 |
|
Net bookings
The increase in net bookings for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, was primarily due to:
| |
| • | a $202 million increase in Activision net bookings primarily driven by (1) higher net bookings from Call of Duty: Modern Warfare (which was released in October 2019, and when referred to herein, is inclusive of Call of Duty: Warzone,which was released in March 2020) as compared to Call of Duty: Black Ops 4,which was released in October 2018 and (2) net bookings from Call of Duty: Mobile, which was released in October 2019, partially offset by lower net bookings from Sekiro: Shadows Die TwiceTM,which was released in March 2019, with no comparable release in 2020; and |
| |
| • | a $108 million increase in Blizzard net bookings driven by higher net bookings from World of Warcraft,primarily from higher subscription net bookings due to the release of World of WarcraftClassic in August 2019, and revenues associated with in-game content delivered to customers upon pre-purchase of World of Warcraft:Shadowlands, with no comparable net bookings in the prior period. |
The increase was partially offset by a $31 million decrease in King net bookings, primarily due to lower net bookings from player purchases, driven by the Candy Crush franchise, partially offset by an increase in advertising net bookings.
In-game net bookings
The increase in in-game net bookings for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, was primarily due to a $182 million increase in Activision in-game net bookings, driven by (1) higher in-game net bookings from Call of Duty: InfiniteModern Warfare; and· Blizzard’s Knights
,as compared to Call of Duty: Black Ops 4 and (2) in-game net bookings from Call of Duty: Mobile.
The increase was partially offset by a $50 million decrease in King in-game net bookings due to lower in-game net bookings, driven by the
Frozen Throne™, the latest expansion to Hearthstone.Candy Crush franchise.
Monthly Active
Users: Measuring the Size of Our User BaseUsers
We monitor monthly active users (“MAUs”) as a key measure of the overall size of our user base. MAUs are the number of individuals who
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.
In certain instances, we rely on third parties to publish our games. In these instances, MAU data is based on information provided to us by those third parties, or, if final data is not available, reasonable estimates of MAUs for these third-party published games.
The number of MAUs for a given period can be significantly impacted by the timing of new content releases, since new releases may cause a temporary surge in MAUs. Accordingly, although we believe that overall trending in the number of MAUs can be a meaningful performance metric, period-to-period fluctuations may not be indicative of longer-term trends. The following table details our average MAUs on a sequential quarterly basis for each of our reportable segments (amounts in millions):
| | September 30,
2017 | | June 30, 2017 | | March 31,
2017 | | December 31,
2016 | | September 30,
2016 | | 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 | |
|
| | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 |
| Activision | 102 |
| | 128 |
| | 36 |
| | 37 |
| | 41 |
| | 53 |
|
| Blizzard | 32 |
| | 32 |
| | 33 |
| | 32 |
| | 32 |
| | 35 |
|
| King | 273 |
| | 249 |
| | 247 |
| | 258 |
| | 272 |
| | 268 |
|
| Total | 407 |
| | 409 |
| | 316 |
| | 327 |
| | 345 |
| | 356 |
|
Average MAUs decreasedfor the three months ended March 31, 2020, were relatively comparable to the three months ended December 31, 2019, primarily due to the decrease in average MAUs for Activision being largely offset by 23an increase in average MAUs for King. The decrease in Activision’s average MAUs is driven by the Call of Duty franchise and reflects a decrease in average MAUs for Call of Duty: Mobile, which launched in October 2019, partially offset by an increase in average MAUs for Call of Duty: Modern Warfare,which benefited from the launch of Call of Duty: Warzone in March 2020. The increase in King’s average MAUs is primarily due to an increase in average MAUs for the Candy Crush franchise.
Average MAUs increased by 62 million, or 6%18%, for the three months ended September 30, 2017,March 31, 2020, as compared to the three months ended June 30, 2017.March 31, 2019. The decreaseyear-over-year increase in average MAUs is primarily due to an increase in Activision’s average MAUs due to the Call of Duty franchise driven by Call of Duty: Mobile and Call of Duty: Modern Warfare. King’s average MAUs is due to decreases across franchises reflectingwere roughly equal year-over-year as the maturity of King’s titles, as well as a decreaseincrease in Bubble Witch 3 Saga MAUs during the current quarter given the launch of the title earlier in 2017. The decrease in Blizzard’s average MAUs is due primarily to lower MAUs for the Heroes of the StormCandy Crush franchise was largely offset by decreases in part due to content and feature releases during the prior quarter without comparable releases in the current quarter.Average MAUs decreased by 98 million, or 20%, for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. The decrease in King’s average MAUs is due to decreases across King’s franchises that are largely attributable to the maturity of King’s titles and less engaged users leaving the network.
other franchises.
Management’s Overview of Business Trends
Interactive Entertainment and Mobile Gaming Growth
Our business participates in the global interactive entertainment industry. Games have become an increasingly popular form of entertainment, and we estimate the total industry has grown, on average,
19%13% annually
over the last four calendar years.from 2016 to 2019. The industry continues to benefit from additional players entering the market as interactive entertainment becomes more commonplace across age groups and as more developing regions
increasingly gain access to this form of entertainment.
Further, the wide adoption of smart phonessmartphones 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 fromin our franchises. The October 2019 launch of
Call of Duty: Mobile is an example of these efforts.
Opportunities to Expand Franchises Outside of Games
Our fans spend significant time
investingengaging in our franchises
and investing through purchases of our game content,
whether through purchases ofincluding full games,
or downloadable content
or viaand 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.nascent.
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,Overwatch League, which recently began its third season in February 2020, and,
as announced during
2019, we sold rights for the
third quarter of 2017, we completed the sale offirst 12 teams for the
Overwatch League. TheCall of Duty League, which began its first season in January 2020. As a result of the COVID-19 pandemic and stay-at-home orders across the world, both the Overwatch League
isand the
first majorCall of Duty League pivoted all matches from their originally planned local homestand formats to online play and remote production for the remainder of the regular season, to keep players and fans safe while still delivering premium esports content to a 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.audience.
Concentration of Sales Among the Most Popular Franchises
The concentration of retail revenues among key titles has continued as a trend in the overall interactive
softwareentertainment industry. According to The NPD Group, the top 10 titles accounted for
32%33% of the retail sales in the U.S. interactive entertainment industry in
2016.2019. 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 also been responsible for a disproportionately high percentage of our profits. For example,
in 2019, the Call of Duty, Candy Crush,
and World of Warcraft
and Overwatch franchises, collectively, accounted for
69%67% of our consolidated net
revenues, revenues—and a significantly higher percentage of our operating
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.
income.
In addition to investing in, and developing sequels and content for, our top titles,franchises, with the aim of releasing content more frequently, we are continually exploring additional ways to expand those franchises. Further, we invest in new properties infranchises, such as our recent release of Activision’s Call of Duty: Warzone, an effortall-new free-to-play experience from the world of Call of Duty:Modern Warfarefor the console and PC platforms. We also have been focusing on expanding our franchises to develop future top franchises. 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 in the mobile market, on February 23, 2016, we acquired King.platform, as demonstrated by the recently released
Call of Duty: Mobile, as well as our plans for Diablo ImmortalTM, which is currently in development.
Overall, we do expect that a limited number of popular franchises will continue to produce a disproportionately high percentage of our, and the industry’s, revenues and profits in the near future. Accordingly, our ability to maintain our top franchises and our ability to successfully compete against our competitors’ top franchises can significantly impact our performance.
Recurring Revenue Business Models
and Seasonality
Increased 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 than premium games developed primarily for the console or PC platforms.
While our business is shifting toward a year-round engagement model, the interactive entertainment industry remains somewhat seasonal.
We have historically experienced our highest sales volume, particularly for Activision, in the calendar year-end holiday buying season.
Consolidated Statements of Operations Data
The 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): | | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, | |
| | 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 March 31, |
| | | 2020 | | 2019 |
| Net revenues | | |
| |
| | |
| |
|
| Product sales | | $ | 543 |
| 30 | % | | $ | 656 |
| 36 | % |
| Subscription, licensing, and other revenues | | 1,245 |
| 70 |
| | 1,169 |
| 64 |
|
| Total net revenues | | 1,788 |
| 100 |
| | 1,825 |
| 100 |
|
| | | | | | | |
| Costs and expenses | | | |
| | |
| |
|
| Cost of revenues—product sales: | | | | | | |
| Product costs | | 119 |
| 22 |
| | 152 |
| 23 |
|
| Software royalties, amortization, and intellectual property licenses | | 82 |
| 15 |
| | 111 |
| 17 |
|
| Cost of revenues—subscription, licensing, and other revenues: | | | | | | |
| Game operations and distribution costs | | 258 |
| 21 |
| | 239 |
| 20 |
|
| Software royalties, amortization, and intellectual property licenses | | 46 |
| 4 |
| | 61 |
| 5 |
|
| Product development | | 238 |
| 13 |
| | 249 |
| 14 |
|
| Sales and marketing | | 243 |
| 14 |
| | 207 |
| 11 |
|
| General and administrative | | 167 |
| 9 |
| | 179 |
| 10 |
|
| Restructuring and related costs | | 23 |
| 1 |
| | 57 |
| 3 |
|
| Total costs and expenses | | 1,176 |
| 66 |
| | 1,255 |
| 69 |
|
| | | | | | | |
| Operating income | | 612 |
| 34 |
| | 570 |
| 31 |
|
| Interest and other expense (income), net | | 8 |
| — |
| | 3 |
| — |
|
| Income before income tax expense | | 604 |
| 34 |
| | 567 |
| 31 |
|
| Income tax expense | | 99 |
| 6 |
| | 120 |
| 7 |
|
| Net income | | $ | 505 |
| 28 | % | | $ | 447 |
| 24 | % |
Consolidated Net Revenues
The key drivers of changes in our consolidated net revenues, operating segment results, consolidated results, and sources of liquidity are presented in the order of significance.
The following table summarizes our consolidated net revenues,
in-game net revenues, and
the increase (decrease) in deferred net revenues recognized
for the three and nine months ended September 30, 2017 and 2016 (amounts in millions):
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2017 | | 2016 | | Increase
(decrease) | | % Change | | 2017 | | 2016 | | Increase
(decrease) | | % 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 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | | For the Three Months Ended March 31, |
| | | 2020 | | 2019 | | Increase (Decrease) | | % Change |
| Consolidated net revenues | | $ | 1,788 |
| | $ | 1,825 |
| | $ | (37 | ) | | (2 | )% |
| Net effect from recognition (deferral) of deferred net revenues | | 266 |
| | 567 |
| | (301 | ) | | |
| | | | | | | | | |
| In-game net revenues (1) | | 935 |
| | 943 |
| | (8 | ) | | (1 | )% |
| |
| (1) | In-game net revenues primarily includes the net amount of revenue recognized for downloadable content and microtransactions during the period. |
Consolidated Net Revenues
Q3 2017 vs. Q3 2016
The
increasedecrease in consolidated net revenues for the three months ended
September 30, 2017,March 31, 2020, as compared to the three months ended
September 30, 2016,March 31, 2019, was primarily
driven by a decrease in revenues of $121 million due to:
·
| |
| • | lower revenues from Sekiro: Shadows Die Twice,which was released in March 2019, with no comparable release in 2020; and |
the absence of revenues recognized from the continued strengthDestiny franchise in 2019 (reflecting our sale of the publishing rights for Destiny to Bungie in December 2018).
The decrease was partially offset by an increase in revenues of $65 million due to revenues recognized from Call of Duty: Black Ops III, driven by the downloadable content pack, Zombies ChroniclesMobile, which was released in May 2017, and continued strength of microtransactions;· higher revenues from the Candy Crush franchise, driven by in-game events and features, such as the live events across the franchise that coincided with the broadcasting of the game show; and
· revenues from Crash BandicootTM N. Sane Trilogy,which was released 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 2017 vs. YTD Q3 2016
The increase in consolidated net revenues for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, 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,October 2019, as well as highera net increase in revenues of $19 million from the Candy Crush franchise, due to in-game eventsvarious other franchises 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.
titles.
Change in Deferred Revenues Recognized
Q3 2017 vs. Q3 2016
The decrease in net deferred revenues recognized for the three months ended September 30, 2017,March 31, 2020, as compared to the three months ended September 30, 2016,March 31, 2019, was primarily due to the deferraldriven by (1) a decrease of revenues associated with the Destiny franchise, due to the release of Destiny 2 $185 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 WorldActivision, primarily due to lower net revenues recognized from Call of WarcraftDuty: Modern Warfare, which was released in October 2019, as compared to Call of Duty: Black Ops 4, which was released in October 2018 and (2) a net deferraldecrease of revenues in the comparable prior period due to the release of World of Warcraft: Legion in August 2016.YTD Q3 2017 vs. YTD Q3 2016
The increase$120 million in net deferred revenues recognized for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, wasfrom Blizzard, 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; and
· 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 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
World of Warcraft, driven by revenues recognized in the Callprior period from World of Duty franchise,Warcraft: Battle for Azeroth®, which was released in August 2018, with no comparable recognition of deferred revenues in the current period given no comparable release in 2019.
In-game Net Revenues
In-game net revenues for the three months ended March 31, 2020, were slightly lower than for the three months ended March 31, 2019, primarily due to a decrease in in-game net revenues of $89 million driven by:
lower in-game revenues from King, primarily due to lower revenues from player purchases, driven by the performanceCandy Crush franchise;
| |
| • | lower in-game revenues recognized from World of Warcraft;and |
| |
| • | lower in-game revenues recognized from Overwatch. |
The decrease was offset by an increase in in-game net revenues of $117 million due to:
| |
| • | in-game revenues recognized from Call of Duty: Mobile; and |
| |
| • | higher in-game revenues recognized from Call of Duty: Modern Warfare, which was released in October 2019, as compared to Call of Duty: Black Ops 4, which was released in October 2018. |
The remaining net decrease of
Duty: Infinite Warfare, as compared to Call of Duty: Black Ops III.$36 million was driven by various other franchises and titles.
Changes in foreign exchange rates had a
positive impact of $28 million and a negative impact of
$34$10 million on
Activision Blizzard’sour consolidated net revenues for the three
and nine months ended
September 30, 2017, respectively,March 31, 2020, 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 Results
Currently, we
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 Blizzard
Information 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 months ended March 31, 2020 and reconciliations2019, are presented below (amounts in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Increase / (Decrease) |
| | Activision | | Blizzard | | King | | Total | | Activision | | Blizzard | | King | | Total |
| Segment Net Revenues | | | | | | | | | | | | | | | |
| Net revenues from external customers | $ | 519 |
| | $ | 437 |
| | $ | 498 |
| | $ | 1,454 |
| | $ | 202 |
| | $ | 98 |
| | $ | (31 | ) | | $ | 269 |
|
| Intersegment net revenues (1) | — |
| | 15 |
| | — |
| | 15 |
| | — |
| | 10 |
| | — |
| | 10 |
|
| Segment net revenues | $ | 519 |
| | $ | 452 |
| | $ | 498 |
| | $ | 1,469 |
| | $ | 202 |
| | $ | 108 |
| | $ | (31 | ) | | $ | 279 |
|
| | | | | | | | | | | | | | | | |
| Segment operating income | $ | 184 |
| | $ | 197 |
| | $ | 156 |
| | $ | 537 |
| | $ | 111 |
| | $ | 142 |
| | $ | (22 | ) | | $ | 231 |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 | | | | | | | | |
| | Activision | | Blizzard | | King | | Total | | | | | | | | |
| Segment Net Revenues | | | | | | | | | | | | | | | |
| Net revenues from external customers | $ | 317 |
| | $ | 339 |
| | $ | 529 |
| | $ | 1,185 |
| | | | | | | | |
| Intersegment net revenues (1) | — |
| | 5 |
| | — |
| | 5 |
| | | | | | | | |
| Segment net revenues | $ | 317 |
| | $ | 344 |
| | $ | 529 |
| | $ | 1,190 |
| | | | | | | | |
| | | | | | | | | | | | | | | | |
| Segment operating income | $ | 73 |
| | $ | 55 |
| | $ | 178 |
| | $ | 306 |
| | | | | | | | |
| |
| (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):
| | For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, | |
| | 2017 | | 2016 | | Increase
(Decrease) | | 2017 | | 2016 | | Increase
(Decrease) | |
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 | | | |
(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 March 31, |
| | | 2020 | | 2019 |
| Reconciliation to consolidated net revenues: | | | | |
| Segment net revenues | | $ | 1,469 |
| | $ | 1,190 |
|
| Revenues from non-reportable segments (1) | | 68 |
| | 73 |
|
| Net effect from recognition (deferral) of deferred net revenues (2) | | 266 |
| | 567 |
|
| Elimination of intersegment revenues (3) | | (15 | ) | | (5 | ) |
| Consolidated net revenues | | $ | 1,788 |
| | $ | 1,825 |
|
| | | | | |
| Reconciliation to consolidated income before income tax expense: | | | | |
| Segment operating income | | $ | 537 |
| | $ | 306 |
|
| Operating income (loss) from non-reportable segments (1) | | 3 |
| | (3 | ) |
| Net effect from recognition (deferral) of deferred net revenues and related cost of revenues | | 171 |
| | 441 |
|
| Share-based compensation expense | | (43 | ) | | (63 | ) |
| Amortization of intangible assets | | (33 | ) | | (54 | ) |
| Restructuring and related costs (4) | | (23 | ) | | (57 | ) |
| Consolidated operating income | | 612 |
| | 570 |
|
| Interest and other expense (income), net | | 8 |
| | 3 |
|
| Consolidated income before income tax expense | | $ | 604 |
| | $ | 567 |
|
| |
| (1) | Includes other income and expenses from operating segments managed outside the reportable segments, including our Distribution business. Also includes unallocated corporate income and expenses. |
| |
| (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, which include severance and other restructuring-related costs. |
Activision
Q3 2017 vs. Q3 2016
The increase in Activision’s net revenues for the three months ended
September 30, 2017,March 31, 2020, as compared to the three months ended
September 30, 2016,March 31, 2019, was primarily due to:
·
| |
| • | higher revenues from Call of Duty: Modern Warfare, which was released in October 2019, as compared to Call of Duty: Black Ops 4, which was released in October 2018; |
| |
| • | revenues from Call of Duty: Mobile, which was released in October 2019; and |
revenues from the Call of Duty League, which began its first season in January 2020.
The increase was partially offset by:
| |
| • | lower revenues from Sekiro: Shadows Die Twice,which was released in March 2019, with no comparable release in 2020; and |
the absence of revenues from the Destiny franchise
driven byin 2019 (reflecting our sale of the
release of publishing rights for Destiny 2to Bungie in
September 2017;· 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, and continued strength of microtransactions; and
· revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017.
December 2018).
Blizzard
The increase
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.YTD Q3 2017 vs. YTD Q3 2016
The increase in Activision’s net revenues for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, was primarily due to the same drivers and partially offsetting factors as for the three months ended September 30, 2017, as discussed above.
Blizzard
Q3 2017 vs. Q3 2016
The decrease in Blizzard’s net revenues for the three months ended September 30, 2017,March 31, 2020, as compared to the three months ended September 30, 2016,March 31, 2019, 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.
| |
| • | higher revenues from World of Warcraft,primarily driven by higher subscription revenues due to the release of World of WarcraftClassic in August 2019, and revenues associated with in-game content delivered to customers upon pre-purchase of World of Warcraft:Shadowlands, with no comparable revenues in the prior period; and |
| |
| • | revenues from WarcraftIII: Reforged,which was released in January 2020. |
King
The decrease
was partially offset 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 2017 vs. YTD Q3 2016
The decrease in Blizzard’s net revenues for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, was primarily due to the same drivers as for the three months ended September 30, 2017, as discussed above.
King
Q3 2017 vs. Q3 2016
The increase in King’s net revenues for the three months ended September 30, 2017,March 31, 2020, as compared to the three months ended September 30, 2016,March 31, 2019, was primarily due to higherlower revenues from player purchases, driven by the Candy Crush franchise, drivenpartially offset by in-game events and features.
YTD Q3 2017 vs. YTD Q3 2016
Thean increase in King’s net revenues for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, was primarily 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 events and features.
advertising revenues.
Segment Income from Operations
Activision
Q3 2017 vs. Q3 2016
The increase in Activision’s operating income for the three months ended September 30, 2017,March 31, 2020, as compared to the three months ended September 30, 2016,March 31, 2019, was primarily due to the to:
higher revenues, as discussed above. The increase wasabove;
| |
| • | lower cost of revenues and marketing costs for Sekiro: Shadows Die Twice given the launch of the title in the prior year; and |
lower bad debt provisions.
These increases were partially offset by:
| |
| • | marketing costs, service provider fees such as digital storefront fees (e.g. fees retained by Apple and Google for our sales on their platforms) and server bandwidth fees, and software royalties for Call of Duty: Mobile in the current quarter with no such costs in the prior-year quarter; and |
higher product development costs driven by higher
amortizationpersonnel bonuses as a result of
capitalized software costs and higher product costs primarily due to the release of Destiny 2 in September 2017, along with higher sales and marketing costs to support that release.YTD Q3 2017 vs. YTD Q3 2016
strong business performance.
Blizzard
The increase
in Activision’s operating income for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, was primarily due to the higher revenues discussed above and lower costs associated with the Skylanders franchise, as there will not be a new release title in 2017. The increase was partially offset by the same factors discussed above as for the three months ended September 30, 2017.Blizzard
Q3 2017 vs. Q3 2016
The decrease in Blizzard’s operating income for the three months ended September 30, 2017,March 31, 2020, as compared to the three months ended September 30, 2016,March 31, 2019, was primarily due to the lowerto:
higher revenues, as discussed above. The decrease was partially offset by above; and
lower
amortization of capitalized software costs due to the release of World of Warcraft: Legion in August 2016, with no comparable release in 2017.YTD Q3 2017 vs. YTD Q3 2016
The decrease in Blizzard’s operating income for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, was primarily due to the lower revenues discussed above, along with higher product development costs, resulting from lowerdriven by higher capitalization of software development costs due tofrom the timing of game development cycles. cycles and higher personnel costs.
King
The decrease
was partially offset by:· lower sales 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.
King
Q3 2017 vs. Q3 2016
The increase in King’s operating income for the three months ended September 30, 2017,March 31, 2020, as compared to the three months ended September 30, 2016,March 31, 2019, was primarily due to the higherto:
lower revenues, as discussed above, along with lowerabove; and
higher sales 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.YTD Q3 2017 vs. YTD Q3 2016
The increase in King’s operating income for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, wasCandy Crush franchise.
These decreases were partially offset by lower service provider fees, primarily
due to the current period including King’s results of operationsdigital 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.our sales on their platforms).
Changes in foreign exchange rates had a
positivenegative impact of
$34 million and $1$19 million on reportable segment net revenues for the three
and nine months ended
September 30, 2017, respectively,March 31, 2020, as compared to the
impact on reportable segment 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.
Net Revenues by Distribution Channel
The 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):
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2017 | | 2016 | | Increase
(decrease) | | 2017 | | 2016 | | Increase
(decrease) | |
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 | |
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):
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2017 | | 2016 | | Increase
(decrease) | | 2017 | | 2016 | | Increase
(decrease) | |
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 | |
(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 March 31, |
| | | 2020 | | 2019 | | Increase (Decrease) |
| Net revenues by distribution channel: | | |
| | |
| | |
|
| Digital online channels (1) | | $ | 1,441 |
| | $ | 1,393 |
| | $ | 48 |
|
| Retail channels | | 221 |
| | 313 |
| | (92 | ) |
| Other (2) | | 126 |
| | 119 |
| | 7 |
|
| Total consolidated net revenues | | $ | 1,788 |
| | $ | 1,825 |
| | $ | (37 | ) |
| |
| (1) | Net revenues from “Digital online channels” include revenues from digitally-distributed subscriptions, downloadable content, microtransactions, and products, as well as licensing royalties. |
| |
| (2) | Net revenues from “Other” include revenues from our Distribution business, the Overwatch League, and the Call of Duty League. |
Digital Online Channel Net Revenues
Net Revenues
Q3 2017 vs. Q3 2016
Net revenues from digital online channels for the three months ended September 30, 2017, were comparable to the three months ended September 30, 2016. This was primarily due to increases in revenues driven by:
· 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; 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.
YTD Q3 2017 vs. YTD Q3 2016
The increase in net revenues from digital online channels for the
ninethree months ended
September 30, 2017,March 31, 2020, as compared to the
ninethree months ended
September 30, 2016,March 31, 2019, 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;
· 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.
| |
| • | higher revenues recognized from Call of Duty: Modern Warfare, which was released in October 2019, as compared to Call of Duty: Black Ops 4, which was released in October 2018; and |
| |
| • | revenues recognized from Call of Duty: Mobile, which was released in October 2019. |
The increase was partially offset by lower revenues recognized from Call of Duty: Infinite WarfareSekiro: Shadows Die Twice, as compared to the performance of Call of Duty: Black Ops III, thewhich was released in March 2019, with no comparable 2015 title.Changerelease in Deferred Revenues Recognized
Q3 2017 vs. Q3 2016
The 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 2016
The 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.
2020.
Retail Channel Net Revenues
Net Revenues
Q3 2017 vs. Q3 2016
The
increasedecrease in net revenues from retail channels for the three months ended
September 30, 2017,March 31, 2020, as compared to the three months ended
September 30, 2016,March 31, 2019, 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.
YTD Q3 2017 vs. YTD Q3 2016
The decrease in net revenues 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 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 decrease was partially offset by revenues from Crash Bandicoot N. Sane Trilogy.
Change in Deferred Revenues Recognized
Q3 2017 vs. Q3 2016
The 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 2016
The 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.
| |
| • | lower revenues from Sekiro: Shadows Die Twice; and |
| |
| • | lower revenues recognized from Call of Duty: Modern Warfare as compared to Call of Duty: Black Ops 4. |
Net Revenues by Geographic Region
The 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):
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2017 | | 2016 | | Increase
(decrease) | | 2017 | | 2016 | | Increase
(decrease) | |
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 | |
(1) Consists of the Europe, Middle East, and Africa geographic regions.
|
| | | | | | | | | | | | |
| | | For the Three Months Ended March 31, |
| | | 2020 | | 2019 | | Increase (Decrease) |
| Net revenues by geographic region: | | |
| | |
| | |
|
| Americas | | $ | 948 |
| | $ | 988 |
| | $ | (40 | ) |
| EMEA (1) | | 566 |
| | 614 |
| | (48 | ) |
| Asia Pacific | | 274 |
| | 223 |
| | 51 |
|
| Consolidated net revenues | | $ | 1,788 |
| | $ | 1,825 |
| | $ | (37 | ) |
| |
| (1) | “EMEA” consists of the Europe, Middle East, and Africa geographic regions. |
Americas
Q3 2017 vs. Q3 2016
Net
The decrease in net revenues in the Americas region for the three months ended September 30, 2017, were comparableMarch 31, 2020, as compared to the three months ended September 30, 2016. Net revenues were comparableMarch 31, 2019, was primarily due to increases inlower revenues from:· revenues recognized from the continued strength of Call of Duty: Black Ops III
Sekiro: Shadows Die Twice, driven by the downloadable content pack, Zombies Chronicles, which was released in May 2017, and continued strength of microtransactions; and· higher revenues from the Candy Crush franchise, driven by in-game events and features.
March 2019, with no comparable release in 2020.
EMEA
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 2017 vs. YTD Q3 2016
The increase in net revenues in the Americas region for the nine months ended September 30, 2017, as compared to 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;
· 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.
EMEA
Q3 2017 vs. Q3 2016
The increasedecrease in net revenues in the EMEA region for the three months ended September 30, 2017,March 31, 2020, as compared to the three months ended September 30, 2016, was primarily due to:
· revenues from Crash Bandicoot N. Sane Trilogy, which was released in June 2017;
· 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 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.
YTD Q3 2017 vs. YTD Q3 2016
The increase in net revenues in the EMEA region for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016,March 31, 2019, was primarily due to the same drivers and partially offsetting factors as those for the three months ended September 30, 2017, as discussed above.
lower revenues from
Sekiro: Shadows Die Twice.
Asia Pacific
Q3 2017 vs. Q3 2016
The
decreaseincrease in net revenues in the Asia Pacific region for the three months ended
September 30, 2017,March 31, 2020, as compared to the three months ended
September 30, 2016,March 31, 2019, was primarily due
to lower revenues recognized from Overwatch, which was released in May 2016.YTD Q3 2017 vs. YTD Q3 2016
The increase in net revenues in the Asia Pacific region for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, was primarily due to higher 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.
to:
| |
| • | higher subscription revenues from World of Warcraft, primarily driven by the release of World of WarcraftClassic in August 2019; |
| |
| • | revenues from WarcraftIII: Reforged,which was released in January 2020; and |
| |
| • | revenues recognized from Call of Duty: Mobile, which was released in October 2019. |
The 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):
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2017 | | 2016 | | Increase
(Decrease) | | 2017 | | 2016 | | Increase
(Decrease) | |
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 | |
(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 March 31, |
| | | 2020 | | 2019 | | Increase (Decrease) |
| Net revenues by platform: | | | | | | |
| Console | | $ | 594 |
| | $ | 677 |
| | $ | (83 | ) |
| PC | | 498 |
| | 494 |
| | 4 |
|
| Mobile and ancillary (1) | | 570 |
| | 535 |
| | 35 |
|
| Other (2) | | 126 |
| | 119 |
| | 7 |
|
| Total consolidated net revenues | | $ | 1,788 |
| | $ | 1,825 |
| | $ | (37 | ) |
| |
| (1) | Net revenues from “Mobile and ancillary” include revenues from mobile devices, as well as non-platform-specific game-related revenues, such as standalone sales of physical merchandise and accessories. |
| |
| (2) | Net revenues from “Other” include revenues from our Distribution business, the Overwatch League, and the Call of Duty League. |
Console
Q3 2017 vs. Q3 2016
The increasedecrease in net revenues from the console platform for the three months ended September 30, 2017,March 31, 2020, as compared to the three months ended September 30, 2016, 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
· higher revenues recognized from the Destiny franchise, driven by the release of Destiny 2 in September 2017.
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.
YTD Q3 2017 vs. YTD Q3 2016
The decrease in net revenues from the console platform for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016,March 31, 2019, was primarily due to lower revenues recognized from Call of Duty: Infinite Warfare
Sekiro: Shadows Die Twice, as compared to the performance of Call of Duty: Black Ops III. 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 Overwatch,
which was released in May 2016.PC
Q3 2017 vs. Q3 2016
The decreaseMarch 2019, with no comparable release in net2020.
PC
Net revenues from the PC platform for the three months ended September 30, 2017, as comparedMarch 31, 2020, were roughly equal to the three months ended September 30, 2016, wasMarch 31, 2019, primarily due to:· lowerto higher revenues recognized from Overwatch
Call of Duty: Modern Warfare, 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 2017 vs. YTD Q3 2016
The increase in net revenues from the PC platform for the nine months ended September 30, 2017,October 2019, as compared to the nine months ended September 30, 2016,
Call of Duty: Black Ops 4, which was primarily due to:· higherreleased in October 2018. This increase was largely offset by lower 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.
Sekiro: Shadows Die Twice.
Mobile and Ancillary
Q3 2017 vs. Q3 2016
The increase in net revenues from mobile and ancillary for the three months ended September 30, 2017,March 31, 2020, as compared to net revenues for the three months ended September 30, 2016,March 31, 2019, was primarily due to higher revenues recognized from the Candy Crush franchise, driven by in-game events and features.YTD Q3 2017 vs. YTD Q3 2016
The increase
Call of Duty: Mobile, which was released in net revenues from mobile and ancillary for the nine months ended September 30, 2017, as compared to 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.October 2019.
The 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): | | Three Months
Ended
September 30,
2017 | | % of associated
net revenues | | Three Months
Ended
September 30,
2016 | | % of associated
net revenues | | Increase
(Decrease) | |
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
Ended
September 30,
2017 | | % of associated net revenues | | Nine Months
Ended
September 30,
2016 | | % of associated
net revenues | | Increase
(Decrease) | |
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:
|
| | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | % of associated net revenues | | Three Months Ended March 31, 2019 | | % of associated net revenues | | Increase (Decrease) |
| Cost of revenues—product sales: | | | | | | | | | |
| Product costs | $ | 119 |
| | 22 | % | | $ | 152 |
| | 23 | % | | $ | (33 | ) |
| Software royalties, amortization, and intellectual property licenses | 82 |
| | 15 |
| | 111 |
| | 17 |
| | (29 | ) |
| Cost of revenues—subscription, licensing, and other revenues: | | | | | | | | | |
| Game operations and distribution costs | 258 |
| | 21 |
| | 239 |
| | 20 |
| | 19 |
|
| Software royalties, amortization, and intellectual property licenses | 46 |
| | 4 |
| | 61 |
| | 5 |
| | (15 | ) |
| Total cost of revenues | $ | 505 |
| | 28 | % | | $ | 563 |
| | 31 | % | | $ | (58 | ) |
Cost of Revenues—Product Sales:
Q3 2017 vs. Q3 2016
The
increasedecrease in product costs for the three months ended
September 30, 2017,March 31, 2020, as compared to the three months ended
September 30, 2016,March 31, 2019, was
primarily due toin line with the
increasedecrease in product
sales for the period, including from our relatively lower margin Distribution business.revenues.
The
decrease in software royalties, amortization, and intellectual property licenses related to product sales for the three months ended
September 30, 2017, was comparableMarch 31, 2020, as compared to the three months ended
September 30, 2016.YTD Q3 2017 vs. YTD Q3 2016
The decrease in product costs for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016,March 31, 2019, was primarily due to 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, as compared to the nine months ended September 30, 2016, was primarily due to:
· lower developer royalties and software amortization associated with 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.
The decrease was partially offset by higher software amortization from World of Warcraft: Legion, which was released in August 2016.
| |
| • | a $20 million decrease in software amortization and royalties from Activision, driven by lower software amortization and royalties from Sekiro: Shadows Die Twice, which was released in March 2019, with no comparable release in 2020; and |
| |
| • | an $8 million decrease in software amortization and royalties from Blizzard, driven by lower software amortization and royalties from World of Warcraft, as the prior year included software amortization from the August 2018 release of World of Warcraft: Battle for Azeroth with no comparable amortization in the current year. |
Cost of Revenues—Subscription, Licensing, and Other Revenues:Q3 2017 vs. Q3 2016
Revenues
:
The increase in game operations and distribution costs for the three months ended September 30, 2017,March 31, 2020, as compared to the three months ended September 30, 2016,March 31, 2019, was primarily due to higher platform provider fees associated withan increase of $13 million in esports broadcast costs, driven by the increaseCall of Duty League, which began its first season in revenues from King.January 2020.
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,March 31, 2020, as compared to the three months ended September 30, 2016, was primarily due to lower amortization of internally-developed franchise intangible assets acquired in the King Acquisition.YTD Q3 2017 vs. YTD Q3 2016
The increase in game operations and distribution costs for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, was primarily due to higher online costs and platform provider fees associated with revenues from King, as the current period includes King’s costs for a full year-to-date period, while the comparable prior period only included King’s revenues and associated costs for the partial period following the King Closing Date.
The increase in software royalties, amortization, and intellectual property licenses related to subscription, licensing, and other revenues for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016,March 31, 2019, was primarily due to a full year-to-date perioddecrease of $22 million in amortization of internally-developed franchise and developed software intangible assets acquired as part of our acquisition of King. The decrease was partially offset by an increase in the King Acquisition, while the comparable prior period only included a partial periodsoftware amortization and royalties from Activision of amortization$7 million, driven by software royalties on
Call of internally-developed franchise intangible assets following the King Closing Date.Duty: Mobile
, which was released in October 2019.
Product Development (amounts in millions) | | September 30,
2017 | | % of
consolidated
net revenues | | September 30,
2016 | | % of
consolidated
net revenues | | Increase
(Decrease) | |
Three Months Ended | | $ | 273 | | 17% | | $ | 249 | | 16% | | $ | 24 | |
Nine Months Ended | | $ | 750 | | 15% | | $ | 673 | | 15% | | $ | 77 | |
Q3 2017 vs. Q3 2016
|
| | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | % of consolidated net revenues | | March 31, 2019 | | % of consolidated net revenues | | Increase (Decrease) |
| Three Months Ended | $ | 238 |
| | 13 | % | | $ | 249 |
| | 14 | % | | $ | (11 | ) |
The
increasedecrease in product development costs for the three months ended
September 30, 2017,March 31, 2020, as compared to the three months ended
September 30, 2016,March 31, 2019, was primarily due to
a $40 million increase in capitalization of development costs, driven by the timing of Blizzard’s game development cycles. The decrease was partially offset by higher product development costs
resulting from lower capitalization of
software development costs in the current period due to the timing$29 million, driven by higher personnel bonuses as a result of
game development cycles. The increase was partially offset by lower accrued bonuses for Blizzard.YTD Q3 2017 vs. YTD Q3 2016
The increase in product development costs for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, was primarily due to:
· higher Blizzard product development costs resulting from lower capitalization of software development costs due to 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.
strong business performance.
Sales and Marketing (amounts in millions)
| | September 30,
2017 | | % of
consolidated
net revenues | | September 30,
2016 | | % of
consolidated
net revenues | | Increase
(Decrease) | |
Three Months Ended | | $ | 345 | | 21% | | $ | 340 | | 22% | | $ | 5 | |
Nine Months Ended | | $ | 899 | | 18% | | $ | 830 | | 18% | | $ | 69 | |
Q3 2017 vs. Q3 2016
Sales and marketing expenses for the three months ended September 30, 2017, were comparable to the three months ended September 30, 2016, as the higher sales and 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 2017 vs. YTD Q3 2016
|
| | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | % of consolidated net revenues | | March 31, 2019 | | % of consolidated net revenues | | Increase (Decrease) |
| Three Months Ended | $ | 243 |
| | 14 | % | | $ | 207 |
| | 11 | % | | $ | 36 |
|
The increase in sales and marketing expenses for the ninethree months ended September 30, 2017,March 31, 2020, as compared to the ninethree months ended September 30, 2016,March 31, 2019, was driven by an increase of $51 million in marketing spending and personnel costs, primarily due to:· increased amortization of the customer base intangible assets acquired in the King Acquisition and increased sales and marketing costs to support King’s titles, 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; and
·associated with higher sales and marketing costs for
Call of Duty: Mobile and the DestinyCandy Crush franchise, given the release of Destiny 2.The increase was partially offset by lower sales and marketing costs for Overwatch
Sekiro: Shadows Die Twice and World of Warcraft: Legion, due to their launchesa decrease in the prior year.bad debt provisions.
General and Administrative (amounts in millions)
| | September 30,
2017 | | % of
consolidated
net revenues | | September 30,
2016 | | % of
consolidated
net revenues | | Increase
(Decrease) | |
Three Months Ended | | $ | 191 | | 12% | | $ | 156 | | 10% | | $ | 35 | |
Nine Months Ended | | $ | 539 | | 11% | | $ | 486 | | 11% | | $ | 53 | |
Q3 2017 vs. Q3 2016
|
| | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | % of consolidated net revenues | | March 31, 2019 | | % of consolidated net revenues | | Increase (Decrease) |
| Three Months Ended | $ | 167 |
| | 9 | % | | $ | 179 |
| | 10 | % | | $ | (12 | ) |
The increasedecrease in general and administrative expenses for the three months ended September 30, 2017,March 31, 2020, as compared to the three months ended September 30, 2016,March 31, 2019, was primarily due to increaseda $10 million decrease in personnel costs including stock-based compensation expense, to support the growthand professional service fees.
Restructuring and related costs (amounts in millions)
|
| | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | % of consolidated net revenues | | March 31, 2019 | | % of consolidated net revenues | | Increase (Decrease) |
| Three Months Ended | $ | 23 |
| | 1 | % | | $ | 57 |
| | 3 | % | | $ | (34 | ) |
During 2019, we implemented our previously announced restructuring plan, which was aimed at refocusing our resources on our largest opportunities and removing unnecessary levels of complexity and duplication from certain parts of our businessbusiness. Since the roll out of the plan, we have been, and expanding areas of opportunity.YTD Q3 2017 vs. YTD Q3 2016
will continue focusing on these goals as we continue to execute against our plan into 2020. The increase in generalrestructuring and administrative expenses for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, was primarily due to:
· increased personnelrelated costs to support the growth of our business and expanding areas of opportunity; and
· 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 the nine months ended September 30, 2016, included the King Acquisition.
Interest and Other Expense (Income), Net (amounts in millions)
| | September 30,
2017 | | % of
consolidated
net revenues | | September 30,
2016 | | % of
consolidated
net revenues | | Increase
(Decrease) | |
Three Months Ended | | $ | 37 | | 2% | | $ | 63 | | 4% | | $ | (26 | ) |
Nine Months Ended | | $ | 121 | | 3% | | $ | 181 | | 3% | | $ | (60 | ) |
The decrease in interest and other expense (income), net, for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, was primarily due to our lower total outstanding debt and lower interest rates on our current debt instruments as a result of our refinancing activities in 2016 and 2017. See further discussion below under “Liquidity and Capital Resources.”
Income Tax Expense (amounts in millions)
| | September 30,
2017 | | % of pretax
income | | September 30,
2016 | | % of pretax
income | | Increase
(Decrease) | |
Three Months Ended | | $ | 32 | | 15% | | $ | 32 | | 14% | | $ | — | |
Nine Months Ended | | $ | 109 | | 11% | | $ | 93 | | 12% | | $ | 16 | |
The income tax expense of $32 million forincurred during the three months ended September 30, 2017, reflects an effective tax rate of 15%, which is higher than the effective tax rate of 14%March 31, 2020, relates primarily to severance costs for the three months ended September 30, 2016. The increase is dueactions under this plan being executed in 2020. Refer 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.
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.
Further information about our income taxes is provided in Note 1011 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for further discussion.
Interest and Other Expense (Income), Net (amounts in millions)
|
| | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | % of consolidated net revenues | | March 31, 2019 | | % of consolidated net revenues | | Increase (Decrease) |
| Three Months Ended | $ | 8 |
| | — | % | | $ | 3 |
| | — | % | | $ | 5 |
|
Interest and other expense (income), net, for the three months ended March 31, 2020, was comparable to the three months ended March 31, 2019. As of March 31, 2020, based on the composition of our investment portfolio, and as a result of the COVID-19 pandemic and recent actions by central banks around the world, including the interest rate cuts by the U.S. Federal Reserve, we anticipate investment yields may remain low, which would lower our future interest income. Such impact is not expected to be material to the Company’s liquidity.
Income Tax Expense (amounts in millions)
|
| | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | % of pretax income | | March 31, 2019 | | % of pretax income | | Increase (Decrease) |
| Three Months Ended | $ | 99 |
| | 16 | % | | $ | 120 |
| | 21 | % | | $ | (21 | ) |
The income tax expense of $99 million for the three months ended March 31, 2020 reflects an effective tax rate of 16%, which is lower than the effective tax rate of 21% for the three months ended March 31, 2019. The decrease is primarily due to a discrete tax benefit recognized in the current year in connection with the remeasurement of a U.S. deferred tax asset related to foreign earnings resulting from an intra-group asset transfer.
The effective tax rate of 16% for the three months ended March 31, 2020 is lower than the U.S. statutory rate of 21%, primarily due to lower U.S. taxes on foreign earnings, the remeasurement of a U.S. deferred tax asset related to foreign earnings, and the recognition of federal research and development credits.
The overall effective income tax rate in future periods will depend on a variety of factors, such as changes in pre-tax income or loss by jurisdiction, applicable accounting rules, applicable tax laws and regulations, and rulings and interpretations thereof, developments in tax audits and other matters, and variations in the estimated and actual level of annual pre-tax income or loss.
Further information about our income taxes is provided in Note 13 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
We believe our ability to generate cash flows from operating activities is one of our fundamental financial strengths.
InDespite the impacts of the COVID-19 pandemic on the global economy, in the near term, we expect our business
and financial condition to remain strong and to continue to generate significant operating cash
flows.flows, which, we believe, in combination with our existing balance of cash and cash equivalents and short-term investments of $6.0 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,March 31, 2020, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was
$2.3$2.0 billion, as compared to
$1.9$2.8 billion as of December 31,
2016. If the2019. 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)
| | September 30, 2017 | | December 31, 2016 | | Increase
(Decrease) | |
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
(Decrease) | |
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 | ) |
|
| | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 | | Increase (Decrease) |
| Cash and cash equivalents | $ | 5,906 |
| | $ | 5,794 |
| | $ | 112 |
|
| Short-term investments | 78 |
| | 69 |
| | 9 |
|
| | $ | 5,984 |
| | $ | 5,863 |
| | $ | 121 |
|
| Percentage of total assets | 31 | % | | 30 | % | | |
|
|
| | | | | | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 | | Increase (Decrease) |
| Net cash provided by operating activities | $ | 148 |
| | $ | 450 |
| | $ | (302 | ) |
| Net cash used in investing activities | (28 | ) | | (5 | ) | | (23 | ) |
| Net cash provided by financing activities | 7 |
| | 24 |
| | (17 | ) |
| Effect of foreign exchange rate changes | (15 | ) | | 2 |
| | (17 | ) |
| Net increase in cash and cash equivalents and restricted cash | $ | 112 |
| | $ | 471 |
| | $ | (359 | ) |
Net Cash Provided by Operating Activities
The 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
ninethree months ended
September 30, 2017,March 31, 2020, was
$1.1 billion,$148 million, as compared to
$1.3 billion$450 million for the
ninethree months ended
September 30, 2016.March 31, 2019. The decrease was primarily due to
higher tax payments, driven by payments in the
timing of the launches of our games, as the prior period included cash flows from two major launches—Overwatch 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 decrease was partially offset by:· higher net income for the ninethree months ended September 30, 2017, as compared to the nine months ended September 30, 2016, alongMarch 31, 2020 for a tax settlement in France, with larger adjustments to net income for non-cash charges, primarily associated with the amortization of the acquired intangiblesno comparable activity in the King Acquisition;2019, and
· changes in our working capital due toresulting from the timing of collections and payments.
Net Cash Used in Investing Activities
The primary drivers of net cash flows associated with
our investing activities typically include capital expenditures, purchases and sales of investments, changes in restricted cash balances, and cash used for acquisitions.
Net cash used in investing activities for the
ninethree months ended
September 30, 2017,March 31, 2020, was
$156$28 million, as compared to
$1.2 billionnet cash used in investing activities of $5 million for the
ninethree months ended
September 30, 2016.March 31, 2019. The
decrease in the cash usedincrease was primarily due to
cash usedthe purchase of $9 million of available-for-sale investments for the
King Acquisition in the ninethree months ended
September 30, 2016, with no comparable transaction in the current period. The decrease was partially offset by purchasesMarch 31, 2020, as compared to proceeds from maturities of available-for-sale investments of
$80$13 million in the prior-year period. Additionally, capital expenditures of $19 million for the
ninethree months ended
September 30, 2017, with no comparable transaction inMarch 31, 2020, were lower than the
priorcapital expenditures of $18 million for the prior-year period.
Net Cash
(Used in) Providedprovided by Financing Activities
The primary drivers of net cash flows associated with
our financing activities typically include the proceeds from, and repayments of, our long-term debt and transactions involving our common stock, including the issuance of shares of common stock to employees upon the exercise of stock options, as well as the payment of dividends.
Net
cash used in financing activities for the nine months ended September 30, 2017, was $640 million, as compared to net cash provided by financing activities
of $2.1 billion for the
ninethree months ended
September 30, 2016. The changeMarch 31, 2020, was
primarily attributed to our debt financing activities. For the nine months ended September 30, 2017, we had net debt repayments of $500$7 million, as compared to
approximately $2.3 billion of net debt proceeds$24 million for the
ninethree months ended
September 30, 2016.March 31, 2019. The
cash flows used in financing activitiesdecrease was primarily due to higher tax payments made for
net share settlements on restricted stock units, with $19 million of payments during the
ninethree months ended
September 30, 2017, were partially offset by higher proceeds from stock option exercises of $150 million,March 31, 2020, as compared to
$86$6 million
forin the
nine months ended September 30, 2016.prior-year period.
Effect of Foreign Exchange Rate Changes
Changes in foreign exchange rates had a
positive impact of $72 million and a negative impact of
$23$15 million on our cash and cash equivalents
and restricted cash for the
ninethree months ended
September 30, 2017 and 2016, respectively.March 31, 2020, as compared to a positive impact of $2 million for the three months ended March 31, 2019. The change was primarily due to changes in the value of the U.S. dollar relative to the
Euroeuro and the British pound.
At both March 31, 2020 and December 31,
2016,2019, 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):
| | At September 30, 2017 | |
| | Gross Carrying
Amount | | Unamortized
Discount and
Deferred Financing
Costs | | Net Carrying
Amount | |
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 | |
A summary of our debt as of December 31, 2016, was as follows (amounts in millions):
| | At December 31, 2016 | |
| | Gross Carrying
Amount | | Unamortized
Discount and
Deferred Financing
Costs | | Net Carrying
Amount | |
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 | |
|
| | | | | | | | | | | |
| | At March 31, 2020 |
| | 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 |
| | (7 | ) | | 843 |
|
| 2027 Notes | 400 |
| | (5 | ) | | 395 |
|
| 2047 Notes | 400 |
| | (9 | ) | | 391 |
|
| Total long-term debt | $ | 2,700 |
| | $ | (25 | ) | | $ | 2,675 |
|
|
| | | | | | | | | | | |
| | At December 31, 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 |
| | (7 | ) | | 843 |
|
| 2027 Notes | 400 |
| | (5 | ) | | 395 |
|
| 2047 Notes | 400 |
| | (9 | ) | | 391 |
|
| Total long-term debt | $ | 2,700 |
| | $ | (25 | ) | | $ | 2,675 |
|
Refer to Note 78 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.
On February
2, 2017,6, 2020, our Board of Directors
approveddeclared a cash dividend of
$0.30$0.41 per common share.
OnSuch dividend is payable on May
10, 2017, we made an aggregate cash dividend payment of $226 million6, 2020, to shareholders of record at the close of business on
April 15, 2020. We have recorded $316 million of dividends payable in “Accrued expenses and other liabilities” on our condensed consolidated balance sheet as of 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.31, 2020.
For the year ending December 31,
2017,2020, we anticipate total capital expenditures of approximately
$135$130 million, primarily for leasehold improvements, computer hardware, and software purchases. During the
ninethree months ended
September 30, 2017,March 31, 2020, capital expenditures were
$86$19 million.
Off-Balance Sheet Arrangements
At
September 30, 2017each of March 31, 2020 and December 31,
2016,2019, Activision Blizzard had no significant relationships with unconsolidated entities or financial parties, often referred to as “structured finance” or “special purpose” entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of
America (“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;· Allowances for Returns and Price Protection;
· Allowance for Inventory Obsolescence;
·Recognition;
•Income Taxes;
•Software Development Costs;· Income Taxes;
· and
•Fair Value Estimates (including Business Combinations and Assessment of Impairment of Assets); and· Share-Based Payments.
.
During the ninethree months ended September 30, 2017,March 31, 2020, 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 December��31, 2016,2019, for a more complete discussion of our critical accounting policies and estimates.
Recently Issued Accounting Pronouncements
Below are recently issued accounting pronouncements that were most significant to our accounting policy activities.
For a detailed discussion of all relevant recently issued accounting pronouncements, see Note 152 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.Recently Adopted Accounting Pronouncements
Inventory
In July 2015, the Financial Accounting Standards Board (“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 Adopted
Revenue Recognition
In 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.
Leases
In 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 Cash
In 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 impact to the 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.
Item 3.
Quantitative and Qualitative Disclosures about Market RiskMarket risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily include fluctuations in foreign currency exchange rates and interest rates.
Foreign Currency Exchange Rate Risk
We transact business in many different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange
rates.rates, with a heightened risk for volatility in the future due to potential impacts of COVID-19 on global financial markets. Revenues and related expenses generated from our international operations are generally denominated in their respective local currencies. Primary currencies include
Euros,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 Hedges
At 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
The total gross notional amountamounts and fair values of outstandingour Cash Flow Hedges was approximately $328 million. The fair value of these contracts, all of whichare as follows (amounts in millions):
|
| | | | | | | | | | | | | |
| | As of March 31, 2020 | | As of December 31, 2019 |
| | Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
| Foreign Currency: | | | | | |
| Buy USD, Sell Euro | $ | 646 |
| $ | 6 |
| | $ | 350 |
| $ | (2 | ) |
At March 31, 2020, our Cash Flow Hedges have remaining maturities of 1520 months or less, was $10 million of net unrealized losses. At September 30, 2017, we had approximately $6less. Additionally, $3 million of net realized but unrecognized lossesgains are recorded within “Accumulated other comprehensive income (loss)” associated with contractsat March 31, 2020, 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 March 31, | | Statement of Operations Classification |
| | | 2020 | 2019 | |
| Cash Flow Hedges | | $ | 9 |
| $ | 11 |
| | Net revenues |
Foreign Currency Forward Contracts Not Designated as Hedges
The total gross notional amounts and fair values of our foreign currency forward contracts not designated as hedges are as follows (amounts in millions):
|
| | | | | | | | | |
| | As of March 31, 2020 | | As of December 31, 2019 |
| | Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
| Foreign Currency: |
|
| |
|
|
| Buy USD, Sell GBP | 25 |
| — |
| | 25 |
| (2 | ) |
For the three months ended March 31, 2020 and 2019, pre-tax net gains (losses) associated with these forward contracts were recorded in “General and administrative expenses” and were not material.
In the absence of hedging activities for the
ninethree months ended
September 30, 2017,March 31, 2020, a hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in a theoretical decline of our net income of approximately
$95$30 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.
Our 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.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, 2017,March 31, 2020, our $3.58 billion of cash and cash equivalents waswere comprised primarily of money market funds.
The Company has determined that,
As of March 31, 2020, based on the composition of our investment portfolio, and as a result of September 30, 2017, there was no materialthe COVID-19 pandemic and recent actions by central banks around the world, including the interest rate risk exposurecuts by the U.S. Federal Reserve, we anticipate investment yields may remain low, which would lower our future interest income. Such impact is not expected to be material to the Company’s consolidated financial condition, results of operations, or liquidity as of that date.liquidity.
Item 4.
Controls and Procedures
Definition and Limitations of Disclosure Controls and Procedures
Our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act is: (1) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and
forms,forms; and (2) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. A control system, no matter how well designed and operated, can provide only reasonable assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports. Inherent limitations to any system of disclosure controls and procedures include, but are not limited to, the possibility of human error and the circumvention or overriding of such controls by one or more persons. In addition, we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, and our system of controls may therefore not achieve its desired objectives under all possible future events.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures at September 30, 2017,March 31, 2020, the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at September 30, 2017,March 31, 2020, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i)(1) recorded, processed, summarized, and reported
on a timely basis, and
(ii)(2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated any changes in our internal control over financial reporting that occurred during the fiscal quarter ended
September 30, 2017.March 31, 2020. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at
September 30, 2017,March 31, 2020, there have not been any changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
We are party to routine claims, suits, investigations, audits, and other proceedings arising from the ordinary course of business, including with respect to intellectual property rights, contractual claims, labor and employment matters, regulatory matters, tax matters, unclaimed property matters, compliance matters, and collection matters. In the opinion of management, after consultation with legal counsel, such routine claims and lawsuits are not significant, and we do not expect them to have a material adverse effect on our business, financial condition, results of operations, or liquidity.
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, 2016.2019 (the “2019 Form 10-K”).
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Risk Factors” in the 2019 Form 10-K which could materially affect our business, reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, or stock price. The ongoing global COVID-19 pandemic has heightened, and in some cases manifested, certain of the risks we normally face in operating our business, including those disclosed in the 2019 Form 10-K, and the risk factor disclosure in the 2019 Form 10-K is qualified by the information relating to the ongoing global COVID-19 pandemic that is described in this Quarterly Report on Form 10-Q, including the updated risk factor set forth below. Except as set forth below or otherwise discussed in this report, there have been no material changes to the risk factors previously disclosed in the 2019 Form 10-K.
Large-scale medical emergencies or public health epidemics may adversely affect our business, operations, financial condition, and future results.
Epidemics, medical emergencies and other public health crises outside of our control could have a negative impact on our business. Large-scale public health emergencies can take many forms and can cause widespread illness and death.
For example, in December 2019, COVID-19 emerged and has since extensively impacted global health and the economic environment. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic.
The full extent to which the global COVID-19 pandemic and its aftermath will impact our business, reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, or stock price depends on numerous evolving factors that we are not able to fully predict, including: the duration and severity of the pandemic; the impact of the pandemic on the global economy; the impact of governmental, business and individual actions that have been and will continue to be taken in response to the pandemic; unintended consequences of actions we take, or have taken, in response to the pandemic; the impact of the pandemic on the health or productivity of our employees and external developers, including the ability to develop high-quality and well-received interactive software products and entertainment content and/or to release our products and content in a timely manner; the effects on the health, finances and discretionary spending patterns of our consumers, including the ability of our consumers to pay for our products and content; the effects on the demand for our products and content (including following the lifting of stay-at-home orders); our ability to sell products at assumed prices; the financial impact and strain on the retail customers and distributors on whom we rely to sell our physical products to consumers; the financial impact and strain on platform providers for whose video game consoles and/or on whose networks certain of our products are exclusively available; the financial impact and strain on third-party mobile and web platforms that provide significant online distribution for, and/or provide other services critical for the operation of, a number of our games; the effects on our suppliers who manufacture our physical products; the effects on other third parties with which we partner (e.g., to market or ship our products); the effects on our lenders and financial counterparties; the effects on regulatory agencies around the world on which we rely; our ability and the ability of the teams in the esports leagues we operate to host live events at some time in the future; our ability to continue to develop our emerging businesses, such as esports and advertising; increased volatility in foreign currency exchange rates; the impact of large-scale intervention by the Federal Reserve and other central banks around the world, including the impact on interest rates; and any other factor which results in disruptions or increased costs associated with the development, production, post-production, marketing and distribution of our products, the operation of our esports leagues and/or the digital advertising offered within our content. If the ongoing global COVID-19 pandemic has adverse effects in any one of these areas, our business may be negatively impacted.
Item 5. Other Information
On April 28, 2020, the Board of Directors of the Company appointed Jesse Yang as its Senior Vice President, Chief Accounting Officer, effective May 6, 2020. Mr. Yang will assume the duties of the principal accounting officer from Dennis Durkin, the Company’s Chief Financial Officer, who has been serving in that role since August 5, 2019.
Mr. Yang, 44, held various positions of increasing responsibility in the finance department of Seagate Technology plc., a data storage technology and solutions company, from 2009 until April 2020, most recently serving as Senior Vice President, Corporate Controller & Treasury Operations from March 2019 until April 2020. Prior to joining Seagate, Mr. Yang was employed by PriceWaterhouseCoopers, a multinational network of firms delivering assurance, tax, and consulting services, from 1997 until 2008. Mr. Yang holds a B.S degree in applied mathematics from the University of California at Los Angeles.
There are no family relationships between Mr. Yang and any director or executive officer of the Company. Mr. Yang has not engaged in any related person transaction (as defined in Item 404(a) of Regulation S-K) with the Company.
Mr. Yang’s term of employment under his agreement began on May 1, 2020 and continues through April 30, 2022 (subject to the Company’s right to extend for an additional year). The agreement provides for: a minimum annual base salary of $439,888; eligibility to receive annual discretionary bonuses targeted at 60% of base salary; participation in other benefits generally available to executives; and a one-time payment of $400,000 as a long-term contract inducement, the entire amount of which is subject to “clawback” if Mr. Yang leaves the Company’s employment in certain situations prior to the first anniversary of his start date and half of which is subject to “clawback” if Mr. Yang leaves the Company’s employment in those situations prior to the second anniversary of his start date (but after the first anniversary of this start date).
Mr. Yang will initially be granted equity consisting of: (1) stock options ($1,160,000 grant value), two-thirds of which will vest on April 29, 2022, and the remaining one-third of which will vest on April 29, 2023; and (2) performance-vesting restricted share units ($1,740,000 grant date value at target; 125% of target at maximum performance), one-third of which will vest on each of April 29, 2021, 2022 and 2023, in each case based upon the level of achievement of the operating income objective for the Company set forth in its annual operating plan for the prior year.
If the agreement is terminated by reason of Mr. Yang’s death, his heirs or estate will be entitled to receive, in addition to any amounts earned or accrued but unpaid, a lump sum payment of two times his base salary and a pro rata annual bonus with respect to the current year, and any vested options will generally remain exercisable for one year after his death. If the agreement is terminated by the Company without “cause”, by Mr. Yang due to the relocation of his principal place of business without his consent, or as a result of his disability, he is entitled to receive, in addition to any amounts earned or accrued but unpaid, salary continuation through the expiration date of the agreement and a pro rata annual bonus with respect to the current year and, in the case of his termination due to disability, any vested options will generally remain exercisable for one year after such termination.
Certain payments contemplated by the agreement that would constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code are subject to reduction.
The exhibits listed on the accompanying Exhibit Index are hereby incorporated by reference into this Quarterly Report on Form 10-Q.
*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.
| |
| * | Indicates a management contract or compensatory plan, contract or arrangement in which a director or executive officer of the Company participates. |
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, 2017May 5, 2020
ACTIVISION BLIZZARD, INC.
/s/ SPENCER NEUMANN
| | /s/ STEPHEN WEREB
|
Spencer Neumann
| | Stephen Wereb
|
/s/ DENNIS DURKIN |
| Dennis Durkin |
Chief Financial Officer, and |
| Chief Accounting Officer and
|
Principal Financial Officer, of and |
| Principal Accounting Officer of |
Activision Blizzard, Inc. |
| Activision Blizzard, Inc.
|
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