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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

x

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

For the Quarterly Period Ended September 30, 2017

2021

OR

o

☐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

atvi-20210930_g1.jpg
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

N/A

90405

N/A

(Address of principal executive offices)

(Zip Code)

(310) 255-2000

(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.000001 per shareATVIThe 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, 20172021 was 756,099,455.

778,888,584.

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

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CERTIFICATIONS

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CAUTIONARY STATEMENT


This Quarterly Report on Form 10-Q contains, or incorporates by reference, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements consist of any statement other than a recitation of historical facts and include, but are not limited to: (1) projections of revenues, expenses, income or loss, earnings or loss per share, cash flow, or other financial items; (2) statements of our plans and objectives, including those related to releases of products or services;services, restructuring activities, and employee retention and recruitment; (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 the negative version of these words 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, distributors, and manufacturers who sell our physical products to customers and the platform providers on whose networks and consoles certain of our games are available; effects on our ability to release our content in a timely manner; effects on the operations of our professional esports leagues; the impact of large-scale intervention by the Federal Reserve and other central banks around the world, including the impact on interest rates; increased demand for our games due to stay-at-home orders and curtailment of other forms of entertainment, which may not be sustained and is likely to fluctuate as stay-at-home orders are reduced, lifted and/or reinstated; macroeconomic impacts arising from the long duration of the COVID-19 pandemic, including labor shortages and supply chain disruptions; 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; competition; concentration of revenue among a small number of titles; Activision Blizzard, Inc.’sfranchises; our ability to predict consumer preferences, including interest in specific genres and preferences among platforms;satisfy the diversionexpectations of management time and attentionconsumers with respect to issues relating to the operations of our acquired brands, games, services, and/or newly started businesses; the amount ofbusiness practices; our debt and the limitations imposed by the covenants in the agreements governing our debt; the adoption rate and availability of new hardware (including peripherals) and related software; counterparty risks relating to customers, licensees, licensors, and manufacturers; maintenance of relationships with key personnel, customers, financing providers, licensees, licensors, manufacturers, vendors, and third-party developers, including the ability to attract, retain, and develop key personnel and developers that can create high-quality titles, products, and services; risks relating to the expansion into new businesses, including the potential impact on our existing businesses; changing business models within the video game industry, including digital delivery of content and the increased prevalence of free-to-play games; product delays or defects; competition, including from other forms of entertainment;motivate skilled personnel; rapid changes in technology and industry standards; possible declines in software pricing; product returns and price protection; the identificationincreasing importance of suitable future acquisition opportunities and potential challengesrevenues derived from digital distribution channels; risks associated with geographic expansion; the seasonalretail sales business model; the continued growth in the scope and cyclical naturecomplexity of our business; substantial influence of third-party platform providers over our products and costs; success and availability of video game consoles manufactured by third parties, including our ability to predict the consoles that will be most successful in the marketplace and develop commercially-successful products for those consoles; risks associated with the free-to-play business model, including our 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 benefits of, and effectively implement and manage, our restructuring actions; difficulties in integrating acquired businesses or otherwise realizing the anticipated benefits of strategic transactions; the seasonality in the sale of our products; risks relating to behavior of our distributors, retailers, development, and licensing partners, or other affiliated third parties that may harm our brands or business operations; risks associated with our use of open source software; risks and uncertainties of conducting business outside the United States (the “U.S.”), including the recently enacted Chinese regulation that further limits the number of hours per week children under the age of 18 can play video games; risks associated with undisclosed content or features that may result in consumers’ refusal to buy or retailers’ refusal to sell our products; risks associated with objectionable consumer- or other third-party-created content; reliance on servers and networks to distribute and operate our games and our proprietary online gaming service; data breaches and other cybersecurity risks; significant disruption during our live events; risks related to the impacts of catastrophic events, including the susceptibility of some of our primary operating locations to earthquakes; provisions in our corporate documents that may make it more difficult for any person to acquire control of our company; risks and costs associated with legal proceedings, including the impact of the interactive entertainment market;complaint filed by the California Department of Fair Employment and Housing alleging violations of the California Fair Employment and Housing Act and the California Equal Pay Act and separate investigations and complaints by other parties and regulators related to certain employment practices and related disclosures; court approval of our settlement agreement with the Equal Employment Opportunity Commission (“EEOC”) and successful implementation of the requirements of the agreement with the EEOC; intellectual property claims; increasing regulation in key territories; regulation relating to the Internet, including potential harm from laws impacting “net neutrality”; regulation concerning data privacy, including China's recently passed Personal Information Protection Law; scrutiny regarding the appropriateness of our games’ content, including ratings assigned by third parties; changes in tax rates or exposure to additional tax liabilities, as well as the outcome of current or future tax disputes; litigation risks and associated costs; protection of proprietary rights; shiftsfluctuations in consumer spending trends; capital market risks; the impact of applicable regulations; domestic and international economic, financial, and political conditions and policies; tax rates and foreigncurrency exchange rates; the impactimpacts of changes in financial accounting standards; insolvency or business failure of any of our business partners, which has been magnified as a result of the current macroeconomic environment;COVID-19 pandemic; risks associated with our reliance on discretionary spending; 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.

2020 and Part II, Item 1A of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2021.


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. Actual events or results may differ from those expressed in forward-looking statements. Although theseAs such, you should not rely on forward-looking statements are believed to be true when made, theyas predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may ultimately prove to be incorrect.affect our business, financial condition, operating results, prospects, strategy, and financial needs. These statements are not guarantees of our future performance and are subject to risks, uncertainties, andand 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.


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PART I. FINANCIAL INFORMATION


Item 1. Financial Statements

(Unaudited)


ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(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 September 30, 2021At December 31, 2020
Assets
Current assets:
Cash and cash equivalents$9,718 $8,647 
Accounts receivable, net of allowances of $36 and $83, at September 30, 2021 and December 31, 2020, respectively585 1,052 
Software development227 352 
Other current assets681 514 
Total current assets11,211 10,565 
Software development349 160 
Property and equipment, net171 209 
Deferred income taxes, net1,400 1,318 
Other assets632 641 
Intangible assets, net449 451 
Goodwill9,765 9,765 
Total assets$23,977 $23,109 
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable$248 $295 
Deferred revenues844 1,689 
Accrued expenses and other liabilities924 1,116 
Total current liabilities2,016 3,100 
Long-term debt, net3,607 3,605 
Deferred income taxes, net433 418 
Other liabilities971 949 
Total liabilities7,027 8,072 
Commitments and contingencies (Note 17)
00
Shareholders’ equity:  
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,207,443,667 and 1,202,906,087 shares issued at September 30, 2021 and December 31, 2020, respectively— — 
Additional paid-in capital11,640 11,531 
Less: Treasury stock, at cost, 428,676,471 shares at September 30, 2021 and December 31, 2020(5,563)(5,563)
Retained earnings11,460 9,691 
Accumulated other comprehensive loss(587)(622)
Total shareholders’ equity16,950 15,037 
Total liabilities and shareholders’ equity$23,977 $23,109 

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

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in millions, except per share data)

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

 

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 September 30,For the Nine Months Ended September 30,
 2021202020212020
Net revenues
Product sales$423 $408 $1,666 $1,484 
In-game, subscription, and other revenues1,647 1,546 4,974 4,190 
Total net revenues2,070 1,954 6,640 5,674 
Costs and expenses
Cost of revenues—product sales:
Product costs120 101 375 357 
Software royalties, amortization, and intellectual property licenses72 37 272 152 
Cost of revenues—in-game, subscription, and other:
Game operations and distribution costs307 290 925 819 
Software royalties, amortization, and intellectual property licenses28 41 87 115 
Product development329 274 1,016 802 
Sales and marketing244 238 727 722 
General and administrative143 186 614 529 
Restructuring and related costs3 9 46 39 
Total costs and expenses1,246 1,176 4,062 3,535 
Operating income824 778 2,578 2,139 
Interest and other expense (income), net (Note 13)
65 25 52 55 
Loss on extinguishment of debt— 31 — 31 
Income before income tax expense759 722 2,526 2,053 
Income tax expense120 118 391 365 
Net income$639 $604 $2,135 $1,688 
Earnings per common share
Basic$0.82 $0.78 $2.75 $2.19 
Diluted$0.82 $0.78 $2.72 $2.17 
Weighted-average number of shares outstanding
Basic778 772 777 771 
Diluted783 779 784 777 

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

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Amounts in millions)

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

 

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 September 30,For the Nine Months Ended September 30,
 2021202020212020
Net income$639 $604 $2,135 $1,688 
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax(14)21 (8)11 
Unrealized gains (losses) on forward contracts designated as hedges, net of tax14 (18)40 (26)
Unrealized gains (losses) on available-for-sale securities, net of tax6 (2)3 1 
Total other comprehensive income (loss)$6 $1 $35 $(14)
Comprehensive income$645 $605 $2,170 $1,674 

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


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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(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

 For the Nine Months Ended September 30,
 20212020
Cash flows from operating activities:
Net income$2,135 $1,688 
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes(82)(13)
Non-cash operating lease cost46 48 
Depreciation and amortization88 152 
Amortization of capitalized software development costs and intellectual property licenses (1)256 141 
Share-based compensation expense (2)259 138 
 Realized and unrealized gain on equity investment (Note 6)
(36)(3)
Other(3)15 
Changes in operating assets and liabilities:
Accounts receivable, net462 225 
Software development and intellectual property licenses(303)(300)
Other assets(88)(179)
Deferred revenues(818)(322)
Accounts payable(46)(71)
Accrued expenses and other liabilities(117)(407)
Net cash provided by operating activities1,753 1,112 
Cash flows from investing activities:
Proceeds from maturities of available-for-sale investments120 36 
Proceeds from sale of available-for-sale investments66 — 
Purchases of available-for-sale investments(248)(158)
Capital expenditures(59)(56)
Other investing activities20 — 
Net cash used in investing activities(101)(178)
Cash flows from financing activities:
Proceeds from issuance of common stock to employees78 114 
Tax payment related to net share settlements on restricted stock units(246)(41)
Dividends paid(365)(316)
Proceeds from debt issuances, net of discounts— 1,994 
Repayment of long-term debt— (1,050)
Payment of financing costs— (20)
Premium payment for early redemption of note— (28)
Net cash (used in) provided by financing activities(533)653 
Effect of foreign exchange rate changes on cash and cash equivalents(35)32 
Net increase (decrease) in cash and cash equivalents and restricted cash1,084 1,619 
Cash and cash equivalents and restricted cash at beginning of period8,652 5,798 
Cash and cash equivalents and restricted cash at end of period$9,736 $7,417 
(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.

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three and Nine Months Ended September 30, 2017

2021

(Unaudited)

(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 StockTreasury StockAdditional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Total
Shareholders’
Equity
 SharesAmountSharesAmount
Balance at December 31, 20201,203 $— (429)$(5,563)$11,531 $9,691 $(622)$15,037 
Components of comprehensive income:
Net income— — — — — 619 — 619 
Other comprehensive income (loss)— — — — — — 22 22 
Issuance of common stock pursuant to employee stock options1 — — — 33 — — 33 
Issuance of common stock pursuant to restricted stock units4 — — — — — — — 
Restricted stock surrendered for employees’ tax liability(2)— — — (165)— — (165)
Share-based compensation expense related to employee stock options and restricted stock units— — — — 150 — — 150 
Dividends ($0.47 per common share)— — — — — (365)— (365)
Balance at March 31, 20211,206 $— (429)$(5,563)$11,549 $9,945 $(600)$15,331 
Components of comprehensive income:
Net income— — — — — 876 — 876 
Other comprehensive income (loss)— — — — — — 7 7 
Issuance of common stock pursuant to employee stock options— — — — 33 — — 33 
Restricted stock surrendered for employees’ tax liability— — — — (7)— — (7)
Share-based compensation expense related to employee stock options and restricted stock units— — — — 46 — — 46 
Balance at June 30, 20211,206 $— (429)$(5,563)$11,621 $10,821 $(593)$16,286 
Components of comprehensive income:
Net income— — — — — 639 — 639 
Other comprehensive income (loss)— — — — — — 6 6 
Issuance of common stock pursuant to employee stock options— — — — 12 — — 12 
Issuance of common stock pursuant to restricted stock units2 — — — — — — — 
Restricted stock surrendered for employees’ tax liability(1)— — — (73)— — (73)
Share-based compensation expense related to employee stock options and restricted stock units— — — — 80 — — 80 
Balance at September 30, 20211,207 $— (429)$(5,563)$11,640 $11,460 $(587)$16,950 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

8
Table of Contents

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three and Nine Months Ended September 30, 2020
(Unaudited)
(Amounts and shares in millions, except per share data)
 Common StockTreasury StockAdditional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Total
Shareholders’
Equity
 SharesAmountSharesAmount
Balance at December 31, 20191,197 $— (429)$(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 income (loss)— — — — — — (9)(9)
Issuance of common stock pursuant to employee stock options1 — — — 27 — — 27 
Issuance of common stock pursuant to restricted stock units1 — — — — — — — 
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, 20201,199 $— (429)$(5,563)$11,213 $7,999 $(628)$13,021 
Components of comprehensive income:
Net income— — — — — 580 — 580 
Other comprehensive income (loss)— — — — — — (6)(6)
Issuance of common stock pursuant to employee stock options1 — — — 44 — — 44 
Restricted stock surrendered for employees’ tax liability— — — — (3)— — (3)
Share-based compensation expense related to employee stock options and restricted stock units— — — — 46 — — 46 
Balance at June 30, 20201,200 $— (429)$(5,563)$11,300 $8,579 $(634)$13,682 
Components of comprehensive income:
Net income— — — — — 604 — 604 
Other comprehensive income (loss)— — — — — — 1 1 
Issuance of common stock pursuant to employee stock options1 — — — 43 — — 43 
Restricted stock surrendered for employees’ tax liability— — — — (6)— — (6)
Share-based compensation expense related to employee stock options and restricted stock units— — — — 58 — — 58 
Balance at September 30, 20201,201 $— (429)$(5,563)$11,395 $9,183 $(633)$14,382 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
9
Table of Contents
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”PCs”), and mobile devices. We also operate esports leagues and offer digital advertising within some of 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 of the 2008 business combination (the “Business Combination”) by and among the Company (then known as Activision, Inc.), Vivendi S.A. (“Vivendi”), and Vivendi Games, Inc. (“Vivendi Games”), an indirect wholly-owned subsidiary of Vivendi. In connection with the consummation of the Business Combination, Activision, Inc. was 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, a leading interactive mobile entertainment company (“King”), by purchasing all of its outstanding shares (the “King Acquisition”), as further described in Note 14. Our condensed consolidated financial statements include the operations of King commencing on the King Closing Date.


Our 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”)each of which is a leading global developer and publisher of interactive software products and entertainment content particularly in console gaming.and services based primarily on our internally-developed intellectual properties.


(i) Activision primarilyPublishing, Inc.

Activision Publishing, Inc. (“Activision”) delivers content through retailboth premium and digital channels, includingfree-to-play offerings and primarily generates revenue from 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 principally based on our internally-developed intellectual properties, as well as some licensed properties. We have also established a long-term alliance with Bungie to publish its game universe, Destiny.

Activision’s key product franchises include:franchise is Call of Duty®, a first-person shooter foraction franchise. Activision also includes the console and PC platforms; Destiny, an online universeactivities of first-person action gameplay (which we call a “shared-world shooter”) for console and PC platforms; and Skylanders®the Call of Duty League™, a franchise geared towards children that brings physical toys to life digitally in the game, primarily for console platforms.

global professional esports league with city-based teams.


(ii) Blizzard Entertainment, Inc.


Blizzard is a leading global developer and publisher of interactive software products and entertainment content, particularly in PC gaming. Blizzard primarilyEntertainment, Inc. (“Blizzard”) delivers content through retailboth premium and digital channels, including subscriptions,free-to-play offerings and primarily generates revenue from full-game and in-game sales, as well as licenses ofsubscriptions, and by licensing software to third-party or related partyrelated-party companies that distribute Blizzard products. Blizzard also maintains a proprietary online gaming service, 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, Blizzard also includes the activities of our MLG business, which is devoted to esports.

content. 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; DiabloHearthstone®, an action role-playing franchise for the PC and console platforms; Hearthstone®, an online collectible card franchise forbased in the PCWarcraft® universe; Diablo®, an action role-playing franchise; and mobile platforms; Heroes of the StormOverwatch®, a free-to-play team brawler for the PC; and Overwatch®, a team-based first-person shooter foraction franchise. Blizzard also includes the PC and console platforms.

activities of the Overwatch League™, a global professional esports league with city-based teams.


(iii) King Digital Entertainment


King is a leading global developerDigital Entertainment (“King”) delivers content through free-to-play offerings and publisher of interactive entertainment contentprimarily generates revenue from in-game sales and services, particularlyin-game advertising on the mobile platforms, such as 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. King’s games are free-to-play, however, players can acquire in-game items, either with virtual currency the players purchase or directly using real currency.

platform. King’s key product franchises, all of which are for the PC and mobile platforms, include:franchise is Candy Crush™, which featuresa “match three” games; Farm Heroes™, which also features “match three” games; Pet Rescue™, which is a “clicker” game; and Bubble Witch™, which features “bubble shooter” games.

franchise.

Other


We also engage in other businesses that do not represent reportable segments, including:

·                  the Activision Blizzard Studios (“Studios”) business, which is devoted to creating original film and television content based on our library of globally recognized intellectual properties, and which, in 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.


10
Table of Contents

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.

2020.

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 and the ongoing recovery, involves additional uncertainty. While there was no material impact to our estimates in the current period, in future periods, facts and circumstances 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.


2. Recently Issued Accounting Pronouncements

Recently adopted accounting pronouncements

Simplifying the Accounting for Income Taxes

In December 2019, the Financial Accounting Standards Board (“FASB”) issued new guidance, which is intended to simplify various aspects associated with the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 for recognizing deferred taxes for investments, performing an intraperiod allocation, and calculating income taxes in interim periods. The Company considers events or transactions that occur after the balance sheet date, but before the financial statements are issued,amendment also clarifies and amends certain areas of existing guidance to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures.

Supplemental Cash Flow Information: Non-cash Investingreduce complexity and Financing activities

For the nine months ended September 30, 2016, we had non-cash purchase price consideration of $89 million related to vested and unvested stock options and awards that were assumed and replaced with Activision Blizzard equity or deferred cash awardsimprove consistency in the King Acquisition. Referapplication of Topic 740. Generally, the guidance must be applied prospectively upon adoption, with the exception of certain topics, which are required to Note 14 for further discussion.

2.Inventories, Net

Inventories, net, consistbe applied on a retrospective or modified retrospective basis. On January 1, 2021, we adopted this new accounting standard and applied the topics in the manner required by the standard. The adoption of the following (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, 2017 and December 31, 2016, inventory reserves were $21 million and $45 million, respectively.

this standard did not have a material impact on our condensed consolidated financial statements.


3.Software Development and Intellectual Property Licenses

The following table summarizes the components of our


Our total 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

 

Asof $576 million and $512 million, as of September 30, 20172021 and December 31, 2016,2020, respectively, primarily relate to internal development costs. As of both September 30, 2021 and December 31, 2020, 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 September 30,For the Nine Months Ended September 30,
 2021202020212020
Amortization of capitalized software development costs and intellectual property licenses$71 $37 $270 $149 

11
Table of Contents


4.Intangible Assets, Net


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 September 30, 2021
 Estimated
useful
lives		Gross
carrying
amount		Accumulated
amortization		Net
carrying
amount
Acquired definite-lived intangible assets:
Internally-developed franchises3-11 years$1,154 $(1,154)$— 
Trade names and other1-10 years80 (64)16 
Total definite-lived intangible assets (1)$1,234 $(1,218)$16 
Acquired indefinite-lived intangible assets: 
Activision trademarkIndefinite$386 
Acquired trade namesIndefinite47 
Total indefinite-lived intangible assets$433 
Total intangible assets, net$449 

(1) Beginning with the first quarter of 2021, the balances of the developed software intangible assets have been removed as such amounts were fully amortized in the prior year.

 At December 31, 2020
 Estimated
useful
lives		Gross
carrying
amount		Accumulated
amortization		Net carrying
amount
Acquired definite-lived intangible assets:
Internally-developed franchises3-11 years$1,154 $(1,151)$3 
Developed software2-5 years601 (601)— 
Trade names and other1-10 years73 (58)15 
Total definite-lived intangible assets$1,828 $(1,810)$18 
Acquired indefinite-lived intangible assets: 
Activision trademarkIndefinite$386 
Acquired trade namesIndefinite47 
Total indefinite-lived intangible assets$433 
Total intangible assets, net$451 

Amortization expense of our intangible assets was $188$2 million and $573$8 million for the three and nine months ended September 30, 2017,2021, respectively. Amortization expense of our intangible assets was $211$16 million and $496$62 million for the three and nine months ended September 30, 2016,2020, respectively.

At September 30, 2017, 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

 


5.Goodwill


The changes in the carrying amount of goodwill by reportable segment for the nine months endedat both September 30, 2017, are2021 and December 31, 2020, was 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


 ActivisionBlizzardKingTotal
Goodwill$6,899 $190 $2,676 $9,765 


12
Table 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.

Contents




6.Fair Value Measurements

Financial 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


 Fair Value Measurements at September 30, 2021 Using
 As of September 30, 2021Quoted 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$9,422 $9,422 $— $— Cash and cash equivalents
Foreign government treasury bills29 29 — — Cash and cash equivalents
U.S. treasuries and government agency securities224 224 — — Other current assets
Equity securities58 58 — — Other current assets
Foreign currency forward contracts designated as hedges15 — 15 — Other current assets & Other assets
Foreign currency forward contracts not designated as hedges6 — 6 — Other current assets
Total$9,754 $9,733 $21 $—  
Financial Liabilities:
Foreign currency forward contracts designated as hedges$(3)$— $(3)$— Accrued expenses and other liabilities
13
Table 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.

Contents




 Fair Value Measurements at December 31, 2020 Using 
 As of December 31, 2020Quoted 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$8,345 $8,345 $— $— Cash and cash equivalents
Foreign government treasury bills34 34 — — Cash and cash equivalents
U.S. treasuries and government agency securities164 164 — — Other current assets
Total$8,543 $8,543 $— $— 
Financial Liabilities:
Foreign currency forward contracts not designated as hedges$(2)$— $(2)$— Accrued expenses and other liabilities
Foreign currency forward contracts designated as hedges(24)— (24)— Accrued expenses and other liabilities
Total$(26)$— $(26)$— 

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 which havehad remaining maturities of 1514 months or less was $10 millionas of net unrealized losses. At September 30, 2017, we had approximately $6 million of net realized but unrecognized losses recorded within “Accumulated other comprehensive income (loss)” associated with contracts that had settled but were deferred and will be amortized into earnings, along with the associated hedged revenues. Such amounts will be reclassified into earnings within the next 12 months.

At December 31, 2016, the gross notional amount of outstanding Cash Flow Hedges was approximately $346 million. The fair value of these contracts was $22 million of net unrealized gains2021, are as of December 31, 2016.

Duringfollows (amounts in millions):


As of September 30, 2021As of December 31, 2020
Notional amountFair value gain (loss)Notional amountFair value gain (loss)
Foreign Currency:
Buy USD, Sell EUR$700 $12 $542 $(24)

For the three and nine months ended September 30, 20172021 and 2016, there was no ineffectiveness relating to our Cash Flow Hedges. The amount ofSeptember 30, 2020, 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 waswere not material.

Fair Value Measurements on a Non-Recurring Basis

We measure the


Foreign Currency Forward Contracts Not Designated as Hedges

The gross notional amounts and fair valuevalues of certain assets on a non-recurring basis, generally annually or when events or changesour foreign currency forward contracts not designated as hedges are as follows (amounts in circumstances indicate that the carrying amount of the assets may not be recoverable.

millions):


As of September 30, 2021As of December 31, 2020
Notional amountFair value gain (loss)Notional amountFair value gain (loss)
Foreign Currency:
Buy USD, Sell EUR$68 $3 $— $— 
Buy USD, Sell GBP$144 $3 $116 $(2)

For the three and nine months ended September 30, 20172021 and 2016, thereSeptember 30, 2020, pre-tax net gains (losses) associated with these forward contracts were no impairment charges related to assets that are measured on a non-recurring basis.

7.Debt

Credit Facilities

recorded in “General and administrative expenses” and were not material.


14
Table of Contents


Equity Securities Fair Value Measurement

At December 31, 2016,2020, we held an investment in equity securities with a carrying value of $45 million. The investment did not have a readily-determinable fair value and was carried at cost, less impairment, and adjusted for changes resulting from observable price changes in orderly transactions for identical or similar investments in the same issuer.

During June 2021, the investee completed a merger with a special purpose acquisition company (“SPAC”) and, as a result, our investment was converted into common shares of the publicly traded company. In connection with the SPAC transaction, we sold a portion of our investment for $22 million and recognized a realized gain of $16 million during the three months ended June 30, 2021. Our remaining investment is now measured at fair value at the end of each reporting period. As of September 30, 2021, the carrying value of the investment was $58 million and was classified within “Other current assets” in our condensed consolidated balance sheets. The realized and unrealized gains were recorded within “Interest and other expense (income), net” in our condensed consolidated statement of operations (refer to Note 13) for the three and nine months ended September 30, 2021.

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 aggregate of the current and non-current balances of deferred revenues as of September 30, 2021 and December 31, 2020, were $0.9 billion and $1.7 billion, respectively. For the nine months ended September 30, 2021, 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, all of which were in the ordinary course of business. During the three and nine months ended September 30, 2021, $87 million and $1.7 billion of revenues, respectively, were recognized that were included in the deferred revenues balance at December 31, 2020. During the three and nine months ended September 30, 2020, $54 million and $1.3 billion of revenues, respectively, were recognized that were included in the deferred revenues balance at December 31, 2019.

As of September 30, 2021, the aggregate amount of contracted revenues allocated to our unsatisfied performance obligations was $1.6 billion, which included our deferred revenues balances and amounts to be invoiced and recognized as revenue in future periods. We expect to recognize approximately $1.3 billion over the next 12 months, $0.2 billion in the subsequent 12-month period, and the remainder thereafter. This balance did not include an estimate for variable consideration arising from sales-based royalty license revenue in excess of the contractual minimum guarantee or any estimated amounts of variable consideration that are subject to constraint in accordance with the revenue accounting standard.

8. Debt

Credit Facilities

As of September 30, 2021 and December 31, 2020, 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.

2021.


Refer to Note 1113 contained in our Annual Report on Form 10-K for the year ended December 31, 20162020 for further details regarding the Credit Agreement and its key terms, and amendments made to the Credit Agreement.

terms.


15
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Unsecured Senior Notes

At


As of September 30, 2021 and December 31, 2016,2020, we had the following$3.7 billion of gross unsecured senior notes outstanding:

·                  $750 millionoutstanding. A summary of 6.125%our outstanding unsecured senior notes due September 2023 that we issued on September 19, 2013 (the “2023 Notes”),is as follows (amounts in a private offering made in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”); and

·                  $650 million of 2.3% unsecured senior notes due September 2021 (the “Unregistered 2021 Notes”) and $850 million of 3.4% unsecured senior notes due September 2026 (the “Unregistered 2026 Notes”) that we issued on September 19, 2016, in a private offering made in accordance with Rule 144A and Regulation S under the Securities Act.

In connection with the issuance of the Unregistered 2021 Notes and the Unregistered 2026 Notes, we entered into a registration rights agreement (the “Registration Rights Agreement”), among the Company, and the representatives of the initial purchasers of the Unregistered 2021 Notes and the Unregistered 2026 Notes. Under the Registration Rights Agreement, wemillions):


 At September 30, 2021At December 31, 2020
Unsecured Senior NotesInterest RateSemi-Annual Interest Payments Due OnMaturityPrincipalFair Value
(Level 2)		PrincipalFair Value
(Level 2)
2026 Notes3.40%Mar. 15 & Sept. 15Sept. 2026$850 $927 $850 $970 
2027 Notes3.40%Jun. 15 & Dec. 15Jun. 2027400 439 400 454 
2030 Notes1.35%Mar. 15 & Sept. 15Sept. 2030500 466 500 490 
2047 Notes4.50%Jun. 15 & Dec. 15Jun. 2047400 492 400 525 
2050 Notes2.50%Mar. 15 & Sept. 15Sept. 20501,500 1,320 1,500 1,462 
Total gross long-term debt$3,650 $3,650 
Unamortized discount and deferred financing costs(43)(45)
Total net carrying amount$3,607 $3,605 

We were required to use commercially reasonable efforts to, within one year of the issue date of the Unregistered 2021 Notes and the Unregistered 2026 Notes, among other things, (1) file a registration statement with respect to an offer to exchange each series of the Unregistered 2021 Notes and the Unregistered 2026 Notes for new notes that were substantially identical in all material respects (except for the provisions relating to the transfer restrictions and payment of additional interest) (the “Exchange Offer”), and (2) cause that registration statement (the “Exchange Offer Registration Statement”) to be declared effective by the SEC under the Securities Act. The Exchange Offer Registration Statement was declared effective by the SEC on April 28, 2017, and we completed the Exchange Offer on June 1, 2017, such that all the Unregistered 2021 Notes and Unregistered 2026 Notes were exchanged for registered 2021 notes (the “2021 Notes”) and registered 2026 notes (the “2026 Notes”).

In addition, on May 26, 2017, in a public underwritten offering, we issued $400 million of 2.6% unsecured senior notes due June 2022 (the “2022 Notes”), $400 million of 3.4% unsecured senior notes due June 2027 (the “2027 Notes”), and $400 million of 4.5% unsecured senior notes due June 2047 (the “2047 Notes”, and together with the 2021 Notes, the 2022 Notes, the 2023 Notes, the 2026 Notes, and the 2027 Notes, the “Notes”), which were outstanding at September 30, 2017.

We may redeem some or all of the 2022 Notes, the 2027 Notes and the 2047 Notes, in whole or in part, at any time on or after May 15, 2022, March 15, 2027, and December 15, 2046, respectively, and in each case at 100% of the aggregate principal amount thereof plus accrued and unpaid interest. In addition, we may redeem some or all of the 2022 Notes, the 2027 Notes, and the 2047 Notes prior to May 15, 2022, March 15, 2027, and December 15, 2046, respectively, and in each case at a price equal to 100% of the aggregate principal amount thereof plus a “make-whole” premium and accrued and unpaid interest.

Upon the occurrence of certain change of control events, we will be required to offer to repurchase the 2022 Notes, the 2027 Notes, and the 2047 Notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest. These repurchase requirements are considered clearly and closely related to the 2022 Notes, the 2027 Notes, and the 2047 Notes and were not accounted for separately upon issuance.

The 2022 Notes, the 2027 Notes, and the 2047 Notes contain covenants that place restrictions in certain circumstances on, among other things, the incurrence of secured debt, entry into sale or leaseback transactions, and certain merger or consolidation transactions.

The Notes are general senior obligations of the Company and rank pari passu in right of payment to all of the Company’s existing and future senior indebtedness, including the Credit Facilities described above. The Notes are not secured and are effectively subordinated to any of the Company’s existing and future indebtedness that is secured. The Company was in compliance with the terms of each of the Notesnotes outstanding as of September 30, 2017.

Interest is payable semi-annually in arrears on March 15 and September 15 of each year for the 2021 Notes, the 2023 Notes, and 2026 Notes, and payable semi-annually in arrears on June 15 and December 15 of each year for the 2022 Notes, the 2027 Notes, and 2047 Notes. Accrued interest payable is recorded within “Accrued expenses and other liabilities” in our condensed consolidated balance sheets.2021. As of September 30, 2017 and December 31, 2016, we had accrued interest payable2021, with the exception of $18 million and $25 million, respectively, relatedour 2026 Notes, which are scheduled to mature in September 2026, no other contractual principal repayments of our long-term debt were due within the Notes.

next five years.


Refer to Note 1113 contained in our Annual Report on Form 10-K for the year ended December 31, 20162020 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 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

 

As of September 30, 2017, the scheduled maturities and contractual principal repayments of our debt for each of the five succeeding years 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

 

With the exception of the 2023 Notes, using Level 2 inputs (i.e., observable market prices in less-than-active markets), the carrying values of our debt instruments approximated their fair value as of September 30, 2017, as the interest rates are similar to current rates at which we can borrow funds over the selected interest periods. At September 30, 2017, based on Level 2 inputs, the fair value of the 2023 Notes was $804 million.

At December 31, 2016, the carrying value of the 2016 TLA approximated its fair value, based on Level 2 inputs. At December 31, 2016, based on Level 2 inputs, the fair values of the 2021 Notes, 2023 Notes, and 2026 Notes were $635 million, $818 million, and $808 million, respectively.

8.outstanding notes.


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 Nine Months Ended September 30, 2021
Foreign currency
translation
adjustments		Unrealized gain (loss)
on available-for-
sale securities		Unrealized gain (loss)
on forward
contracts		Total
Balance at December 31, 2020$(589)$(5)$(28)$(622)
Other comprehensive income (loss) before reclassifications(8)— 27 19 
Amounts reclassified from accumulated other comprehensive income (loss) into earnings— 3 13 16 
Balance at September 30, 2021$(597)$(2)$12 $(587)

 For the Nine Months Ended September 30, 2020
 Foreign currency
translation
adjustments		Unrealized gain (loss)
on available-for-
sale securities		Unrealized gain (loss)
on forward
contracts		Total
Balance at December 31, 2019$(624)$(3)$8 $(619)
Other comprehensive income (loss) before reclassifications13 — (19)(6)
Amounts reclassified from accumulated other comprehensive income (loss) into earnings(2)1 (7)(8)
Balance at September 30, 2020$(613)$(2)$(18)$(633)

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10. Operating Segments and Geographic Region

Currently, weRegions


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.

income for the three months ended September 30, 2021 and 2020, are presented below (amounts in millions):


Three Months Ended September 30, 2021
ActivisionBlizzardKingTotal
Segment Revenues
Net revenues from external customers$641 $478 $652 $1,771 
Intersegment net revenues (1)— 15 — 15 
Segment net revenues$641 $493 $652 $1,786 
Segment operating income$244 $188 $303 $735 
Three Months Ended September 30, 2020
ActivisionBlizzardKingTotal
Segment Revenues
Net revenues from external customers$773 $393 $536 $1,702 
Intersegment net revenues (1)— 18 — 18 
Segment net revenues$773 $411 $536 $1,720 
Segment operating income$345 $133 $248 $726 

17
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Information on reportable segment net revenues and operating income for the reportable segmentsnine months ended September 30, 2021 and reconciliations2020, are presented below (amounts in millions):

Nine Months Ended September 30, 2021
ActivisionBlizzardKingTotal
Segment Revenues
Net revenues from external customers$2,321 $1,347 $1,896 $5,564 
Intersegment net revenues (1)— 62 — 62 
Segment net revenues$2,321 $1,409 $1,896 $5,626 
Segment operating income$1,049 $537 $755 $2,341 
Nine Months Ended September 30, 2020
ActivisionBlizzardKingTotal
Segment Revenues
Net revenues from external customers$2,285 $1,264 $1,587 $5,136 
Intersegment net revenues (1)— 62 — 62 
Segment net revenues$2,285 $1,326 $1,587 $5,198 
Segment operating income$1,088 $533 $615 $2,236 

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

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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 are presented in the table below (amounts in millions):

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Reconciliation to consolidated net revenues:
Segment net revenues$1,786 $1,720 $5,626 $5,198 
Revenues from non-reportable segments (1)109 65 303 232 
Net effect from recognition (deferral) of deferred net revenues (2)190 187 773 306 
Elimination of intersegment revenues (3)(15)(18)(62)(62)
Consolidated net revenues$2,070 $1,954 $6,640 $5,674 
Reconciliation to consolidated income before income tax expense:
Segment operating income$735 $726 $2,341 $2,236 
Operating income (loss) from non-reportable segments (1)4 (20)(12)(27)
Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (2)154 150 562 169 
Share-based compensation expense(64)(53)(259)(138)
Amortization of intangible assets(2)(16)(8)(62)
Restructuring and related costs (Note 12)
(3)(9)(46)(39)
Consolidated operating income824 778 2,578 2,139 
Interest and other expense (income), net65 25 52 55 
Loss on extinguishment of debt— 31 — 31 
Consolidated income before income tax expense$759 $722 $2,526 $2,053 

(1)Includes other income and expenses outside of our reportable segments, including our Distribution business and 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.


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Net revenues by distribution channel, including a reconciliation to each of our reportable segment’s revenues, for the three months ended September 30, 2021 and 2020, were as follows (amounts in millions):

Three Months Ended September 30, 2021
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (3)Total
Net revenues by distribution channel:
Digital online channels (1)$723 $493 $651 $— $(15)$1,852 
Retail channels63 6 — — — 69 
Other (2)8 33 — 108 — 149 
Total consolidated net revenues$794 $532 $651 $108 $(15)$2,070 
Change in deferred revenues:
Digital online channels (1)$(128)$(37)$1 $— $— $(164)
Retail channels(25)(2)— — — (27)
Other (2)— — — 1 — 1 
Total change in deferred revenues$(153)$(39)$1 $1 $— $(190)
Segment net revenues:
Digital online channels (1)$595 $456 $652 $— $(15)$1,688 
Retail channels38 4 — — — 42 
Other (2)8 33 — 109 — 150 
Total segment net revenues$641 $493 $652 $109 $(15)$1,880 
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Three Months Ended September 30, 2020
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (3)Total
Net revenues by distribution channel:
Digital online channels (1)$826 $405 $540 $— $(18)$1,753 
Retail channels110 7 — — — 117 
Other (2)8 11 — 65 — 84 
Total consolidated net revenues$944 $423 $540 $65 $(18)$1,954 
Change in deferred revenues:
Digital online channels (1)$(130)$(14)$(4)$— $— $(148)
Retail channels(41)2 — — — (39)
Other (2)— — — — — — 
Total change in deferred revenues$(171)$(12)$(4)$— $— $(187)
Segment net revenues:
Digital online channels (1)$696 $391 $536 $— $(18)$1,605 
Retail channels69 9 — — — 78 
Other (2)8 11 — 65 — 84 
Total segment net revenues$773 $411 $536 $65 $(18)$1,767 

Net revenues by distribution channel, including a reconciliation to each of our reportable segment’s revenues, for the nine months ended September 30, 20172021 and 2016, are presented below2020, were as follows (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


Nine Months Ended September 30, 2021
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (3)Total
Net revenues by distribution channel:
Digital online channels (1)$2,625 $1,426 $1,894 $— $(62)$5,883 
Retail channels334 20 — — — 354 
Other (2)38 71 — 294 — 403 
Total consolidated net revenues$2,997 $1,517 $1,894 $294 $(62)$6,640 
Change in deferred revenues:
Digital online channels (1)$(491)$(101)$2 $— $— $(590)
Retail channels(185)(7)— — — (192)
Other (2)— — — 9 — 9 
Total change in deferred revenues$(676)$(108)$2 $9 $— $(773)
Segment net revenues:
Digital online channels (1)$2,134 $1,325 $1,896 $— $(62)$5,293 
Retail channels149 13 — — — 162 
Other (2)38 71 — 303 — 412 
Total segment net revenues$2,321 $1,409 $1,896 $303 $(62)$5,867 
21
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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




Nine Months Ended September 30, 2020
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (3)Total
Net revenues by distribution channel:
Digital online channels (1)$2,054 $1,203 $1,587 $— $(62)$4,782 
Retail channels485 23 1 — — 509 
Other (2)55 87 — 241 — 383 
Total consolidated net revenues$2,594 $1,313 $1,588 $241 $(62)$5,674 
Change in deferred revenues:
Digital online channels (1)$(16)$16 $(1)$— $— $(1)
Retail channels(293)(2)— — — (295)
Other (2)— (1)— (9)— (10)
Total change in deferred revenues$(309)$13 $(1)$(9)$— $(306)
Segment net revenues:
Digital online channels (1)$2,038 $1,219 $1,586 $— $(62)$4,781 
Retail channels192 21 1 — — 214 
Other (2)55 86 — 232 — 373 
Total segment net revenues$2,285 $1,326 $1,587 $232 $(62)$5,368 

(1)               Includes other incomeNet revenues from “Digital online channels” include revenues from digitally-distributed downloadable content, microtransactions, subscriptions, and expensesproducts, as well as licensing royalties.

(2)Net revenues from operating segments managed outside“Other” include revenues from our Distribution business, the reportable segments, including our StudiosOverwatch League, and Distribution businesses. Also includes unallocated corporate incomethe Call of Duty League.

(3)Intersegment revenues reflect licensing and expenses.

(2)               Reflectsservice fees and other expenses, such as legal, banking, and professional services fees, related to the King Acquisition and associated integration activities, inclusivecharged between segments.


22
Table 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.

Contents



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 September 30, 2021 and 2020, 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

 


Three Months Ended September 30, 2021
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (2)Total
Net revenues by geographic region:
Americas$515 $243 $417 $— $(9)$1,166 
EMEA (1)187 166 163 108 (5)619 
Asia Pacific92 123 71 — (1)285 
Total consolidated net revenues$794 $532 $651 $108 $(15)$2,070 
Change in deferred revenues:
Americas$(110)$(27)$1 $— $— $(136)
EMEA (1)(42)(22)— 1 — (63)
Asia Pacific(1)10 — — — 9 
Total change in deferred revenues$(153)$(39)$1 $1 $— $(190)
Segment net revenues:
Americas$405 $216 $418 $— $(9)$1,030 
EMEA (1)145 144 163 109 (5)556 
Asia Pacific91 133 71 — (1)294 
Total segment net revenues$641 $493 $652 $109 $(15)$1,880 

Three Months Ended September 30, 2020
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (2)Total
Net revenues by geographic region:
Americas$595 $192 $350 $— $(10)$1,127 
EMEA (1)263 131 136 65 (6)589 
Asia Pacific86 100 54 — (2)238 
Total consolidated net revenues$944 $423 $540 $65 $(18)$1,954 
Change in deferred revenues:
Americas$(77)$(4)$(4)$— $(1)$(86)
EMEA (1)(68)(8)— — 1 (75)
Asia Pacific(26)— — — — (26)
Total change in deferred revenues$(171)$(12)$(4)$— $— $(187)
Segment net revenues:
Americas$518 $188 $346 $— $(11)$1,041 
EMEA (1)195 123 136 65 (5)514 
Asia Pacific60 100 54 — (2)212 
Total segment net revenues$773 $411 $536 $65 $(18)$1,767 
23
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Net revenues by geographic region, including a reconciliation to each of our reportable segment’s net revenues, for the nine months ended September 30, 2021 and 2020, were as follows (amounts in millions):

Nine Months Ended September 30, 2021
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (2)Total
Net revenues by geographic region:
Americas$1,942 $698 $1,215 $— $(36)$3,819 
EMEA (1)780 507 485 294 (21)2,045 
Asia Pacific275 312 194 — (5)776 
Total consolidated net revenues$2,997 $1,517 $1,894 $294 $(62)$6,640 
Change in deferred revenues:
Americas$(420)$(57)$2 $— $— $(475)
EMEA (1)(213)(55)(1)9 — (260)
Asia Pacific(43)4 1 — — (38)
Total change in deferred revenues$(676)$(108)$2 $9 $— $(773)
Segment net revenues:
Americas$1,522 $641 $1,217 $— $(36)$3,344 
EMEA (1)567 452 484 303 (21)1,785 
Asia Pacific232 316 195 — (5)738 
Total segment net revenues$2,321 $1,409 $1,896 $303 $(62)$5,867 

Nine Months Ended September 30, 2020
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (2)Total
Net revenues by geographic region:
Americas$1,615 $580 $1,024 $— $(31)$3,188 
EMEA (1)750 393 407 241 (21)1,770 
Asia Pacific229 340 157 — (10)716 
Total consolidated net revenues$2,594 $1,313 $1,588 $241 $(62)$5,674 
Change in deferred revenues:
Americas$(124)$18 $— $— $— $(106)
EMEA (1)(146)(3)(1)(9)— (159)
Asia Pacific(39)(2)— — — (41)
Total change in deferred revenues$(309)$13 $(1)$(9)$— $(306)
Segment net revenues:
Americas$1,491 $598 $1,024 $— $(31)$3,082 
EMEA (1)604 390 406 232 (21)1,611 
Asia Pacific190 338 157 — (10)675 
Total segment net revenues$2,285 $1,326 $1,587 $232 $(62)$5,368 

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

(2)    Intersegment revenues reflect licensing and service fees charged between segments.
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The Company’s net revenues in the U.S. were 43% of consolidated net revenues for both the three months ended September 30, 201749% and 2016. The Company’s net revenues in the U.K. were 12% and 10%50% of consolidated net revenues for the three months ended September 30, 20172021 and 2016,2020, respectively. The Company’s net revenues in the United Kingdom (“U.K.”) were 10% and 9% of consolidated net revenues for the three months ended September 30, 2021 and 2020, respectively. No other country’s net revenues exceeded 10% of consolidated net revenues for either the three months ended September 30, 20172021 or 2016.

2020.

The Company’s net revenues in the U.S. were 46%50% of consolidated net revenues for both the nine months ended September 30, 20172021 and 2016.2020. The Company’s net revenues in the U.K. were 10% of consolidated net revenues for both the nine months ended September 30, 20172021 and 2016.2020. No other country’s net revenues exceeded 10% of consolidated net revenues for either the nine months ended September 30, 20172021 or 2016.

2020.


Net revenues by platform, including a reconciliation to each of our reportable segment’s net revenues, for the three months ended September 30, 2021 and 2020, 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

 


Three Months Ended September 30, 2021
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (3)Total
Net revenues by platform:
Console$480 $43 $— $— $— $523 
PC140 434 19 — (15)578 
Mobile and ancillary (1)166 22 632 — — 820 
Other (2)8 33 — 108 — 149 
Total consolidated net revenues$794 $532 $651 $108 $(15)$2,070 
Change in deferred revenues:
Console$(119)$5 $— $— $— $(114)
PC(33)(47)— — — (80)
Mobile and ancillary (1)(1)3 1 — — 3 
Other (2)— — — 1 — 1 
Total change in deferred revenues$(153)$(39)$1 $1 $— $(190)
Segment net revenues:
Console$361 $48 $— $— $— $409 
PC107 387 19 — (15)498 
Mobile and ancillary (1)165 25 633 — — 823 
Other (2)8 33 — 109 — 150 
Total segment net revenues$641 $493 $652 $109 $(15)$1,880 

25
Table of Contents


Three Months Ended September 30, 2020
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (3)Total
Net revenues by platform:
Console$664 $31 $— $— $— $695 
PC152 357 23 — (18)514 
Mobile and ancillary (1)120 24 517 — — 661 
Other (2)8 11 — 65 — 84 
Total consolidated net revenues$944 $423 $540 $65 $(18)$1,954 
Change in deferred revenues:
Console$(125)$(4)$— $— $— $(129)
PC(35)(9)(1)— — (45)
Mobile and ancillary (1)(11)1 (3)— — (13)
Other (2)— — — — — — 
Total change in deferred revenues$(171)$(12)$(4)$— $— $(187)
Segment net revenues:
Console$539 $27 $— $— $— $566 
PC117 348 22 — (18)469 
Mobile and ancillary (1)109 25 514 — — 648 
Other (2)8 11 — 65 — 84 
Total segment net revenues$773 $411 $536 $65 $(18)$1,767 


26
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Net revenues by platform, including a reconciliation to each of our reportable segment’s net revenues, for the nine months ended September 30, 2021 and 2020, were as follows (amounts in millions):

Nine Months Ended September 30, 2021
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (3)Total
Net revenues by platform:
Console$1,971 $90 $— $— $— $2,061 
PC532 1,293 64 — (62)1,827 
Mobile and ancillary (1)456 63 1,830 — — 2,349 
Other (2)38 71 — 294 — 403 
Total consolidated net revenues$2,997 $1,517 $1,894 $294 $(62)$6,640 
Change in deferred revenues:
Console$(530)$— $— $— $— $(530)
PC(145)(108)— — — (253)
Mobile and ancillary (1)(1)— 2 — — 1 
Other (2)— — — 9 — 9 
Total change in deferred revenues$(676)$(108)$2 $9 $— $(773)
Segment net revenues:
Console$1,441 $90 $— $— $— $1,531 
PC387 1,185 64 — (62)1,574 
Mobile and ancillary (1)455 63 1,832 — — 2,350 
Other (2)38 71 — 303 — 412 
Total segment net revenues$2,321 $1,409 $1,896 $303 $(62)$5,867 

27
Table of Contents


Nine Months Ended September 30, 2020
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (3)Total
Net revenues by platform:
Console$1,855 $89 $— $— $— $1,944 
PC423 1,060 73 — (62)1,494 
Mobile and ancillary (1)261 77 1,515 — — 1,853 
Other (2)55 87 — 241 — 383 
Total consolidated net revenues$2,594 $1,313 $1,588 $241 $(62)$5,674 
Change in deferred revenues:
Console$(295)$(6)$— $— $— $(301)
PC(50)24 (1)— — (27)
Mobile and ancillary (1)36 (4)— — — 32 
Other (2)— (1)— (9)— (10)
Total change in deferred revenues$(309)$13 $(1)$(9)$— $(306)
Segment net revenues:
Console$1,560 $83 $— $— $— $1,643 
PC373 1,084 72 — (62)1,467 
Mobile and ancillary (1)297 73 1,515 — — 1,885 
Other (2)55 86 — 232 — 373 
Total segment net revenues$2,285 $1,326 $1,587 $232 $(62)$5,368 
(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” includeprimarily includes revenues from our StudiosDistribution business, the Overwatch League, and Distribution businesses, as well asthe Call of Duty League.

(3)Intersegment revenues from MLG.

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 September 30, 2021At December 31, 2020
Long-lived assets* by geographic region:
Americas$273 $270 
EMEA131 166 
Asia Pacific17 17 
Total long-lived assets by geographic region$421 $453 

*    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; allassets and lease right-of-use assets. All other long-term assets are not allocated by location.


28
Table of Contents

10.



11. Share-Based Payments

Fair Value Assumptions

Valuation of Stock Options

The fair value of stock options granted are principally estimated using a binomial-lattice model. The inputs in our binomial-lattice model include expected stock price volatility, risk-free interest rate, dividend yield, contractual term, and vesting schedule, as well as measures of employees’ cancellation, exercise, and post-vesting termination behavior.

Valuation of Restricted Stock Units (“RSUs”)

The fair value of the Company’s RSU awards granted are generally based upon the closing price of the Company’s common stock on the date of grant reduced by the present value of dividends expected to be paid on our common stock prior to vesting. We also grant market-based RSU awards, from time to time, the fair value of which is determined using a Monte Carlo simulation. Such market-based RSU awards include performance conditions based on our own stock price and may also include performance conditions that compare our stock price performance to an index, such as the S&P 500 Total Shareholder Return index. The valuation assumptions utilized in the Monte Carlo model are generally consistent with the inputs discussed in the valuation of stock options above.

Accuracy of Fair Value Estimates

We developed the assumptions used in the models above, including measures of employees’ exercise and post-vesting termination behavior. Our ability to accurately estimate the fair value of share-based payment awards at the grant date depends upon the accuracy of the model and our ability to accurately forecast model inputs for as long as 10 years into the future. Although the fair value of employee stock options is determined using an option-pricing model, the estimates that are produced by this model may not be indicative of the fair value observed between a willing buyer and a willing seller as there are not current active markets for the trading of employee stock options and other share-based instruments.

Stock Option Activity

Stock option activity is as follows:

 Number of shares (in thousands)Weighted-average
exercise price per stock option		Weighted-average
remaining
contractual term (in years)		Aggregate
intrinsic value (in millions)
Outstanding stock options at December 31, 202011,297 $53.84 
Granted754 92.56 
Exercised(1,677)46.27 
Forfeited(700)63.58 
Expired(18)56.58 
Outstanding stock options at September 30, 20219,656 $57.47 7.18$211 
Vested and expected to vest at September 30, 20219,260 $56.62 7.10$208 
Exercisable at September 30, 20215,015 $45.46 6.00$160 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between our closing stock price on the last trading day of the period and the exercise price, times the number of shares for options where the closing stock price is greater than the exercise price) that would have been received by the option holders had all option holders exercised their options on that date. This amount changes based on the market value of our stock.

At September 30, 2021, $44 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 1.10 years.

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Table of Contents


RSU Activity

We grant RSUs, which represent the right to receive shares of our common stock. Vesting for RSUs is generally contingent upon the holder’s continued employment with us and may be subject to other conditions (which may include the satisfaction of a performance measure). Also, certain of our performance-based RSUs, including those that are market-based, include a range of shares that may be released at vesting, which are above or below the targeted number of RSUs based on actual performance relative to the performance measure. If the vesting conditions are not met, unvested RSUs will be forfeited. Upon vesting of the RSUs, we may withhold shares otherwise deliverable to satisfy tax withholding requirements.

The following table summarizes our RSU activity with performance-based RSUs, including those with market conditions, presented at 100% of the target level shares that may potentially vest (amounts in thousands, except per share data):

 Number of sharesWeighted-
average grant
date fair value per RSU
Unvested RSUs at December 31, 20207,102 $82.50 
Granted4,657 95.05 
Vested(3,177)96.63 
Forfeited(1,085)72.94 
Unvested RSUs at September 30, 20217,497 $86.71 

At September 30, 2021, approximately $351 million of total unrecognized compensation cost was related to RSUs and is expected to be recognized over a weighted-average period of 1.56 years. Of the total unrecognized compensation cost, $108 million was related to performance-based RSUs, which is expected to be recognized over a weighted-average period of 1.20 years.

12. Restructuring

During 2019, we began implementing a 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 sponsorship 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.

To date, substantially all actions under our plan have been accrued for, with remaining activity primarily being related to cash outlays to be made to impacted personnel.

30
Table of Contents


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

Severance and employee related costsFacilities and related costsOther costsTotal
Balance at December 31, 2020$88 $— $3 $91 
Costs charged to expense24 1 2 27 
Cash payments(9)— (1)(10)
Non-cash charge adjustment(2)(1)(1)(4)
Balance at March 31, 2021$101 $— $3 $104 
Costs charged to expense3 12 2 17 
Cash payments(11)— (2)(13)
Non-cash charge adjustment— (12)— (12)
Balance at June 30, 2021$93 $— $3 $96 
Costs charged to expense1 2 1 4 
Cash payments(17)— (1)(18)
Non-cash charge adjustment(1)(2)— (3)
Balance at September 30, 2021$76 $— $3 $79 
Cumulative charges incurred through September 30, 2021$180 $50 $37 $267 

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

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Activision$— $1 $1 $5 
Blizzard4 7 42 30 
King— 1 1 (1)
Other segments (1)— — 4 2 
Total$4 $9 $48 $36 
(1)Includes charges outside of our reportable segments, including charges for our corporate and administrative functions.

During the three and nine months ended September 30, 2021 and 2020, we incurred additional restructuring charges and adjustments that are not included in the plan discussed above. Such amounts were not material.

We have substantially completed our accruals for all actions under the plan. The charges associated with the plan primarily relate to severance and employee-related costs (approximately 65% of the aggregate charge), facilities and related costs (approximately 20% of the aggregate charge), and other costs (approximately 15% of the aggregate charge), including charges for restructuring-related fees and the write-down of assets. A substantial majority (approximately 75%) of the total pre-tax charge associated with the restructuring is expected to be paid in cash using amounts on hand, and such cash outlays are largely expected to be completed within the next 12 months. We do not expect to realize significant net savings in our total operating expenses as a result of our plan, as cost reductions in our selling, general, and administrative activities are expected to be offset by increased investment in product development.

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The total charges incurred through September 30, 2021, and total expected pre-tax restructuring charges related to the plan, by segment, inclusive of amounts already incurred and inclusive of certain inventory write-downs in prior years, are presented below (amounts in millions):

Total charges incurred through September 30, 2021Total charges expected as of September 30, 2021
Activision$33 $33 
Blizzard186 187 
King20 20 
Other segments (1)33 35 
Total$272 $275 

(1)Includes charges outside of our reportable segments, including charges for our corporate and administrative functions.

13. Interest and Other Expense (Income), Net

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

For the Three Months Ended September 30,For the Nine Months Ended September 30,
2021202020212020
Interest income$(1)$(1)$(4)$(20)
Interest expense from debt and amortization of debt discount and deferred financing costs27 27 81 72 
Realized and unrealized loss (gain) on equity investment (Note 6)
36 (3)(35)(3)
Other expense (income), net3 2 10 6 
Interest and other expense (income), net$65 $25 $52 $55 

14. 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$120 million for the three months ended September 30, 2017,2021, reflects an effective tax rate of 16%, which is comparable to the effective tax rate of 16% for the three months ended September 30, 2020 due to lower U.S. taxes on foreign earnings in the current year offset by the impact of discrete tax benefits from remeasurement of deferred tax assets in the prior year period.

The income tax expense of $391 million for the nine months ended September 30, 2021, reflects an effective tax rate of 15%, which is higherlower 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 million18% 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, 2016.2020. The decrease is primarily 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.

U.S. taxes on foreign earnings.


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Table of Contents


The effective tax raterates of 15%16% and 11%15% for the three and nine months ended September 30, 2017,2021, respectively, isare 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,and the recognition of excess tax benefits from share-based payments, andpayments. In addition, a discrete tax benefit was recognized from the recognitionremeasurement of federal and California research and development credits, partially offseta deferred tax asset as a result of a change in the U.K. tax rate for the nine months ended September 30, 2021.

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”) is currently examining Activision Blizzard’sour federal tax returns for the 2009, 2010, and 20112012 through 2019 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’ results for the period from January 1, 2008 through July 9, 2008, are includedamount and timing of taxable income in the consolidated federal andjurisdictions in which King operates.


In addition, certain foreign state and local income tax returns filed by Vivendi or its affiliates, while Vivendi Games’ results for the period from July 10, 2008 through December 31, 2008, are included in the consolidated federal and certain foreign, state and local income tax returns filed by Activision Blizzard. IRS Appeals proceedings concerning Vivendi Games’ tax return for the 2008 tax year were concluded during July 2016, but that year remains open to examination by other major taxing authorities. The resolution of the 2008 IRS Appeals process did not have a material impact to the Company’s condensed consolidated financial statements.

Certain of our subsidiaries are under examination or investigation, or may be subject to examination or investigation, by tax authorities in various jurisdictions, including France.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.operations.


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Table of Contents


15. 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 September 30,For the Nine Months Ended September 30,
 2021202020212020
Numerator:
Consolidated net income$639 $604 $2,135 $1,688 
Denominator:
Denominator for basic earnings per common share—weighted-average common shares outstanding778 772 777 771 
Effect of dilutive stock options and awards under the treasury stock method5 7 7 6 
Denominator for diluted earnings per common share—weighted-average common shares outstanding plus dilutive common shares under the treasury stock method783 779 784 777 
Basic earnings per common share$0.82 $0.78 $2.75 $2.19 
Diluted earnings per common share$0.82 $0.78 $2.72 $2.17 

The vesting of certain of our employee-related restricted stock units and options areis contingent upon the satisfaction of pre-definedpredefined 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 September 30,For the Nine Months Ended September 30,
2021202020212020
Restricted stock units with performance measures not yet met3 3 3 2 
Anti-dilutive employee stock options2 — 2 1 

16. Capital Transactions


Repurchase Program

Programs


On February 2, 2017,January 27, 2021, our Board of Directors authorized a stock repurchase program under which we are authorized to repurchase up to $1$4 billion of our common stock during the two-year period from February 14, 2021 until the earlier of February 13, 2017 through February 12, 2019.2023 and a determination by the Board of Directors to discontinue the repurchase program. As of September 30, 2017,2021, we havehad not repurchased any shares under this program.

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Table of Contents



Dividends


On February 2, 2017,4, 2021, our Board of Directors approveddeclared a cash dividend of $0.30$0.47 per common share. On May 10, 2017,6, 2021, we made an aggregate cash dividend payment of $226$365 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.

April 15, 2021.


On February 2, 2016,6, 2020, our Board of Directors declared a cash dividend of $0.26$0.41 per common share. On May 11, 2016,6, 2020, we made an aggregate cash dividend payment of $192$316 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.April 15, 2020.


17. Commitments and Contingencies


Legal Proceedings


We are party to routine claims, suits, investigations, audits, and other proceedings arising from the ordinary course of business, including with respect to intellectual property rights, contractual claims, labor and employment matters, regulatory matters, tax matters, unclaimed property matters, compliance matters, and collection matters. In the opinion of management, after consultation with legal counsel, such routine claims and lawsuits are not significant, and we do not expect them to have a material adverse effect on our business, financial condition, results of operations, or liquidity.

14.Acquisitions

King Digital Entertainment

On February 23, 2016, We are also party to the proceedings set forth below.


Pending EEOC Settlement

In September 2021, we completedentered into a proposed consent decree with the King Acquisition, purchasing all of King’s outstanding shares. As a result, King became a wholly-owned subsidiary of Activision Blizzard. KingU.S. Equal Employment Opportunity Commission (“ EEOC”) to settle claims regarding certain employment practices. The consent decree 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 issuedsubject to approval by the Company. We identifiedUnited States District Court, Central District of California, and, recorded assets acquiredamong other things, provides for the creation of an $18 million settlement fund for eligible claimants; upgrading Company policies, practices, and liabilities assumed at their estimated fair values at the King Closing Datetraining to further prevent and allocated the remaining value of approximately $2.7 billion to goodwill.

The final purchase price allocation was as follows (amountseliminate harassment and discrimination 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 “Generalits workplaces, including implementing an expanded performance review system with a new equal opportunity focus; 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 discountsproviding ongoing oversight 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 sharesreview of the Company’s common stock, using an equity award exchange ratio calculated in accordance with the transaction agreement. Astraining programs, investigation policies, disciplinary framework and compliance by appointing 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 valuethird-party equal opportunity consultant whose findings will be recognized over the remaining service periods. Asregularly reported to our Board 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,Directors as well as the management team’s proven abilityEEOC. The California Department of Fair Employment and Housing (“DFEH”) has filed a motion to create future games and franchises. Approximately $620 millionintervene in the matter, seeking to object to the consent decree, including the amount of the goodwillsettlement fund, and that motion is expected topending. There can be deductible for tax purposesno assurance that the consent decree will be approved by the Court.


Other Pending Employment-Related Matters

On July 20, 2021, the DFEH filed a complaint (“DFEH Complaint”) in the U.S.

King Net RevenueLos Angeles County Superior Court of the State of California against Activision Blizzard, Blizzard Entertainment and Earnings

The amountActivision Publishing alleging violations of net revenuethe California Fair Employment and earnings attributable to KingHousing Act and the California Equal Pay Act.


On August 3, 2021, a putative class action was filed in the Company’s condensed consolidated statementUnited States District Court, Central District of operations during the threeCalifornia, entitled Gary Cheng v. Activision Blizzard, Inc., et al., Case No. 2:21-cv-06240-PA-JEM. Plaintiff purports to represent a class of Activision shareholders who purchased stock between August 4, 2016 and nine months ended September 30, 2016, the periodJuly 27, 2021, and asserts claims under Sections 10(b) and 20(a) of the King Acquisition, are includedSecurities Exchange Act of 1934 against the Company and three current or former officers. Beginning on August 6, 2021, three putative shareholder derivative actions were filed in California Superior Court, County of Los Angeles, and those cases have now been consolidated in an action entitled York County on Behalf of County of York Retirement Fund v. Robert A. Kotick, et al., Case No. 21STCV28949. The actions assert claims on the Company’s behalf against eleven current or former officers and directors for breach of fiduciary duty, corporate waste and unjust enrichment based on allegations similar to those in the table below.DFEH Complaint and in the securities class action. The amounts presented representCompany is named as a nominal defendant.

The Company is cooperating with an investigation by the net revenuesU.S. Securities and earnings after adjustments for purchase price accounting, inclusive of amortization of intangible assets, share-based payments, and deferral of revenuesExchange Commission (“SEC”) regarding disclosures on employment matters and related costissues including responding to a subpoena from the SEC. The SEC has also issued subpoenas to a number 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 unauditedcurrent and former executives and other employees in connection with this matter.


We are unable to predict the impact of the above matters on our business, financial information in the table below summarizes the combinedcondition, results of operations, or liquidity at this time.

35
Table 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.

Contents

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


Business Overview


Activision Blizzard, Inc. is a leading global developer and publisher of interactive entertainment content and services. We develop and distribute content and services across all of the major gaming platforms, includingon video game consoles, personal computers (“PC”PCs”), and mobile devices. We also operate esports leagues and offer digital advertising within some of 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 of the 2008 business combination (the “Business Combination”) by and among the Company (then known as Activision, Inc.), Vivendi S.A. (“Vivendi”), and Vivendi Games, Inc., an indirect wholly-owned subsidiary of Vivendi. In connection with the consummation of the Business Combination, Activision, Inc. was 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, a leading interactive mobile entertainment company (“King”), by purchasing all of its outstanding shares (the “King Acquisition”). We made this acquisition because we believe that the addition of King’s highly complementary mobile business positions us as a global leader in interactive entertainment across mobile, console, and PC platforms, as well as positioning us for future growth. The aggregate purchase price of approximately $5.8 billion was funded primarily with $3.6 billion of existing cash and $2.2 billion of cash from new debt issued by the Company. King’s results of operations since the King Closing Date are included in our condensed consolidated financial statements.


Our 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 onupon our organizational structure, we conduct our business through three reportable segments, as follows:

(i) Activision Publishing, Inc.

Activision Publishing, Inc. (“Activision”),each of which is a leading global developer and publisher of interactive software products and entertainment content particularly in console gaming.and services based primarily on our internally-developed intellectual properties.


(i) Activision primarilyPublishing, Inc.

Activision Publishing, Inc. (“Activision”) delivers content through retailboth premium and digital channels, includingfree-to-play offerings and primarily generates revenue from 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 principally based on our internally-developed intellectual properties, as well as some licensed properties. We have also established a long-term alliance with Bungie to publish its game universe, Destiny.

Activision’s key product franchises include:franchise is Call of Duty®, a first-person shooter foraction franchise. Activision also includes the console and PC platforms; Destiny, an online universeactivities of first-person action gameplay (which we call a “shared-world shooter”) for console and PC platforms; and Skylanders®the Call of Duty League™, a franchise geared towards children that brings physical toys to life digitally in the game, primarily for console platforms.

global professional esports league with city-based teams.


(ii) Blizzard Entertainment, Inc.


Blizzard is a leading global developer and publisher of interactive software products and entertainment content, particularly in PC gaming. Blizzard primarilyEntertainment, Inc. (“Blizzard”) delivers content through retailboth premium and digital channels, including subscriptions,free-to-play offerings and primarily generates revenue from full-game and in-game sales, as well as licenses ofsubscriptions, and by licensing software to third-party or related-party companies that distribute Blizzard products. Blizzard also maintains a proprietary online gaming service, 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, Blizzard also includes the activities of our MLG business, which is devoted to esports.

content. 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; DiabloHearthstone®, an action role-playing franchise for the PC and console platforms; Hearthstone®, an online collectible card franchise forbased in the PCWarcraft® universe; Diablo®, an action role-playing franchise; and mobile platforms; Heroes of the StormOverwatch®, a free-to-play team brawler for the PC; and Overwatch®, a team-based first-person shooter foraction franchise. Blizzard also includes the PC and console platforms.

activities of the Overwatch League™, a global professional esports league with city-based teams.


(iii) King Digital Entertainment


King is a leading global developerDigital Entertainment (“King”) delivers content through free-to-play offerings and publisher of interactive entertainment contentprimarily generates revenue from in-game sales and services, particularlyin-game advertising on the mobile platforms, such as 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. King’s games are free-to-play, however, players can acquire in-game items, either with virtual currency the players purchase, or directly using real currency.

platform. King’s key product franchises, all of which are for the PC and mobile platforms, include:franchise is Candy Crush™, which featuresa “match three” games; Farm Heroes™, which also features “match three” games; Pet Rescue™, which is a “clicker” game; and Bubble Witch™, which features “bubble shooter” games.

franchise.


Other


We also engage in other businesses that do not represent reportable segments, including:

·                  the Activision Blizzard Studios (“Studios”) business, which is devoted to creating original film and television content based on our library of globally recognized intellectual properties, and which, in 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 March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. In an effort to contain the spread of COVID-19, domestic and international governments around the world enacted various measures, including orders to close all businesses not deemed “essential,” quarantine orders for individuals to stay in their homes or places of residence, and to practice social distancing when engaging in essential activities.

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During the early stages of the COVID-19 pandemic, our business experienced an increase in demand for certain of our products and services as a result of the stay-at-home orders enacted in various regions as players had more time to engage with our games. We have, however, seen a moderation in these trends in some regions since the stay-at-home orders were originally enacted early in 2020, and it is uncertain at this time how our business could be impacted in the current state of the pandemic as stay-at-home orders in certain regions are reduced, lifted, or at times, fully or partially reinstated, as new cases and variants of COVID-19 arise and evolve.

In an effort to protect the health and safety of our employees, the majority of our workforce continues to work from home, and we have placed restrictions on non-essential business travel. Additionally, thus far, the pandemic has caused minimal disruption to our game titles’ published release dates. Please see “Management’s Overview of Business Trends” section included in Part II, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.

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, and stock price will depend on numerous evolving factors that we are not able to fully predict at this time, including the duration and spread of the pandemic and associated macroeconomic impacts including labor shortages and supply chain disruption, the speed and effectiveness of regional and worldwide containment and vaccination efforts including vaccine mandates, and the impact of these and other factors on our employees, customers, and partners. We will continue to actively monitor the developments of the COVID-19 pandemic and may take further actions that could alter our business operations as may be required by federal, state, local, or foreign authorities, or that we determine are in the best interests of our employees, customers, partners, and shareholders.

Refer to Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020 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.

Other

As described in Note 17 to the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, in July 2021, the California Department of Fair Employment and Housing (“DFEH”) filed a complaint against Activision Blizzard, Blizzard Entertainment, and Activision Publishing alleging violations of the California Fair Employment and Housing Act and the California Equal Pay Act, and the Company is separately awaiting court approval of a consent decree with the U.S. Equal Employment Opportunity Commission (“EEOC”) settling claims against the Company regarding certain employment practices. Subsequently, the Company has also been named as a defendant in a shareholder class action and a nominal defendant in shareholder derivative actions involving allegations similar to those alleged in the foregoing matters and is cooperating in an investigation with the SEC with respect to its disclosures on employment matters and related issues. We are taking actions to address the concerns of employees and other key stakeholders and the adverse consequences to our business. We are experiencing, and are likely to continue to experience, adverse publicity regarding our company and executives related to these matters. If we experience significantly reduced productivity, significant continued loss of sponsors, advertisers or players, or other negative consequences relating to these matters, our business could be materially adversely impacted. We are carefully monitoring all aspects of our business for such impacts and continue to take actions to address such concerns.



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Business Results and Highlights


Financial Results

During


For the three months ended September 30, 2017:

·2021:


•consolidated net revenues increased 3%6% to $1.62$2.1 billion whileand consolidated operating income decreased 13%increased 6% to $257$824 million, as compared to consolidated net revenues of $1.57$2.0 billion and consolidated operating income of $294$778 million for the three months ended September 30, 2016;

·                  revenues from digital online channels were $1.35 billion, or 84% of consolidated net revenues,2020; and were comparable


•diluted earnings per common share increased 5% to the $1.34 billion, or 86% of consolidated net revenues,$0.82, as compared to $0.78 for the three months ended September 30, 2016;

·                  operating margin was 15.9%, as compared with 18.8% 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;

·                  consolidated net income decreased 6% to $188 million, as compared to $199 million for the three months ended September 30, 2016;

·                  consolidated net income included $15 million of excess tax benefits from share-based payments, as compared to $12 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.

During2020.


For the nine months ended September 30, 2017:

·2021:


•consolidated net revenues increased 8%17% to $4.97$6.6 billion and consolidated operating income increased 10%21% to $1.09$2.6 billion, as compared to consolidated net revenues of $4.59$5.7 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$2.1 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

·in 2020;


•diluted earnings per common share increased 19%25% to $1.12,$2.72, as compared to $0.94 for the nine months ended September 30, 2016.

$2.17 in 2020; and


•cash flows from operating activities were approximately $1.8 billion, an increase of 58%, as compared to $1.1 billion in 2020.

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, 2017,2021, include a net effect of $284$190 million and $132$154 million, respectively, from the deferralrecognition of deferred net revenues and related cost of revenues. Net revenues and operating income for the nine months ended September 30, 2017,2021, include a net effect of $458$773 million and $370$562 million, respectively, from the recognition of deferred net revenues and related cost of revenues.

Release Highlights

Games


The percentage of our consolidated net revenues that are recognized from revenue sources that are recognized at a “point-in-time” and from sources that are recognized “over-time and other” were as follows:

For the Three Months Ended September 30,For the Nine Months Ended September 30,
2021202020212020
Point-in-time (1)14 %12 %11 %12 %
Over-time and other (2)86 %88 %89 %88 %

(1) Revenue recognized at a “point-in-time” is 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.

(2) Revenue recognized “over-time and other revenue” is primarily comprised of revenue associated with the online functionality of our games, in-game purchases, and subscriptions.
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Operating Metrics

The following operating metrics are key performance indicators that we use to evaluate our business. The key drivers of changes in our operating metrics are presented in the order of significance.

Net bookings and in-game net bookings

We monitor net bookings and in-game net bookings as key operating metrics in evaluating the performance of our business because they enable an analysis of performance based on the timing of actual transactions with our customers and provide a more timely indication 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 microtransactions and downloadable content thatsold during the period and is equal to in-game net revenues excluding the impact from deferrals.

Net bookings and in-game net bookings were released duringas follows (amounts in millions):

For the Three Months Ended September 30,For the Nine Months Ended September 30,
20212020Increase (Decrease)20212020Increase (Decrease)
Net bookings$1,880 $1,767 $113 $5,867 $5,368 $499 
In-game net bookings$1,198 $1,200 $(2)$3,859 $3,529 $330 

Q3 2021 vs. Q3 2020

Net bookings

The increase in net bookings for the three months ended September 30, 2017, include:

·                  Activision’s Absolution,2021, as compared to the third downloadable content pack for three months ended September 30, 2020, was primarily due to:


•a $116 million increase in King net bookings, driven by higher net bookings from in-game player purchases and advertising, primarily in the Candy Crush franchise; and

•a $82 million increase in Blizzard net bookings, driven by higher net bookings from Diablo® II: Resurrected™,which was released in September 2021 and is a remastered version of the original action role-playing game title Diablo II.

The increase in net bookings was partially offset by a $132 million decrease in Activision net bookings, driven by lower net bookings from (1) Call of Duty: Infinite Warfare™;

·                  Activision’s Destiny 2, the sequelBlack Ops Cold War (which was released in November 2020, and when referred to Destiny;

·                  Activision’s Retribution on PlayStation 4, the fourth downloadable content pack for herein, is inclusive of Call of Duty: InfiniteWarzone™ following the release of Call of Duty: Black Ops Cold War Season 1 content on December 16, 2020), as compared to Call of Duty: Modern Warfare® (which was released in October 2019, and when referred to herein, is inclusive of Call of Duty: Warzone from its release in March 2020 through December 16, 2020), and (2) Tony Hawk’s™ Pro Skater™ 1 + 2, which was released in September 2020, partially offset by higher net bookings from Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4, which was released in October 2018.


In-game net bookings

In-game net bookings for the three months ended September 30, 2021, were comparable to those for the three months ended September 30, 2020, as an $87 million decrease in Activision in-game net bookings, driven by lower in-game net bookings from Call of Duty: Black Ops Cold War, as compared to Call of Duty: Modern Warfare, was largely offset by a $75 million increase in King in-game net bookings, driven by the Candy Crush franchise.

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YTD Q3 2021 vs. YTD Q3 2020

Net bookings

The increase in net bookings for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, was primarily due to:

•a $309 million increase in King net bookings, driven by higher net bookings from in-game player purchases and advertising, primarily in the Candy Crush franchise;

•a $83 million increase in Blizzard net bookings, driven by higher net bookings from Diablo II: Resurrected; and

·                  Blizzard’s Knights


•a $36 million increase in Activision net bookings, driven by higher net bookings from (1) Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4, and (2) Call of Duty: Mobile, which was released in October 2019, partially offset by lower net bookings from Call of Duty: Black Ops Cold War, as compared to Call of Duty: Modern Warfare.

In-game net bookings

The increase in in-game net bookings for the Frozen Throne™nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, was primarily due to:

•a $196 million increase in King in-game net bookings, driven by the Candy Crush franchise; and

•a $76 million increase in Activision in-game net bookings, driven by higher in-game net bookings from (1) Call of Duty: Mobile and (2) Call of Duty: Modern Warfare, the latest expansionas compared to Hearthstone.

Call of Duty: Black Ops 4, partially offset by lower in-game net bookings from Call of Duty: Black Ops Cold War, as compared to Call of Duty: Modern Warfare.


Monthly Active Users: Measuring the Size of Our User Base

Users


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

 


September 30, 2021June 30, 2021March 31, 2021December 31, 2020September 30, 2020
Activision119 127 150 128 111 
Blizzard26 26 27 29 30 
King245 255 258 240 249 
Total390 408 435 397 390 

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Average MAUs decreased by 2318 million, or 6%4%, for the three months ended September 30, 2017,2021, as compared to the three months ended June 30, 2017.2021. The decrease in King’swas primarily due to (1) lower average MAUs is due to decreases across franchises reflectingfor King, primarily driven by Crash Bandicoot: On the maturity of King’s titles, as well as a decreaseRun!™, which was released in Bubble Witch 3 Saga MAUs during the current quarter given the launch of the title earlier in 2017. The decrease in Blizzard’sMarch 2021, and (2) lower average MAUs is duefor Activision, primarily to lower MAUs fordriven by the HeroesCall of the Storm franchise, in part due to content and feature releases during the prior quarter without comparable releases in the current quarter.

Duty franchise.


Average MAUs decreased by 98 million, or 20%, for the three months ended September 30, 2017, as compared2021 are comparable to those for the three months ended September 30, 2016. The decrease2020, as the increase in King’s average MAUs isfor Activision, driven by Call of Duty: Mobile due to the December 2020 launch in China, was largely offset by lower average MAUs for Blizzard and King driven by decreases across King’sin various franchises that are largely attributable to the maturity of King’s titles and less engaged users leaving the network.

titles.


Management’s Overview of Business Trends

Interactive Entertainment


Management’s overview of business trends are described in Part II, Item 7, “Management's Discussion and Mobile Gaming Growth

OurAnalysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). Management has not identified any material changes or new 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% annually over the last four calendar years. The industry continuestrends 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 phones globally and the free-to-play business model on those platforms has increased the total addressable market for gaming significantly. Smart phones and associated free-to-play games have introduced gaming to new age groups and new regions and allowed 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, our other business units have mobile efforts underway that present the opportunity for us to drive additional player investment from our franchises.

Opportunities to Expand Franchises Outside of Games

Our fans spend significant time investingpreviously disclosed in our franchises through purchases of2020 Form 10-K, except as set forth below.


Increased Competition for Talent

We believe that our game content, whether through purchases of full games or downloadable content, or via microtransactions. Given the passion our players have for our franchises, we believe there are emerging opportunitiescontinued success and growth is directly related to drive player investment outside of game purchases. These opportunities include esports, film and television, and consumer products. Our efforts to build these additional opportunities are still relatively nascent, but we view them as potentially significant sources of future revenues.

As part of our efforts to take advantage of the esports opportunity, and as announced during the third quarter of 2017, we completed the sale of 12 teams for the Overwatch League. The Overwatch League is the first major global professional esports league with city-based teams. The first preseason game is expected to occur in December 2017, with the inaugural season starting in January 2018.

Concentration of Sales Among the Most Popular Franchises

The concentration of retail revenues among key titles has continued as a trend in the overall interactive software industry. According to The NPD Group, the top 10 titles accounted for 32% of the retail sales in the U.S. interactive entertainment industry in 2016. Similarly, a significant portion of our revenues have historically been derived from video games based on a few popular franchises and these video games were responsible for a disproportionately high percentage of our profits. For example, the Call of Duty, Candy Crush, World of Warcraft, and Overwatch franchises, collectively, accounted for 69% of our consolidated net 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.

In addition to investing in and developing sequels and content for our top titles, we are continually exploring additional ways to expand those franchises. Further, we invest in new properties in an effort 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.

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 maintainattract, retain, and develop top talent. We have seen increased competition in the market for talent and expect the competitive environment to continue at least in the short term. We have experienced challenges in both the retention of our top franchisesexisting talent and attraction of new talent, with our average voluntary turnover rates being higher in the current year as compared to the prior year in many parts of our company. This competition, voluntary turnover and recruiting difficulty, has negatively impacted our ability to successfully compete against our competitors’ top franchises can significantlydeliver future game releases, and if they persist, could continue to negatively impact our performance.

Recurring Revenue Business Models

Increased consumer online connectivity has allowed usability to offer players new investment opportunitiesdeliver content in a cadence that will be optimal for our business.


Updates to Upcoming Content Releases

We are now planning for a later launch for our Overwatch 2 and Diablo IV titles than originally expected in order to provide the development teams the extra time they need to deliver the experiences that their communities deserve, and to shift our businessset the franchises up for success over a multi-year period. As a result, we will not have the financial uplift that we had expected next year from the release of these two titles. Additionally, as previously announced, Blizzard’s mobile title based on the Diablo franchise, Diablo Immortal™, which was anticipated to release in the second half of 2021, is anticipated to release in 2022 as game testing revealed additional opportunities the team is going to pursue which are expected to make the title more engaging for a more 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 engagement. Also, mobile games, and free-to-play games more broadly, are generally less seasonal.

wider audience.
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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 (amountsrevenues:

For the Three Months Ended September 30,For the Nine Months Ended September 30,
2021202020212020
Net revenues
Product sales$423 20 %$408 21 %$1,666 25 %$1,484 26 %
In-game, subscription, and other revenues1,647 80 1,546 79 4,974 75 4,190 74 
Total net revenues2,070 100 1,954 100 6,640 100 5,674 100 
Costs and expenses
Cost of revenues—product sales:
Product costs120 28 101 25 375 23 357 24 
Software royalties, amortization, and intellectual property licenses72 17 37 9 272 16 152 10 
Cost of revenues—in-game, subscription, and other:
Game operations and distribution costs307 19 290 19 925 19 819 20 
Software royalties, amortization, and intellectual property licenses28 2 41 3 87 2 115 3 
Product development329 16 274 14 1,016 15 802 14 
Sales and marketing244 12 238 12 727 11 722 13 
General and administrative143 7 186 10 614 9 529 9 
Restructuring and related costs3 — 9 — 46 1 39 1 
Total costs and expenses1,246 60 1,176 60 4,062 61 3,535 62 
Operating income824 40 778 40 2,578 39 2,139 38 
Interest and other expense (income), net65 3 25 1 52 1 55 1 
Loss on extinguishment of debt (1)— — 31 2 — — 31 1 
Income before income tax expense759 37 722 37 2,526 38 2,053 36 
Income tax expense120 6 118 6 391 6 365 6 
Net income$639 31 %$604 31 %$2,135 32 %$1,688 30 %

(1) Represents the loss on extinguishment of debt we recognized 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%

 

connection with our debt financing activities during the three months ended September 30, 2020.

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Table of Contents
Consolidated Net Revenues


The key drivers of changes in our consolidated results, operating segment results, and sources of liquidity are presented in the order of significance.

The following table summarizes our consolidated net revenues and in-game net revenues (amounts in millions):

 For the Three Months Ended September 30,For the Nine Months Ended September 30,
 20212020Increase (Decrease)% Change20212020Increase (Decrease)% Change
Consolidated net revenues$2,070 $1,954 $116 6 %$6,640 $5,674 $966 17 %
In-game net revenues (1)$1,316 $1,283 $33 3 %$4,058 $3,331 $727 22 %

(1)    In-game net revenues primarily includes the increase (decrease) in deferred net amount of revenues recognized for microtransactions and downloadable content during 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

 

 

 

Consolidated Net Revenues

period.


Q3 20172021 vs. Q3 2016

2020


Consolidated net revenues

The increase in consolidated net revenues for the three months ended September 30, 2017,2021, as compared to the three months ended September 30, 2016,2020, was primarily driven by an increase in revenues of $249 million due to:

·to higher revenues recognized fromfrom:

•in-game player purchases and advertising in the continued strengthCandy Crush franchise;

•Diablo II: Resurrected, which was released in September 2021; and

•Call of Duty: Modern Warfare, which was released in October 2019, as compared toCall of Duty: Black Ops III4, driven by the downloadable content pack, Zombies Chronicles, 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.

TheOctober 2018.


This increase was partially offset by:

·by a decrease in revenues of $203 million due to 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 from:


•Call of Duty: Infinite Warfare (which, when referred to herein, is inclusive of Call of Duty: Modern Warfare® Remastered)Black Ops Cold War, which was released in November 2016,2020, as compared to Call of Duty: Modern Warfare; and

•Tony Hawk’s Pro Skater 1 + 2, which was released in September 2020.

The remaining net increase in revenues of $70 million was driven by various other franchises and titles.

In-game net revenues

The increase in in-game net revenues for the three months ended September 30, 2021, as compared to the performancethree months ended September 30, 2020, was primarily driven by an increase in in-game net revenues of $112 million due to higher in-game net revenues from:

•the Candy Crush franchise; and

•Call of Duty: Mobile, which was released in October 2019.

This increase was offset by a decrease in in-game net revenues of $97 million due to lower in-game net revenues from Call of Duty: Black Ops IIICold War, the comparable 2015 title.

as compared to Call of Duty: Modern Warfare.


The remaining net increase in in-game net revenues of $18 million was driven by various other franchises and titles.

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Table of Contents
YTD Q3 20172021 vs. YTD Q3 2016

2020


Consolidated net revenues

The increase in consolidated net revenues for the nine months ended September 30, 2017,2021, as compared to the nine months ended September 30, 2016,2020, was primarily driven by an increase in revenues of $1.1 billion due to:

·to higher revenues from King titlesfrom:


•Call of Duty: Modern Warfare, 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, duecompared to in-game events and features;

·                  revenues recognized from the continued strength of Call of Duty: Black Ops III4;


•the Candy Crush franchise;

•World of Warcraft, driven bywhich includes the downloadable content pack, Zombies Chronicles,release of World of Warcraft: Shadowlands in November 2020 and continued strengthWorld of microtransactions;

·                  higher revenues recognized from Overwatch;Warcraft: Burning Crusade™ Classic in June 2021; and

·                  revenues from Crash Bandicoot N. Sane Trilogy.


•Call of Duty: Mobile.

The increase was partially offset by lower revenues recognized from Call of Duty: Infinite Warfare, as compared to the performance of Call of Duty: Black Ops III.

Change in Deferred Revenues Recognized

Q3 2017 vs. Q3 2016

Thea net decrease in revenues of $119 million, driven by various other franchises and titles.


In-game net deferred revenues recognized 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, due to the release of Destiny 2 in September 2017, the revenues from which are largely deferred and will be recognized in future periods over an estimated service period. The decrease was partially offset by net deferred revenues recognized from World of Warcraft, as compared to a net deferral 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 in in-game net deferred revenues recognized for the nine months ended September 30, 2017,2021, as compared to the nine months ended September 30, 2016,2020, was primarily driven by an increase in in-game net revenues of $830 million due to:

·to higher in-game net deferred revenues recognized from Overwatch,from:


•Call of Duty: Modern Warfare, as compared to a net deferralCall of revenues in Duty: Black Ops 4;

•the comparable prior period due to the releaseCandy Crush franchise;

•Call of Overwatch in May 2016;Duty: Mobile; 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.

Warcraft.


The increase was partially offset by:

·by a net deferraldecrease in in-game net revenues 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;$103 million, driven by various other franchises and

·                  lower net deferred revenues recognized from the Call of Duty franchise, primarily due to the performance of Call of Duty: Infinite Warfare, as compared to Call of Duty: Black Ops III.

titles.


Foreign Exchange Impact


Changes in foreign exchange rates had a positive impact of $28approximately $19 million and a negative impact of $34$181 million on Activision Blizzard’sour consolidated net revenues for the three and nine months ended September 30, 2017,2021, respectively, as compared to the impact on net revenues forsame periods in the three and nine months ended September 30, 2016.previous year. The changes are primarily due to changes in the value of the U.S. dollar relative to the Euroeuro and the British pound.



44
Table of Contents
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 reportable operating segment. Prior period amounts have been revised to reflect this change. This change had no impact on consolidated net revenues or operating income.


Information on the reportable segmentssegment net revenues and reconciliationssegment operating income are presented below (amounts in millions):

For the Three Months Ended September 30, 2021Increase / (decrease)
ActivisionBlizzardKingTotalActivisionBlizzardKingTotal
Segment Revenues
Net revenues from external customers$641 $478 $652 $1,771 $(132)$85 $116 $69 
Intersegment net revenues (1)— 15 — 15 — (3)— (3)
Segment net revenues$641 $493 $652 $1,786 $(132)$82 $116 $66 
Segment operating income$244 $188 $303 $735 $(101)$55 $55 $9 
For the Three Months Ended September 30, 2020
ActivisionBlizzardKingTotal
Segment Revenues
Net revenues from external customers$773 $393 $536 $1,702 
Intersegment net revenues (1)— 18 — 18 
Segment net revenues$773 $411 $536 $1,720 
Segment operating income$345 $133 $248 $726 

45
Table of Contents
For the Nine Months Ended September 30, 2021Increase / (decrease)
ActivisionBlizzardKingTotalActivisionBlizzardKingTotal
Segment Revenues
Net revenues from external customers$2,321 $1,347 $1,896 $5,564 $36 $83 $309 $428 
Intersegment net revenues (1)— 62 — 62 — — — — 
Segment net revenues$2,321 $1,409 $1,896 $5,626 $36 $83 $309 $428 
Segment operating income$1,049 $537 $755 $2,341 $(39)$4 $140 $105 
For the Nine Months Ended September 30, 2020
ActivisionBlizzardKingTotal
Segment Revenues
Net revenues from external customers$2,285 $1,264 $1,587 $5,136 
Intersegment net revenues (1)— 62 — 62 
Segment net revenues$2,285 $1,326 $1,587 $5,198 
Segment operating income$1,088 $533 $615 $2,236 

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

46
Table of Contents
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

 

 

 


For the Three Months Ended September 30,For the Nine Months Ended September 30,
2021202020212020
Reconciliation to consolidated net revenues:
Segment net revenues$1,786 $1,720 $5,626 $5,198 
Revenues from non-reportable segments (1)109 65 303 232 
Net effect from recognition (deferral) of deferred net revenues (2)190 187 773 306 
Elimination of intersegment revenues (3)(15)(18)(62)(62)
Consolidated net revenues$2,070 $1,954 $6,640 $5,674 
Reconciliation to consolidated income before income tax expense:
Segment operating income$735 $726 $2,341 $2,236 
Operating income (loss) from non-reportable segments (1)4 (20)(12)(27)
Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (2)154 150 562 169 
Share-based compensation expense(64)(53)(259)(138)
Amortization of intangible assets(2)(16)(8)(62)
Restructuring and related costs (Note 12)
(3)(9)(46)(39)
Consolidated operating income824 778 2,578 2,139 
Interest and other expense (income), net65 25 52 55 
Loss on extinguishment of debt— 31 — 31 
Consolidated income before income tax expense$759 $722 $2,526 $2,053 

(1)Includes other income and expenses from operating segments managed outside theof our reportable segments, including our StudiosDistribution business and Distribution businesses. Also includes unallocated corporate income and expenses.


(2)Reflects fees and other expenses, such as legal, banking, and professional services fees,the net effect from recognition (deferral) of deferred net revenues, along with related to the King Acquisition and associated integration activities, inclusivecost 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 ofrevenues, on certain of our foreign entities.

online-enabled products.

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

47
Table of Contents

Segment Net Revenues

Activision

Results


Q3 20172021 vs. Q3 2016

2020


Activision

The increasedecrease in Activision’s segment net revenues and operating income for the three months ended September 30, 2017,2021, as compared to the three months ended September 30, 2016,2020, was primarily due to:

·                  higherto lower revenues from the Destiny franchise, driven by the release of Destiny 2 in September 2017;

·                  revenues from the continued strength of from:


•Call of Duty: Black Ops III, driven by the downloadable content pack, Zombies ChroniclesCold War, which was released in May 2017,November 2020, as compared to Call of Duty: Modern Warfare, which was released in October 2019; and continued strength of microtransactions; and

·                  revenues from Crash Bandicoot N. Sane Trilogy


•Tony Hawk’s Pro Skater 1 + 2, which was released in June 2017.

September 2020.


In addition, the decrease in Activision’s segment operating income was driven by higher product development costs, driven by increased costs to support the Call of Duty franchise.

These decreases to segment net revenues and operating income were partially offset by higher revenues from:

•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4, which was released in October 2018; and

•Call of Duty: Mobile,which was released in October 2019.

In addition, the decrease in Activision’s segment operating income was partially offset by lower sales and marketing costs due to the timing of product releases.

Blizzard

The increase in Blizzard’s segment net revenues and operating income for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, was primarily due to higher revenues from:

•Diablo II: Resurrected, which was released in September 2021;and

•the Overwatch League, as the prior-year period was negatively impacted from actions taken to support team owners as a result of the COVID-19 pandemic, with no similar actions taken in the current year.

This increase to segment net revenues and operating income was partially offset by lower revenues from CallWorld of Duty: Infinite Warfare, whichWarcraft.

In addition, the increase in Blizzard’s segment operating income was releasedpartially offset by higher cost of revenues driven by software amortization and royalties for Diablo II: Resurrected.

King

The increase in November 2016,King’s segment net revenues and operating income for the three months ended September 30, 2021, as compared to Callthe three months ended September 30, 2020, was primarily due to higher revenues from in-game player purchases and advertising, primarily in the Candy Crush franchise.

In addition, the increase in King’s segment operating income was driven by higher insurance claim proceeds primarily relating to a network outage which occurred in 2018 from changes made by a third-party partner which inadvertently impacted some users’ ability to play and spend money in King games.

These increases in King’s segment operating income were partially offset by:

•higher sales and marketing costs to support its franchises; and

48
Table of Duty: Black Ops III,Contents
•higher service provider fees, primarily digital storefront fees, driven by the comparable 2015 title.

higher revenues from in-game player purchases.



YTD Q3 20172021 vs. YTD Q3 2016

2020


Activision

The increase in Activision’s segment net revenues for the nine months ended September 30, 2017,2021, as compared to the nine months ended September 30, 2016,2020, was primarily due to the same drivershigher revenues from:

•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4; and

•Call of Duty: Mobile.

This increase to segment net revenues was partially offsetting factorsoffset by lower revenues from Call of Duty: Black Ops Cold War, as for the three months ended September 30, 2017, as discussed above.

Blizzard

Q3 2017 vs. Q3 2016

compared to Call of Duty: Modern Warfare.


The decrease in Blizzard’sActivision’s segment operating income, despite the increase in segment net revenues, for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, was primarily due to:

·                  lower revenues from World of Warcraft, driven by higher product development costs, driven by increased costs to support the releaseCall 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.

TheDuty franchise. This decrease to segment operating income was partially offset by:

·                  higher revenues from Hearthstone;by lower sales and

·                  higher revenues from Diablo III marketing costs for the Call of Duty franchise and for Tony Hawk’s Pro Skater 1 + 2 and CrashTM Bandicoot 4: It’s About TimeTM, primarily due to the releaseboth of Rise of the Necromancer™, a downloadable content pack for Diablo III which waswere released in June 2017.

YTD Q3 2017 vs. YTD Q3 2016

2020.


Blizzard

The decreaseincrease in Blizzard’s segment net revenues and operating income for the nine months ended September 30, 2017,2021, 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, as compared to the three months ended September 30, 2016,2020, was primarily due to higher revenues from:


•Diablo II: Resurrected, which was released in September 2021;and

•World of Warcraft.

The increase in Blizzard’s segment operating income from the Candy Crush franchiseabove was largely offset by:

•higher product development costs to support game development efforts; and

•higher cost of revenues driven by in-game eventssoftware amortization and features.

YTD Q3 2017 vs. YTD Q3 2016

royalties for Diablo II: Resurrected.


King

The increase in King’s segment net revenues and operating income for the nine months ended September 30, 2017,2021, as compared to the nine months ended September 30, 2016,2020, 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 in-game player purchases and advertising, primarily in the Candy Crush franchise, due to in-game events and features.

Segment Income from Operations

Activision

Q3 2017 vs. Q3 2016

franchise.


The increase in Activision’sKing’s segment operating income forfrom the three months ended September 30, 2017, as compared to the three months ended September 30, 2016,above was partially offset by:

•higher service provider fees, primarily due todigital storefront fees, driven by the higher revenues discussed above. The increase was partially offset by higher amortization of capitalized software costsfrom in-game player purchases; 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

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, as compared to the three months ended September 30, 2016, was primarily due to the lower revenues discussed above. The decrease was partially offset by 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 lower capitalization of software development costs due to the timing of game development cycles. 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, as compared to the three months ended September 30, 2016, was primarily due to the higher revenues discussed above, along with lower 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, was primarily due to the current period including King’s results of operations 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.

costs.


Foreign Exchange Impact

Changes in foreign exchange rates had a positive impact of $34$10 million and $1$124 million on reportableActivision Blizzard’s segment net revenues for the three and nine months ended September 30, 2017,2021, respectively, as compared to the impact on reportable segment net revenues forsame periods in the three and nine months ended September 30, 2016.previous year. The changes are primarily due to changes in the value of the U.S. dollar relative to the Euroeuro and the British pound.


49
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Consolidated Results


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

 


 For the Three Months Ended September 30,For the Nine Months Ended September 30,
 20212020Increase/
(decrease)		20212020Increase/
(decrease)
Net revenues by distribution channel:   
Digital online channels (1)$1,852 $1,753 $99 $5,883 $4,782 $1,101 
Retail channels69 117 (48)354 509 (155)
Other (2)149 84 65 403 383 20 
Total consolidated net revenues$2,070 $1,954 $116 $6,640 $5,674 $966 

(1)Net revenues from “Digital online channels” include revenues from digitally-distributed subscriptions, licensing royalties, value-added services, downloadable content, microtransactions, subscriptions, and products.

products, as well as licensing royalties.


(2)Net revenues from “Other” includeprimarily includes revenues from our StudiosDistribution business, the Overwatch League, and Distribution businesses, as well as revenues from MLG.

the Call of Duty League.


Q3 2021 vs. Q3 2020

Digital Online Channel Net Revenues

Net Revenues

Q3 2017 vs. Q3 2016

Net


The increase in net revenues from digital online channels for the three months ended September 30, 2017, were comparable2021, as compared to the three months ended September 30, 2016. This2020, was primarily due to increaseshigher revenues from:

•in-game player purchases and advertising in revenues driven by:

·                  revenues recognized from the continued strengthCandy Crush franchise;


•Diablo II: Resurrected, which was released in September 2021; and

•Call of Duty: Modern Warfare, which was released in October 2019, as compared toCall of Duty: Black Ops III4, 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.

October 2018.


The increase was partially offset by:

·by lower revenues recognized from Call of Duty: Infinite WarfareBlack Ops Cold War, which was released in November 2016,2020, as compared to Call of Duty: Modern Warfare.


Retail Channel Net Revenues

The decrease in net revenues from retail channels for the three months ended September 30, 2021, as compared to the performance of Call of Duty: Black Ops III, the comparable 2015 title;

·three months ended September 30, 2020, was primarily due to lower revenues recognized from OverwatchTony Hawk’s Pro Skater 1 + 2, 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.

September 2020.


YTD Q3 20172021 vs. YTD Q3 2016

2020


Digital Online Channel Net Revenues

The increase in net revenues from digital online channels for the nine months ended September 30, 2017,2021, as compared to the nine months ended September 30, 2016,2020, was primarily due to:

·to higher revenues from King titles,from:


•Call of Duty: Modern Warfare, 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 duecompared to in-game events and features;

·                  revenues recognized from the continued strength of Call of Duty: Black Ops III, driven by4;


•in-game player purchases and advertising in the downloadable content pack, Zombies ChroniclesCandy Crush franchise;

50
Table of Contents
•World of Warcraft, which includes the release of World of Warcraft: Shadowlands in November 2020 and continued strengthWorld of microtransactions; and

·                  higher revenues recognized from Overwatch.

The increase was partially offset by lower revenues recognized from Warcraft: Burning Crusade Classic™ in June 2021;


•Call of Duty: Infinite Warfare, as compared to the performance of Mobile; and

•Call of Duty: Black Ops III, the comparable 2015 title.

Change 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 WarcraftCold War, 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.

Modern Warfare.


Retail Channel Net Revenues

Net Revenues

Q3 2017 vs. Q3 2016

The increase in net revenues 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 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, 2017,2021, as compared to the nine months ended September 30, 2016,2020, 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 from:

•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 WarfareCold War, as compared toCall 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: InfiniteModern 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


•Crash™ Team Racing Nitro-Fueled, as compared to a net deferral of revenues in the comparable prior period, due to the release of Overwatch in May 2016.

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.

Americas

Q3 2017 vs. Q3 2016

Net revenues in the Americas region for the three months ended September 30, 2017, were comparable to the three months ended September 30, 2016. Net revenues were comparable primarily due to increases in revenues from:

·                  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 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 increase in net revenues in the EMEA region for the three months ended September 30, 2017, 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, was primarily due to the same drivers and partially offsetting factors as those for the three months ended September 30, 2017, as discussed above.

Asia Pacific

Q3 2017 vs. Q3 2016

The decrease in net revenues in the Asia Pacific region for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, 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.

2019.


Net Revenues by Platform


The following tables detail 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

 


For the Three Months Ended September 30,For the Nine Months Ended September 30,
20212020Increase/
(decrease)		20212020Increase/
(decrease)
Net revenues by platform:
Console$523 $695 $(172)$2,061 $1,944 $117 
PC578 514 64 1,827 1,494 333 
Mobile and ancillary (1)820 661 159 2,349 1,853 496 
Other (2)149 84 65 403 383 20 
Total consolidated net revenues$2,070 $1,954 $116 $6,640 $5,674 $966 

(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” includeprimarily includes revenues from our StudiosDistribution business, the Overwatch League, and Distribution businesses, as well as revenues from MLG.

Console

the Call of Duty League.


Q3 20172021 vs. Q3 2016

2020


Console

The increasedecrease in net revenues from the console platform for the three months ended September 30, 2017,2021, as compared to the three months ended September 30, 2016,2020, was primarily due to:

·to lower revenues recognized from the continued strength of from:


•Call of Duty: Black Ops III, driven by the downloadable content pack, Zombies ChroniclesCold War, which was released in May 2017, and continued strengthNovember 2020, as compared to Call of microtransactions;

·                  revenues from Crash Bandicoot N. Sane TrilogyDuty: Modern Warfare, which was released in June 2017;October 2019; and

·


•Tony Hawk’s Pro Skater 1 + 2, which was released in September 2020.

The decrease was partly offset by higher revenues recognizedfrom Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4,which was released in October 2018.

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Table of Contents
PC

The increase in net revenues from the Destiny franchise, driven byPC platform for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, was primarily due to higher revenues from:

•Diablo II: Resurrected, which was released in September 2021;

•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4; and

•World of Warcraft, which includes the release of Destiny 2 World of Warcraft: Shadowlands in September 2017.

November 2020 and World of Warcraft: Burning Crusade Classic in June 2021.


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 IIICold War, as compared to Call of Duty: Modern Warfare.

Mobile and Ancillary

The increase in net revenues from mobile and ancillary for the comparable 2015 title.

three months ended September 30, 2021, as compared to the three months ended September 30, 2020, was primarily due to higher revenues from:


•in-game player purchases and advertising in the Candy Crush franchise; and

•Call of Duty: Mobile,which was released in October 2019.

YTD Q3 20172021 vs. YTD Q3 2016

2020


Console

The decreaseincrease in net revenues from the console platform for the nine months ended September 30, 2017,2021, as compared to the nine months ended September 30, 2016,2020, was primarily due to lowerhigher revenues recognized from Call of Duty: InfiniteModern Warfare, as compared to the performance of Call of Duty: Black Ops III4. 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 decrease in net revenues from the PC platform for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, was primarily due to:

·                  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, 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, 2017,2021, 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; and

·                  higher revenues recognized from World of Warcraft.

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, as compared to the three months ended September 30, 2016,2020, was primarily due to higher revenues from the Candy Crush franchise, driven by in-game eventsfrom:


•World of Warcraft; and features.

YTD Q3 2017 vs. YTD Q3 2016


•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4.

Mobile and Ancillary

The increase in net revenues from mobile and ancillary for the nine months ended September 30, 2017,2021, as compared to the nine months ended September 30, 2016,2020, 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 fromfrom:

•in-game player purchases and advertising in the Candy Crush franchise due to in-game eventsfranchise; and features.


•Call of Duty: Mobile.
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Costs and Expenses


Cost of Revenues


The following tables detail 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 September 30, 2021% of
associated
net revenues		Three Months Ended September 30, 2020% of
associated
net revenues		Increase
(Decrease)
Cost of revenues—product sales:
Product costs$120 28 %$101 25 %$19 
Software royalties, amortization, and intellectual property licenses72 17 37 9 35 
Cost of revenues—in-game, subscription, and other:
Game operations and distribution costs307 19 290 19 17 
Software royalties, amortization, and intellectual property licenses28 2 41 3 (13)
Total cost of revenues$527 25 %$469 24 %$58 

 Nine Months Ended September 30, 2021% of
associated
net revenues		Nine Months Ended September 30, 2020% of
associated
net revenues		Increase
(Decrease)
Cost of revenues—product sales:
Product costs$375 23 %$357 24 %$18 
Software royalties, amortization, and intellectual property licenses272 16 152 10 120 
Cost of revenues—in-game, subscription, and other:
Game operations and distribution costs925 19 819 20 106 
Software royalties, amortization, and intellectual property licenses87 2 115 3 (28)
Total cost of revenues$1,659 25 %$1,443 25 %$216 

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Cost of Revenues—Product Sales:

Sales:


Q3 20172021 vs. Q3 2016

2020


The increase in product costs for the three months ended September 30, 2017,2021, as compared to the three months ended September 30, 2016,2020, was primarily due to thedriven by a $35 million increase in product sales for the period, includingcosts from our relatively lower margin Distribution business.

business, as a result of higher revenues.


The increase in software royalties, amortization, and intellectual property licenses related to product sales for the three months ended September 30, 2017, was comparable2021, as compared to the three months ended September 30, 2016.

2020, was primarily due to a$56 million increase in software amortization and royalties from Blizzard, driven by higher software amortization and royalties from (1) Diablo II: Resurrected, which was released in September 2021, and (2) World of Warcraft, given the release of World of Warcraft: Shadowlands in November 2020, with no comparable amortization in the prior year.


YTD Q3 20172021 vs. YTD Q3 2016

2020


The decreaseincrease in product costs for the nine months ended September 30, 2017,2021, as compared to the nine months ended September 30, 2016,2020, was primarily due to the decreasedriven by a $71 million increase in product sales for the period. This wascosts from our Distribution business, partially offset by higherlower product costs resulting from the increased revenuesas a result of our relatively lower-margin Distribution business.

lower retail channel revenues.


The decreaseincrease in software royalties, amortization, and intellectual property licenses related to product sales for the nine months ended September 30, 2017,2021, as compared to the nine months ended September 30, 2016,2020, was primarily due to:

·                  lower developer royalties and


•a $110 million increase in software amortization associated with the Destiny franchise, due to the timing of releases;

·                  lowerand royalties from Blizzard, driven by higher software amortization associatedand royalties from (1) World of Warcraft, given the release of World of Warcraft: Shadowlands in November 2020, with Guitar Hero® Liveno comparable amortization in the prior year, and (2) Diablo II: Resurrected; and


•a $10 million increase software amortization and royalties from Activision, driven by higher software amortization and royalties from Call of Duty: Black Ops Cold War, which was released in October 2015, with no comparable release in 2016; and

·November 2020, as compared to Call of Duty: Modern Warfare, partially offset by lower software amortization associated with Overwatchand royalties from Tony Hawk’s Pro Skater 1 + 2, 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.

September 2020.


Cost of Revenues—In-game, Subscription, Licensing, and Other Revenues:


Q3 20172021 vs. Q3 2016

2020


The increase in game operations and distribution costs for the three months ended September 30, 2017,2021, as compared to the three months ended September 30, 2016,2020, was primarily due to higher platforma $28 million increase in service provider fees, associated with the increase in revenues from King.

The decrease in softwaresuch as digital storefront fees (e.g., fees retained by Apple and Google for our sales on their platforms) and payment processor fees, as a result of higher revenues.


Software royalties, amortization, and intellectual property licenses related to in-game, subscription, licensing, and other revenues for the three months ended September 30, 2017, as compared2021 are comparable to those for the three months ended September 30, 2016, was primarily due to lower amortization of internally-developed franchise intangible assets acquired in the King Acquisition.

2020.


YTD Q3 20172021 vs. YTD Q3 2016

2020


The increase in game operations and distribution costs for the nine months ended September 30, 2017,2021, as compared to the nine months ended September 30, 2016,2020, was primarily due to higher online costs and platforma $98 million increase in service provider fees, associated with revenues from King,such as the current period includes King’s costs fordigital storefront fees and payment processor fees, as 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.

result of higher revenues.


The increasedecrease in software royalties, amortization, and intellectual property licenses related to in-game, subscription, licensing, and other revenues for the nine months ended September 30, 2017,2021, as compared to the nine months ended September 30, 2016,2020, was primarily due to a full year-to-date perioddecrease of $49 million in amortization of internally-developed franchise and developed software intangible assets acquired as part of our 2016 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$28 million, driven by Call of internally-developed franchise intangible assets following the King Closing Date.

Duty: Mobile, which was released in October 2019.


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Table of Contents
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

 


September 30, 2021% of
consolidated
net revenues		September 30, 2020% of
consolidated
net revenues		Increase
(Decrease)
Three Months Ended$329 16 %$274 14 %$55 
Nine Months Ended$1,016 15 %$802 14 %$214 

Q3 20172021 vs. Q3 2016

2020


The increase in product development costs for the three months ended September 30, 2017,2021, as compared to the three months ended September 30, 2016,2020, was primarily due to higher product development spending of $72 million, driven by increased personnel costs resulting from lower capitalization of software development costs in the current period dueand outside developer fees to the timing of game development cycles. The increase was partially offset by lower accrued bonuses for Blizzard.

support our franchises.


YTD Q3 20172021 vs. YTD Q3 2016

2020


The increase in product development costs for the nine months ended September 30, 2017,2021, as compared to the nine months ended September 30, 2016,2020, was primarily due to:

·to higher Blizzard product development spending of $230 million, driven by increased personnel costs resulting from lower capitalization of software development costs dueand outside developer fees 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.

support our franchises.


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

 


September 30, 2021% of
consolidated
net revenues		September 30, 2020% of
consolidated
net revenues		Increase
(Decrease)
Three Months Ended$244 12 %$238 12 %$6 
Nine Months Ended$727 11 %$722 13 %$5 

Q3 20172021 vs. Q3 2016

2020


Sales and marketing expenses for the three months ended September 30, 2017,2021, were comparable to the three months ended September 30, 2016,2020, as the higher sales and marketing costs for the DestinyCandy Crush franchise associated with the release of Destiny 2 in September 2017 were largely 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 thefor prior year included our Callreleases of Duty XP event without a comparable event in the current period.

Tony Hawk’s Pro Skater 1 + 2 and Crash BandicootTM 4: It’s About TimeTM.


YTD Q3 20172021 vs. YTD Q3 2016

The increase in sales2020


Sales and marketing expenses for the nine months ended September 30, 2017,2021, as compared to the nine months ended September 30, 2016, was 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,2020, were comparable, 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

· higher sales and marketing costs for the DestinyCandy Crush franchise given the releaseand World of Destiny 2.

The increase was partiallyWarcraft were offset by lower sales and marketing costs for Overwatchthe Call of Duty franchise and World of Warcraft: Legion, due to their launches in the prior year.

lower personnel-related costs.


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

 


September 30, 2021% of
consolidated
net revenues		September 30, 2020% of
consolidated
net revenues		Increase
(Decrease)
Three Months Ended$143 7 %$186 10 %$(43)
Nine Months Ended$614 9 %$529 9 %$85 

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Table of Contents
Q3 20172021 vs. Q3 2016

2020


The increasedecrease in general and administrative expenses for the three months ended September 30, 2017,2021, as compared to the three months ended September 30, 2016,2020, was primarily due to increased(1) higher insurance claim proceeds of $20 million primarily relating to a network outage which occurred in 2018 from changes made by a third-party partner which inadvertently impacted some users’ ability to play and spend money in King games; and (2) a decrease in personnel costs including stock-based compensation expense, to support the growth of our business and expanding areas$18 million as a result of opportunity.

lower share-based compensation.


YTD Q3 20172021 vs. YTD Q3 2016

2020


The increase in general and administrative expenses for the nine months ended September 30, 2017,2021, as compared to the nine months ended September 30, 2016,2020, was primarily due to:

·                  increasedto a $71 million increase in personnel costs to support the growthas a result of higher share-based compensation.


Restructuring and related costs (amounts in millions)

September 30, 2021% of
consolidated
net revenues		September 30, 2020% of
consolidated
net revenues		Increase
(Decrease)
Three Months Ended$3 — %$9 — %$(6)
Nine Months Ended$46 1 %$39 1 %$7 

During 2019, we began implementing a plan aimed at refocusing our resources on our largest opportunities and removing unnecessary levels of complexity and duplication from certain parts of our businessbusiness. Since then, we have been, and expanding areaswill continue focusing on these goals as we execute against our plan. The restructuring and related costs incurred during 2021 relate primarily to severance costs. We do not expect to realize significant net savings in our total operating expenses as a result of opportunity;our plan, as cost reductions in our selling, general and

· administrative activities are expected to be offset by increased investment in product development. Refer to Note 12 of the inclusion innotes to the current period of a non-cash accounting charge to reclassify certain lossescondensed consolidated financial statements included in our cumulative translation adjustments into earnings due to the substantial liquidationItem 1 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.

this Quarterly Report on Form 10-Q for further discussion.


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

)


September 30, 2021% of
consolidated
net revenues		September 30, 2020% of
consolidated
net revenues		Increase
(Decrease)
Three Months Ended$65 3 %$25 1 %$40 
Nine Months Ended$52 1 %$55 1 %$(3)

Q3 2021 vs. Q3 2020

The decreaseincrease in interest and other expense (income), net, for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, was primarily due to a $39 million loss recorded on an equity investment. Refer to Note 6 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for further discussion.

YTD Q3 2021 vs. YTD Q3 2020

Interest and other expense (income), net, for the nine months ended September 30, 2017, as compared2021, was comparable to the three and nine months ended September 30, 2016, was primarily due to our lower total outstanding debt and2020, with a $32 million increase in gains on equity investments being offset by:

•a $16 million decrease in interest income as a result of lower interest ratesrates; and

•a $10 million increase in interest expense on our current debt instrumentsobligations as a result of a higher average debt outstanding in 2021, when compared to the prior year period, as a result of our refinancingdebt financing activities in 2016 and 2017. See further discussion below under “Liquidity and Capital Resources.”

during the three months ended September 30, 2020.


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Table of Contents
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

 


September 30, 2021% of
Pretax
income		September 30, 2020% of
Pretax
income		Increase
(Decrease)
Three Months Ended$120 16 %$118 16 %$2 
Nine Months Ended$391 15 %$365 18 %$26 

The income tax expense of $32$120 million for the three months ended September 30, 2017,2021 reflects an effective tax rate of 16%, which is comparable to the effective tax rate of 16% for the three months ended September 30, 2020 due to lower U.S. taxes on foreign earnings in the current year offset by the impact of discrete tax benefits from remeasurement of deferred tax assets in the prior year period.

The income tax expense of $391 million for the nine months ended September 30, 2021 reflects an effective tax rate of 15%, which is higherlower 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 million18% 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, 2016.2020. The decrease is primarily 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.

U.S. taxes on foreign earnings.


The effective tax rate of 15%16% and 11%15% for the three and nine months ended September 30, 2017,2021, respectively, isare lower than the U.S. statutory rate of 35%21%, primarily due to lower U.S. tax on foreign earnings taxed at lower statutory rates,and 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 uncertainpayments. In addition, a discrete tax positions.

Our effective tax rate differsbenefit was recognized 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 deferred tax position taken inasset as a prior annual period are recognized separatelyresult of a change in the quarter ofU.K. tax rate for the change.

nine months ended September 30, 2021.


Further information about our income taxes is provided in Note 1014 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. Our primary sourcesflows, which, we believe, in combination with our existing balance of liquidity, which are available to us to fund cash outflows such as our anticipated dividend payments, share repurchases, and scheduled debt maturities, include our cash and cash equivalents, short- and long-term investments, and cash flows provided by operating activities. With our cash and cash equivalents and short-term investments of $3.7$10.0 billion, at September 30, 2017,our access to capital, and the expected cash flows provided byavailability of our operating activities, we believe that we have$1.5 billion revolving credit facility, will be 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 availabilityOur primary sources of a $250 million revolving credit facility.

liquidity, which are available to us to fund our operations and other cash outflows such as potential dividend payments or share repurchases and scheduled debt maturities (the next of which is in 2026), include our cash and cash equivalents, short-term investments, and cash flows provided by operating activities.


As of September 30, 2017,2021, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $2.3$3.3 billion, as compared to $1.9$2.5 billion as of December 31, 2016. If the2020. 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%

 

 

 


September 30, 2021December 31, 2020Increase
(Decrease)
Cash and cash equivalents$9,718 $8,647 $1,071 
Short-term investments300 170 130 
$10,018 $8,817 $1,201 
Percentage of total assets42 %38 % 

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Table of Contents

 

 

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

)

 For the Nine Months Ended September 30,
 20212020Increase
(Decrease)
Net cash provided by operating activities$1,753 $1,112 $641 
Net cash used in investing activities(101)(178)77 
Net cash (used in) provide by financing activities(533)653 (1,186)
Effect of foreign exchange rate changes(35)32 (67)
Net increase in cash and cash equivalents and restricted cash$1,084 $1,619 $(535)

Net Cash Provided by Operating Activities


The primary driversdriver of net cash flows associated with our operating activities includeis the collection of customer receivablesincome generated from the sale of our products and services. These collections areThis is typically partially offset by: payments to vendors forworking capital requirements used in the manufacturing, distribution,development, sale, and marketingsupport of our products; payments for customer service support for our consumers; payments to third-party developers and intellectual property holders; payments for interest on our debt; payments for software development; payments for tax liabilities; and payments to our workforce.


Net cash provided by operating activities for the nine months ended September 30, 2017,2021, was $1.1$1.8 billion, as compared to $1.3$1.1 billion for the nine months ended September 30, 2016.2020. The decreaseincrease was primarily due to 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 nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, along with larger adjustments to net income for non-cash charges, primarily associated with the amortization of the acquired intangiblesand lower tax payments in the King Acquisition; and

·current year, as the prior-year period included payments for a tax settlement in France with no comparable activity in 2021, in addition to 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 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 nine months ended September 30, 2017,2021, was $156$101 million, as compared to $1.2 billion for the nine months ended September 30, 2016. The decrease in the cash used was primarily due to cash used for the King Acquisition in the nine months ended September 30, 2016, with no comparable transaction in the current period. The decrease was partially offset by purchases of available-for-sale investments of $80$178 million for the nine months ended September 30, 2017, with no comparable transaction2020. The decrease in cash used in investing activities was primarily due to the net purchases of available-for-sale investments of $62 million for the nine months ended September 30, 2021, as compared to net purchases of $122 million in the priorprior-year period.


Net Cash (Used in) Provided byUsed in Financing Activities


The primary drivers of net cash flows associated with financing activities typically include the proceeds from, and repayments of, our long-term debt and transactions involving our common stock, including the issuance of shares of common stock to employees upon the exercise of stock options, as well as the payment of dividends.


Net cash used in financing activities for the nine months ended September 30, 2017,2021, was $640$533 million, as compared to net cash provided by financing activities of $2.1 billion for the nine months ended September 30, 2016. The change was primarily attributed to our debt financing activities. For the nine months ended September 30, 2017, we had net debt repayments of $500 million, as compared to approximately $2.3 billion of net debt proceeds for the nine months ended September 30, 2016. The cash flows used in financing activities for the nine months ended September 30, 2017, were partially offset by higher proceeds from stock option exercises of $150 million, as compared to $86$653 million for the nine months ended September 30, 2016.

2020. The increase in cash used in financing activities was primarily due to:


•net debt proceeds of $896 million received for the nine months ended September 30, 2020, resulting from the issuance of an aggregate principal amount of $2.0 billion of new notes and the early redemption of $1.05 billion of our previously outstanding notes, with no comparable activity in the current year;

•higher tax payments made for net share settlements on restricted stock units, driven by a higher volume of share releases, at higher market values, resulting in $246 million of payments during the nine months ended September 30, 2021, as compared to $41 million in the prior-year period; and

•higher dividends paid, with $365 million of dividend payments for the nine months ended September 30, 2021, as compared to $316 million for the prior-year period.

Effect of Foreign Exchange Rate Changes


Changes in foreign exchange rates had a negative impact of $35 million and a positive impact of $72 million and a negative impact of $23$32 million on our cash and cash equivalents for the nine months ended September 30, 20172021 and 2016,September 30, 2020, respectively. The change was primarily due to changes in the value of the U.S. dollar relative to the Euroeuro and the British pound.

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Table of Contents

Debt

As of


At September 30, 2021 and December 31, 2016,2020, our total outstanding debt was $4.9$3.7 billion, bearing interest at a weighted average rate of 2.92%2.87%.

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 September 30, 2021At December 31, 2020
2026 Notes$850 $850 
2027 Notes400 400 
2030 Notes500 500 
2047 Notes400 400 
2050 Notes1,500 1,500 
Total gross long-term debt$3,650 $3,650 
Unamortized discount and deferred financing costs(43)(45)
Total net carrying amount$3,607 $3,605 

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.


Dividends


On February 2, 2017,4, 2021, our Board of Directors approveddeclared a cash dividend of $0.30$0.47 per common share. On May 10, 2017,6, 2021, we made an aggregate cash dividend payment of $226$365 million to shareholders of record at the close of business on March 30, 2017. On May 26, 2017, we made related dividend equivalent paymentsApril 15, 2021.

Off-balance Sheet Arrangements

At each of less than $1 million to certain holders of restricted stock units.

Capital Expenditures

For the year ending December 31, 2017, we anticipate total capital expenditures of approximately $135 million, primarily for leasehold improvements, computer hardware, and software purchases. During the nine months ended September 30, 2017, capital expenditures were $86 million.

Off-Balance Sheet Arrangements

At September 30, 20172021 and December 31, 2016,2020, 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.


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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 ReturnsRecognition;

•Income Taxes; and Price Protection;

·      Allowance for Inventory Obsolescence;

·

•Software Development Costs;

·      Income Taxes;

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

·      Share-Based Payments.

Costs.


During the nine months ended September 30, 2017,2021, 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 OperationsOperations” contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016,2020, 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



60
Table 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.

Contents

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 Risk


Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily include fluctuations in foreign currency exchange rates and interest rates.


Foreign Currency Exchange Rate Risk

We transact business in many different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates.rates, with a heightened risk for volatility in the future due to potential impacts of COVID-19 on global financial markets. Revenues and related expenses generated from our international operations are generally denominated in their respective local currencies. Primary currencies include Euros,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, and Foreign Currency Forward Contracts Not Designated as Hedges


Refer to Note 6 of the gross notional amountnotes to the condensed consolidated financial statements included in Item 1 of outstanding Cash Flow Hedges was approximately $328 million. The fair value of these contracts, all of which have remaining maturities of 15 months or less, was $10 million of net unrealized losses. At September 30, 2017, we had approximately $6 million of net realized but unrecognized losses recorded within “Accumulated other comprehensive income (loss)” associated with contracts that had settled but were deferred and will be amortized into earnings, along with the associated hedged revenues. Such amounts will be reclassified into earnings within the next 12 months.

At December 31, 2016, the gross notional amount of outstanding Cash Flow Hedges was approximately $346 million. The fair value of these contracts was $22 million of net unrealized gains as of December 31, 2016.

During the three and nine months ended September 30, 2017 and 2016, there was no ineffectiveness relating tothis Quarterly Report on Form 10-Q for disclosures regarding our Cash Flow Hedges and the amount of pre-tax net realized gains (losses) associated with these contracts that were reclassified out of “Accumulated other comprehensive income (loss)” and into earnings was not material.

foreign currency forward contracts.


In the absence of hedging activities for the nine months ended September 30, 2017,2021, a hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in a theoretical decline of our net income of approximately $95$124 million. This sensitivity analysis assumes a parallel adverse shift of all foreign currency exchange rates against the U.S. dollar; however, all foreign currency exchange rates do not always move in this manner, and actual results may differ materially.


Interest Rate Risk


Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio, 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, 2017,2021, our $3.58 billion of cash and cash equivalents waswere comprised primarily of money market funds.

The Company has determined that,


As of September 30, 2021, based on the composition of our investment portfolio, as of September 30, 2017, there was nowe anticipate investment yields may remain low, which would continue to negatively impact our future interest income. Such impact is not expected to be material interest rate risk exposure to the Company’s consolidated financial condition, resultsliquidity.

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Table of operations, or liquidity as of that date.

Contents

Item 4.Controls and Procedures


Definition and Limitations of Disclosure Controls and Procedures

Our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act is: (1) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. A control system, no matter how well designed and operated, can provide only reasonable assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports. Inherent limitations to any system of disclosure controls and procedures include, but are not limited to, the possibility of human error and the circumvention or overriding of such controls by one or more persons. In addition, we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, and our system of controls may therefore not achieve its desired objectives under all possible future events.


Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures at September 30, 2017,2021, 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, 2017,2021, 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, 2017.2021. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at September 30, 2017,2021, 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.


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Table of Contents
PART II. OTHER INFORMATION


Item 1.Legal Proceedings


We are party to routine claims, suits, investigations, audits, and other proceedings arising from the ordinary course of business, including with respect to intellectual property rights, contractual claims, labor and employment matters, regulatory matters, tax matters, unclaimed property matters, compliance matters, and collection matters. In the opinion of management, after consultation with legal counsel, such routine claims and lawsuits are not significant, and we do not expect them to have a material adverse effect on our business, financial condition, results of operations, or liquidity.

We are also party to the proceedings set forth below.


Pending EEOC Settlement

In September 2021, we entered into a proposed consent decree with the U.S. Equal Employment Opportunity Commission (“EEOC”) to settle claims regarding certain employment practices. The consent decree is subject to approval by the United States District Court, Central District of California, and, among other things, provides for the creation of an $18 million settlement fund for eligible claimants; upgrading Company policies, practices, and training to further prevent and eliminate harassment and discrimination in its workplaces, including implementing an expanded performance review system with a new equal opportunity focus; and providing ongoing oversight and review of the Company’s training programs, investigation policies, disciplinary framework and compliance by appointing a third-party equal opportunity consultant whose findings will be regularly reported to our Board of Directors as well as the EEOC. The California Department of Fair Employment and Housing (“DFEH”) has filed a motion to intervene in the matter, seeking to object to the consent decree, including the amount of the settlement fund, and that motion is pending. There can be no assurance that the consent decree will be approved by the Court.

Other Pending Employment-Related Matters

On July 20, 2021, the DFEH filed a complaint (“DFEH Complaint”) in the Los Angeles County Superior Court of the State of California against Activision Blizzard, Blizzard Entertainment, and Activision Publishing alleging violations of the California Fair Employment and Housing Act and the California Equal Pay Act.

On August 3, 2021, a putative class action was filed in the United States District Court, Central District of California, entitled Gary Cheng v. Activision Blizzard, Inc., et al., Case No. 2:21-cv-06240-PA-JEM. Plaintiff purports to represent a class of Activision shareholders who purchased stock between August 4, 2016 and July 27, 2021, and asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Company and three current or former officers. Beginning on August 6, 2021, three putative shareholder derivative actions were filed in California Superior Court, County of Los Angeles, and those cases have now been consolidated in an action entitled York County on Behalf of County of York Retirement Fund v. Robert A. Kotick, et al., Case No. 21STCV28949. The actions assert claims on the Company’s behalf against eleven current or former officers and directors for breach of fiduciary duty, corporate waste and unjust enrichment based on allegations similar to those in the DFEH Complaint and in the securities class action. The Company is named as a nominal defendant.

The Company is cooperating with an investigation by the U.S. Securities and Exchange Commission (“SEC”) regarding disclosures on employment matters and related issues including responding to a subpoena from the SEC. The SEC has also issued subpoenas to a number of current and former executives and other employees in connection with this matter.

We are unable to predict the impact of the above matters on our business, financial condition, results of operations, or liquidity at this time.

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Item 1A.Risk Factors


Various risks associated with our business are described in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 6.Exhibits

The exhibits listed on2020 (the “2020 Form 10-K”).


In addition to the accompanying Exhibit Index are hereby incorporated by reference intoother information set forth in this Quarterly Report on Form 10-Q.

10-Q, you should carefully consider the factors discussed in “Risk Factors” in the 2020 Form 10-K, any of which could materially affect our business, reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, or stock price. The ongoing global COVID-19 pandemic has heightened, and in some cases manifested, certain of the risks we normally face in operating our business, including those disclosed in the 2020 Form 10-K.

We have updated certain risk factors included in our 2020 Form 10-K, as set forth below.

Business and Industry Risks

If we do not consistently deliver popular, high‑quality content in a timely manner, if we are not successful in meaningfully expanding our franchises further on the mobile platform, or if consumers prefer products from our competitors, our business may be negatively impacted.

Consumer preferences for games are usually cyclical and difficult to predict. Even the most successful games can lose consumer audiences over time, and remaining popular is increasingly dependent on the games being refreshed with new content or other enhancements. In order to remain competitive and maximize the chances that consumers select our products as opposed to the various entertainment options available to them and with which we compete, we must continuously develop new products or new content for, or other enhancements to, our existing products. These products or enhancements may not be well‑received by consumers, even if well‑reviewed and of high quality. Our competitors include very large corporations with significantly greater financial, marketing and product development resources than we have and many smaller competitors, particularly on the mobile platform. Our larger competitors may be able to leverage their greater financial, technical, personnel, and other resources to provide larger budgets for development and marketing and make higher offers to licensors and developers for commercially desirable properties, as well as adopt more aggressive pricing policies to develop more commercially successful video game products than we do. Further, competitors may develop content that imitates or competes with our best‑selling games, potentially reducing our sales or our ability to charge the same prices we have historically charged for our products. These competing products may take a larger share of consumer spending than anticipated, which could cause product sales to fall below expectations. If we do not continue to develop consistently high‑quality and well‑received games or enhancements to those games, if our marketing fails to resonate with our consumers, if we are not successful in meaningfully expanding our franchises further on the mobile platform, or if consumers lose interest in a genre of games we produce, our revenues and profit margins could decline. In addition, our own best‑selling products could compete with our other games, reducing sales for those other games. Further, a failure by us to develop a high‑quality product, or our development of a product that is otherwise not well‑received, could potentially result in additional expenditures to respond to consumer demands, harm our reputation, and increase the likelihood that our future products will not be well‑received. The increased importance of downloadable content to our business amplifies these risks, as downloadable content for poorly‑received games typically generates lower‑than‑expected sales. The increased demand for consistent enhancements to our products also requires a greater allocation of financial resources to those products.

Additionally, consumer expectations regarding the quality, performance, and integrity of our products and services are high. Consumers may be critical of our brands, games, services, and/or business practices for a wide variety of reasons, and such negative reactions may not be foreseeable or within our control to manage effectively. For example, if our games or services, such as our proprietary online gaming service, do not function as consumers expect, whether because they fail to function as advertised or otherwise, our sales may suffer. The risk that this may occur is particularly pronounced with respect to our games with online features because they involve ongoing consumer expectations, which we may not be able to consistently satisfy. Our games with online features are also frequently updated, increasing the risk that a game may contain significant errors, or “bugs.” If any of these issues occur, consumers may stop playing the game and may be less likely to return to the game as often in the future, which may negatively impact our business. As another example, we are subject to legal proceedings regarding our employment practices, as described in Note 17

of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and could become subject to additional, similar legal proceedings in the future. These legal proceedings have negatively impacted our public reputation and, as a result, some consumers have elected not to continue subscribing to one of our games, and existing and potential players may decide not to play our games in the future. Some existing sponsors, partners, and advertisers have also elected not to be associated with our brand due to this impact on our reputation, and others may so elect in the future. All of this may negatively impact our business.

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Further, delays in product releases or disruptions following the commercial release of one or more new products could negatively impact our business and reputation and could cause our results of operations to be materially different from expectations. If we fail to release our products in a timely manner, or if we are unable to continue to extend the life of existing games by adding features and functionality that will encourage continued engagement with the game, our business may be negatively impacted. For example, we are now planning for a later launch for our Overwatch® 2 and Diablo® IV titles than originally expected, which will delay the uplift to our results that we usually experience following the release of new titles.

Additionally, the amount of lead time and cost involved in the development of high‑quality products is increasing, and the longer the lead time involved in developing a product and the greater the allocation of financial resources to such product, the more critical it is that we accurately predict consumer demand for such product. If our future products do not achieve expected consumer acceptance or generate sufficient revenues upon introduction, we may not be able to recover the substantial up‑front development and marketing costs associated with those products.

If we do not continue to attract, retain, and motivate skilled personnel, we will be unable to effectively conduct our business.

Our success depends significantly on our ability to identify, attract, hire, retain, motivate, and utilize the abilities of qualified personnel, including in some cases, external developers, particularly personnel with the specialized skills needed to create and sell the high‑quality, well‑received content upon which our business is substantially dependent. Our industry is generally characterized by a high level of employee mobility, competitive compensation programs, and aggressive recruiting among competitors for employees with technical, marketing, sales, engineering, product development, creative, and/or management skills.

We have observed labor shortages, increasing competition for talent and increasing attrition. We are experiencing difficulties in attracting and retaining skilled personnel. If we are unable to attract additional qualified personnel or retain and utilize the services of key personnel, we can expect this would adversely affect our business.

Regulatory and Legal Risks

We are involved in legal proceedings that can have a negative impact on our business.

From time to time, we are involved in claims, suits, investigations, audits, and proceedings arising in the ordinary course of our business, including with respect to intellectual property, competition and antitrust, regulatory, tax, privacy, labor and employment, compliance, unclaimed property, liability and personal injury, product damage, collection, and/or commercial matters. In addition, negative consumer sentiment about our business practices may result in inquiries or investigations from regulatory agencies and consumer groups, as well as litigation.

As described in this Quarterly Report on Form 10-Q, we are currently subject to pending legal proceedings regarding employment practices and in September 2021, we reached an agreement with the EEOC to settle claims regarding certain employment practices, which remains subject to approval by the United States District Court for the Central District of California. See Note 17 of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details on these matters. These matters have negatively impacted our public reputation, diverted management attention, caused us to incur additional expenses, and we could be subject to additional, similar legal proceedings in the future. These matters have adversely affected the Company as noted above and we face continuing risks related to these matters.

Claims, suits, investigations, audits, and proceedings are inherently difficult to predict, including those referenced above, and their results are subject to significant uncertainties, many of which are outside of our control. Regardless of the outcome, such legal proceedings can have a negative impact on us due to reputational harm, legal costs, diversion of management resources, and other factors. It is also possible that a resolution of one or more such proceedings could result in substantial settlements, judgments, fines or penalties, injunctions, criminal sanctions, consent decrees, or orders preventing us from offering certain features, functionalities, products, or services, requiring us to change our development process or other business practices.

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There is also inherent uncertainty in determining reserves for these matters. Significant judgment is required in the analysis of these matters, including assessing the probability of potential outcomes and determining whether a potential exposure can be reasonably estimated. In making these determinations, we, in consultation with outside counsel, examine the relevant facts and circumstances on a quarterly basis assuming, as applicable, a combination of settlement and litigated outcomes and strategies. Further, it may take time to develop factors on which reasonable judgments and estimates can be based.

We regard our software as proprietary and rely on a variety of methods, including a combination of copyright, patent, trademark, and trade secret laws, and employee and third‑party non‑disclosure agreements, to protect our proprietary rights. We own or license various copyrights, patents, trademarks, and trade secrets. The process of registering and protecting these rights in various jurisdictions is expensive and time‑consuming. Further, we are aware that some unauthorized copying and piracy occurs, and if a significantly greater amount of unauthorized copying or piracy of our software products were to occur, it could negatively impact our business. We also cannot be certain that existing intellectual property laws will provide adequate protection for our products in connection with emerging technologies or that we will be able to effectively protect our intellectual property through litigation and other means.
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Item 6.    Exhibits
EXHIBIT INDEX

Exhibit Number

Exhibit

Exhibit Number

Exhibit

3.1

3.1

3.2

10.1*

10.2*

Form of Notice of Performance Share Unit Award Regarding Operating Income to Robert A. Kotick.

10.3*

Form of Notice of Performance Share Unit Award Regarding Relative Total Shareholder Return to Robert A. Kotick.

10.4*

Notice of Stock Option Award, datedApril 1, 2021 and corrected as of August 7, 2017, to Dennis Durkin.13, 2021, between Activision Blizzard, Inc. and Armin Zerza.

10.5*

10.2*

31.1

31.2

32.1

32.2

101.INS

XBRL Instance Document.

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

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

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


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

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) condensed consolidated balance sheets at September 30, 2017 and December 31, 2016, (ii) condensed consolidated statements


67
Table 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.

Contents


SIGNATURE

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


Date:  November 2, 2017

2021


ACTIVISION BLIZZARD, INC.

/s/ SPENCER NEUMANN

/s/ STEPHEN WEREB

Spencer Neumann

/s/ ARMIN ZERZA

Stephen Wereb

/s/ JESSE YANG

Armin Zerza

Jesse Yang
Chief Financial Officer and

Principal Financial Officer

Chief Accounting Officer and

Principal Financial Officer of

Principal Accounting Officer of

of Activision Blizzard, Inc.

of Activision Blizzard, Inc.

58

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