UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 20202021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-15839
ACTIVISION BLIZZARD, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | |
Delaware | | 95-4803544 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | |
3100 Ocean Park Boulevard | Santa Monica, | CAN/A | | 90405N/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 class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.000001 per share | | ATVI | | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | |
Large Accelerated Filer | ☒ | | Non-accelerated Filer | ☐ | | Accelerated Filer | ☐ |
| | | | | | | |
| | | | | | Smaller reporting company | ☐ |
| | | | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s Common Stock outstanding at October 22, 202026, 2021 was 772,857,185.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
Table of Contents
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains, or incorporates by reference, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements consist of any statement other than a recitation of historical facts and include, but are not limited to: (1) projections of revenues, expenses, income or loss, earnings or loss per share, cash flow, or other financial items; (2) statements of our plans and objectives, including those related to releases of products or services, restructuring activities, and restructuring activities;employee retention and recruitment; (3) statements of future financial or operating performance, including the impact of tax items thereon; and (4) statements of assumptions underlying such statements. Activision Blizzard, Inc. generally uses words such as “outlook,” “forecast,” “will,” “could,” “should,” “would,” “to be,” “plan,” “aims,” “believes,” “may,” “might,” “expects,” “intends,” “seeks,” “anticipates,” “estimate,” “future,” “positioned,” “potential,” “project,” “remain,” “scheduled,” “set to,” “subject to,” “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.
We caution that a number of important factors, many of which are beyond our control, could cause our actual future results and other future circumstances to differ materially from those expressed in any forward-looking statements. Such factors include, but are not limited to: the ongoing global impact of a novel strain of coronavirus which emerged in December 2019 (“COVID-19”) (including, without limitation, the potential for significant short- and long-term global unemployment and economic weakness and a resulting impact on global discretionary spending; potential strain on the retailers, distributors, and distributorsmanufacturers who sell our physical productproducts to customers;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 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 franchises; our ability to satisfy the expectations of consumers with respect to our brands, games, services, and/or business practices; our ability to attract, retain, and motivate skilled personnel; rapid changes in technology and industry standards; competition, including from other forms of entertainment; increasing importance of revenues derived from digital distribution channels; risks associated with the retail sales business model; the continued growth in the scope and complexity of our business, including the diversion of management time and attention to issues relating to the operations of our newly acquired or started businesses and the potential impact of our expansion into new businesses on our existing businesses;business; substantial influence of third-party platform providers over our products and costs; risks associated with transitions to next-generation consoles; success and availability of video game consoles manufactured by third parties;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 financial and operational 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 abilityproducts; risks relating to quickly adjustbehavior of our cost structuredistributors, 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 responseconsumers’ refusal to sudden changesbuy 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 demand;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;proceedings, including the impact of the 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; our ability to sell products at assumed pricing levels; reliance on external developers for developmentfluctuations in currency exchange rates; impacts of somechanges in financial accounting standards; insolvency or business failure of any of our software products; the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt; the seasonality in the sale of our products; counterparty risks relating to customers, licensees, licensors, and manufacturers,business partners, which havehas been magnified as a result of the COVID-19 pandemic; risks associated with our use of open source software; piracy and unauthorized copying of our products; insolvency or business failure of any of our partners, which has been magnified as a result of the COVID-19 pandemic; risks and uncertainties of conducting business outside the United States (the “U.S.”); increasing regulation of our business, products, and distribution in key territories; compliance with continually evolving laws and regulations concerning data privacy; reliance on servers and networks to operate our games and our proprietary online gaming service; potential data breaches and other cybersecurity risks;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, 2019, our2020 and Part II, Item 1A of this Quarterly Report on Form 10-Q for the periodquarter ended March 31, 2020, and our Quarterly Report on Form 10-Q for the period ended JuneSeptember 30, 2020.2021.
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 U.S. dollars unless otherwise explicitly stated to the contrary.
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, 2020 | | At December 31, 2019 | | At September 30, 2021 | | At December 31, 2020 |
Assets | Assets | | | | Assets | | | |
Current assets: | Current assets: | | | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 7,415 | | | $ | 5,794 | | Cash and cash equivalents | $ | 9,718 | | | $ | 8,647 | |
| Accounts receivable, net of allowances of $88 and $132, at September 30, 2020 and December 31, 2019, respectively | 619 | | | 848 | | |
Accounts receivable, net of allowances of $36 and $83, at September 30, 2021 and December 31, 2020, respectively | | Accounts receivable, net of allowances of $36 and $83, at September 30, 2021 and December 31, 2020, respectively | 585 | | | 1,052 | |
| Software development | Software development | 398 | | | 322 | | Software development | 227 | | | 352 | |
| Other current assets | Other current assets | 570 | | | 328 | | Other current assets | 681 | | | 514 | |
Total current assets | Total current assets | 9,002 | | | 7,292 | | Total current assets | 11,211 | | | 10,565 | |
| Software development | Software development | 145 | | | 54 | | Software development | 349 | | | 160 | |
| Property and equipment, net | Property and equipment, net | 211 | | | 253 | | Property and equipment, net | 171 | | | 209 | |
Deferred income taxes, net | Deferred income taxes, net | 1,287 | | | 1,293 | | Deferred income taxes, net | 1,400 | | | 1,318 | |
Other assets | Other assets | 699 | | | 658 | | Other assets | 632 | | | 641 | |
Intangible assets, net | Intangible assets, net | 469 | | | 531 | | Intangible assets, net | 449 | | | 451 | |
| Goodwill | Goodwill | 9,764 | | | 9,764 | | Goodwill | 9,765 | | | 9,765 | |
Total assets | Total assets | $ | 21,577 | | | $ | 19,845 | | Total assets | $ | 23,977 | | | $ | 23,109 | |
| Liabilities and Shareholders’ Equity | Liabilities and Shareholders’ Equity | | | | Liabilities and Shareholders’ Equity | |
Current liabilities: | Current liabilities: | | | | Current liabilities: | |
Accounts payable | Accounts payable | $ | 224 | | | $ | 292 | | Accounts payable | $ | 248 | | | $ | 295 | |
Deferred revenues | Deferred revenues | 1,108 | | | 1,375 | | Deferred revenues | 844 | | | 1,689 | |
Accrued expenses and other liabilities | Accrued expenses and other liabilities | 855 | | | 1,248 | | Accrued expenses and other liabilities | 924 | | | 1,116 | |
| Total current liabilities | Total current liabilities | 2,187 | | | 2,915 | | Total current liabilities | 2,016 | | | 3,100 | |
Long-term debt, net | Long-term debt, net | 3,604 | | | 2,675 | | Long-term debt, net | 3,607 | | | 3,605 | |
Deferred income taxes, net | Deferred income taxes, net | 480 | | | 505 | | Deferred income taxes, net | 433 | | | 418 | |
Other liabilities | Other liabilities | 924 | | | 945 | | Other liabilities | 971 | | | 949 | |
Total liabilities | Total liabilities | 7,195 | | | 7,040 | | Total liabilities | 7,027 | | | 8,072 | |
Commitments and contingencies (Note 16) | | | | |
Commitments and contingencies (Note 17) | | Commitments and contingencies (Note 17) | 0 | | 0 |
Shareholders’ equity: | Shareholders’ equity: | | Shareholders’ equity: | | | |
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,201,482,888 and 1,197,436,644 shares issued at September 30, 2020 and December 31, 2019, respectively | 0 | | | 0 | | |
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 | | 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 capital | Additional paid-in capital | 11,395 | | | 11,174 | | Additional paid-in capital | 11,640 | | | 11,531 | |
Less: Treasury stock, at cost, 428,676,471 shares at September 30, 2020 and December 31, 2019 | (5,563) | | | (5,563) | | |
Less: Treasury stock, at cost, 428,676,471 shares at September 30, 2021 and December 31, 2020 | | Less: Treasury stock, at cost, 428,676,471 shares at September 30, 2021 and December 31, 2020 | (5,563) | | | (5,563) | |
Retained earnings | Retained earnings | 9,183 | | | 7,813 | | Retained earnings | 11,460 | | | 9,691 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (633) | | | (619) | | Accumulated other comprehensive loss | (587) | | | (622) | |
Total shareholders’ equity | Total shareholders’ equity | 14,382 | | | 12,805 | | Total shareholders’ equity | 16,950 | | | 15,037 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 21,577 | | | $ | 19,845 | | Total liabilities and shareholders’ equity | $ | 23,977 | | | $ | 23,109 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in millions, except per share data)
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2021 | | 2020 | |
Net revenues | Net revenues | | | | | | | | Net revenues | | | | | | | | | |
Product sales | Product sales | $ | 408 | | | $ | 260 | | | $ | 1,484 | | | $ | 1,276 | | Product sales | | $ | 423 | | | $ | 408 | | | $ | 1,666 | | | $ | 1,484 | | |
Subscription, licensing, and other revenues | 1,546 | | | 1,022 | | | 4,190 | | | 3,227 | | |
In-game, subscription, and other revenues | | In-game, subscription, and other revenues | | 1,647 | | | 1,546 | | | 4,974 | | | 4,190 | | |
Total net revenues | Total net revenues | 1,954 | | | 1,282 | | | 5,674 | | | 4,503 | | Total net revenues | | 2,070 | | | 1,954 | | | 6,640 | | | 5,674 | | |
| Costs and expenses | Costs and expenses | | | | | | Costs and expenses | | |
Cost of revenues—product sales: | Cost of revenues—product sales: | | Cost of revenues—product sales: | | |
Product costs | Product costs | 101 | | | 137 | | | 357 | | | 388 | | Product costs | | 120 | | | 101 | | | 375 | | | 357 | | |
Software royalties, amortization, and intellectual property licenses | Software royalties, amortization, and intellectual property licenses | 37 | | | 9 | | | 152 | | | 171 | | Software royalties, amortization, and intellectual property licenses | | 72 | | | 37 | | | 272 | | | 152 | | |
Cost of revenues—subscription, licensing, and other revenues: | | |
Cost of revenues—in-game, subscription, and other: | | Cost of revenues—in-game, subscription, and other: | | |
Game operations and distribution costs | Game operations and distribution costs | 290 | | | 246 | | | 819 | | | 714 | | Game operations and distribution costs | | 307 | | | 290 | | | 925 | | | 819 | | |
Software royalties, amortization, and intellectual property licenses | Software royalties, amortization, and intellectual property licenses | 41 | | | 50 | | | 115 | | | 164 | | Software royalties, amortization, and intellectual property licenses | | 28 | | | 41 | | | 87 | | | 115 | | |
Product development | Product development | 274 | | | 210 | | | 802 | | | 702 | | Product development | | 329 | | | 274 | | | 1,016 | | | 802 | | |
Sales and marketing | Sales and marketing | 238 | | | 182 | | | 722 | | | 580 | | Sales and marketing | | 244 | | | 238 | | | 727 | | | 722 | | |
General and administrative | General and administrative | 186 | | | 177 | | | 529 | | | 527 | | General and administrative | | 143 | | | 186 | | | 614 | | | 529 | | |
Restructuring and related costs | Restructuring and related costs | 9 | | | 24 | | | 39 | | | 104 | | Restructuring and related costs | | 3 | | | 9 | | | 46 | | | 39 | | |
Total costs and expenses | Total costs and expenses | 1,176 | | | 1,035 | | | 3,535 | | | 3,350 | | Total costs and expenses | | 1,246 | | | 1,176 | | | 4,062 | | | 3,535 | | |
| Operating income | Operating income | 778 | | | 247 | | | 2,139 | | | 1,153 | | Operating income | | 824 | | | 778 | | | 2,578 | | | 2,139 | | |
| Interest and other expense (income), net (Note 12) | 25 | | | (2) | | | 55 | | | (33) | | |
Interest and other expense (income), net (Note 13) | | Interest and other expense (income), net (Note 13) | | 65 | | | 25 | | | 52 | | | 55 | | |
Loss on extinguishment of debt | Loss on extinguishment of debt | 31 | | | 0 | | | 31 | | | 0 | | Loss on extinguishment of debt | | — | | | 31 | | | — | | | 31 | | |
Income before income tax expense | Income before income tax expense | 722 | | | 249 | | | 2,053 | | | 1,186 | | Income before income tax expense | | 759 | | | 722 | | | 2,526 | | | 2,053 | | |
| Income tax expense | Income tax expense | 118 | | | 45 | | | 365 | | | 208 | | Income tax expense | | 120 | | | 118 | | | 391 | | | 365 | | |
| Net income | Net income | $ | 604 | | | $ | 204 | | | $ | 1,688 | | | $ | 978 | | Net income | | $ | 639 | | | $ | 604 | | | $ | 2,135 | | | $ | 1,688 | | |
| Earnings per common share | Earnings per common share | | | | | | Earnings per common share | | |
Basic | Basic | $ | 0.78 | | | $ | 0.27 | | | $ | 2.19 | | | $ | 1.28 | | Basic | | $ | 0.82 | | | $ | 0.78 | | | $ | 2.75 | | | $ | 2.19 | | |
Diluted | Diluted | $ | 0.78 | | | $ | 0.26 | | | $ | 2.17 | | | $ | 1.27 | | Diluted | | $ | 0.82 | | | $ | 0.78 | | | $ | 2.72 | | | $ | 2.17 | | |
| Weighted-average number of shares outstanding | Weighted-average number of shares outstanding | | | | | | Weighted-average number of shares outstanding | | |
Basic | Basic | 772 | | | 767 | | | 771 | | | 766 | | Basic | | 778 | | | 772 | | | 777 | | | 771 | | |
Diluted | Diluted | 779 | | | 771 | | | 777 | | | 770 | | Diluted | | 783 | | | 779 | | | 784 | | | 777 | | |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in millions)
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2021 | | 2020 | |
Net income | Net income | $ | 604 | | | $ | 204 | | | $ | 1,688 | | | $ | 978 | | Net income | | $ | 639 | | | $ | 604 | | | $ | 2,135 | | | $ | 1,688 | | |
| Other comprehensive income (loss): | Other comprehensive income (loss): | | Other comprehensive income (loss): | | |
Foreign currency translation adjustment, net of tax | 21 | | | (6) | | | 11 | | | (5) | | |
Foreign currency translation adjustments, net of tax | | Foreign currency translation adjustments, net of tax | | (14) | | | 21 | | | (8) | | | 11 | | |
Unrealized gains (losses) on forward contracts designated as hedges, net of tax | Unrealized gains (losses) on forward contracts designated as hedges, net of tax | (18) | | | 10 | | | (26) | | | 4 | | Unrealized gains (losses) on forward contracts designated as hedges, net of tax | | 14 | | | (18) | | | 40 | | | (26) | | |
Unrealized gains (losses) on investments, net of tax | (2) | | | (3) | | | 1 | | | (5) | | |
| Unrealized gains (losses) on available-for-sale securities, net of tax | | Unrealized gains (losses) on available-for-sale securities, net of tax | | 6 | | | (2) | | | 3 | | | 1 | | |
Total other comprehensive income (loss) | Total other comprehensive income (loss) | $ | 1 | | | $ | 1 | | | $ | (14) | | | $ | (6) | | Total other comprehensive income (loss) | | $ | 6 | | | $ | 1 | | | $ | 35 | | | $ | (14) | | |
Comprehensive income | Comprehensive income | $ | 605 | | | $ | 205 | | | $ | 1,674 | | | $ | 972 | | Comprehensive income | | $ | 645 | | | $ | 605 | | | $ | 2,170 | | | $ | 1,674 | | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in millions)
| | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | |
| | 2021 | | 2020 | | | | | |
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 cost | | 46 | | | 48 | | | | | | |
Depreciation and amortization | | 88 | | | 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, net | | 462 | | | 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 activities | | 1,753 | | | 1,112 | | | | | | |
Cash flows from investing activities: | | | | | | | | | |
Proceeds from maturities of available-for-sale investments | | 120 | | | 36 | | | | | | |
Proceeds from sale of available-for-sale investments | | 66 | | | — | | | | | | |
Purchases of available-for-sale investments | | (248) | | | (158) | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Capital expenditures | | (59) | | | (56) | | | | | | |
Other investing activities | | 20 | | | — | | | | | | |
Net cash used in investing activities | | (101) | | | (178) | | | | | | |
Cash flows from financing activities: | | | | | | | | | |
Proceeds from issuance of common stock to employees | | 78 | | | 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 cash | | 1,084 | | | 1,619 | | | | | | |
Cash and cash equivalents and restricted cash at beginning of period | | 8,652 | | | 5,798 | | | | | | |
Cash and cash equivalents and restricted cash at end of period | | $ | 9,736 | | | $ | 7,417 | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2020 | | 2019 |
Cash flows from operating activities: | | | |
Net income | $ | 1,688 | | | $ | 978 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Deferred income taxes | (13) | | | 100 | |
| | | |
Depreciation and amortization | 152 | | | 246 | |
Non-cash operating lease cost | 48 | | | 49 | |
Amortization of capitalized software development costs and intellectual property licenses (1) | 141 | | | 163 | |
| | | |
| | | |
| | | |
Share-based compensation expense (2) | 138 | | | 127 | |
| | | |
Other | 39 | | | 9 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable, net | 225 | | | 635 | |
| | | |
Software development and intellectual property licenses | (300) | | | (186) | |
Other assets | (206) | | | (48) | |
Deferred revenues | (322) | | | (809) | |
Accounts payable | (71) | | | 22 | |
Accrued expenses and other liabilities | (407) | | | (373) | |
Net cash provided by operating activities | 1,112 | | | 913 | |
| | | |
Cash flows from investing activities: | | | |
Proceeds from maturities of available-for-sale investments | 36 | | | 153 | |
Purchases of available-for-sale investments | (158) | | | 0 | |
| | | |
| | | |
Capital expenditures | (56) | | | (79) | |
Other investing activities | 0 | | | 5 | |
Net cash provided by (used in) investing activities | (178) | | | 79 | |
| | | |
Cash flows from financing activities: | | | |
Proceeds from issuance of common stock to employees | 114 | | | 87 | |
Tax payment related to net share settlements on restricted stock units | (41) | | | (55) | |
| | | |
Dividends paid | (316) | | | (283) | |
Proceeds from issuance of debt, net of discounts | 1,994 | | | 0 | |
Repayment of long-term debt | (1,050) | | | 0 | |
Payment of financing costs | (20) | | | 0 | |
Premium payment for early redemption of notes | (28) | | | 0 | |
| | | |
| | | |
Net cash provided by (used in) financing activities | 653 | | | (251) | |
Effect of foreign exchange rate changes on cash and cash equivalents | 32 | | | (24) | |
Net increase in cash and cash equivalents and restricted cash | 1,619 | | | 717 | |
Cash and cash equivalents and restricted cash at beginning of period | 5,798 | | | 4,229 | |
Cash and cash equivalents and restricted cash at end of period | $ | 7,417 | | | $ | 4,946 | |
(1)Excludes deferral and amortization of share-based compensation expense.
(2)Includes the net effects of capitalization, deferral, and amortization of share-based compensation expense.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three and Nine Months Ended September 30, 2021
(Unaudited)
(Amounts and shares in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders’ Equity |
| Shares | | Amount | | Shares | | Amount | | | | |
Balance at December 31, 2020 | 1,203 | | | $ | — | | | (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 options | 1 | | | — | | | — | | | — | | | 33 | | | — | | | — | | | 33 | |
Issuance of common stock pursuant to restricted stock units | 4 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
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, 2021 | 1,206 | | | $ | — | | | (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, 2021 | 1,206 | | | $ | — | | | (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 units | 2 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
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, 2021 | 1,207 | | | $ | — | | | (429) | | | $ | (5,563) | | | $ | 11,640 | | | $ | 11,460 | | | $ | (587) | | | $ | 16,950 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three and Nine Months Ended September 30, 2020
(Unaudited)
(Amounts and shares in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders’ Equity |
| Shares | | Amount | | Shares | | Amount | | | | |
Balance at December 31, 2019 | 1,197 | | | $ | 0 | | | (429) | | | $ | (5,563) | | | $ | 11,174 | | | $ | 7,813 | | | $ | (619) | | | $ | 12,805 | |
Cumulative impact from adoption of new credit loss standard | — | | | — | | | — | | | — | | | — | | | (3) | | | — | | | (3) | |
Components of comprehensive income: | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 505 | | | — | | | 505 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (9) | | | (9) | |
Issuance of common stock pursuant to employee stock options | 1 | | | — | | | — | | | — | | | 27 | | | — | | | — | | | 27 | |
Issuance of common stock pursuant to restricted stock units | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | 0 | |
Restricted stock surrendered for employees’ tax liability | — | | | — | | | — | | | — | | | (31) | | | — | | | — | | | (31) | |
Share-based compensation expense related to employee stock options and restricted stock units | — | | | — | | | — | | | — | | | 43 | | | — | | | — | | | 43 | |
Dividends ($0.41 per common share) | — | | | — | | | — | | | — | | | — | | | (316) | | | — | | | (316) | |
Balance at March 31, 2020 | 1,199 | | | $ | 0 | | | (429) | | | $ | (5,563) | | | $ | 11,213 | | | $ | 7,999 | | | $ | (628) | | | $ | 13,021 | |
Components of comprehensive income: | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 580 | | | — | | | 580 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | |
Issuance of common stock pursuant to employee stock options | 1 | | | — | | | — | | | — | | | 44 | | | — | | | — | | | 44 | |
Restricted stock surrendered for employees’ tax liability | — | | | — | | | — | | | — | | | (3) | | | — | | | — | | | (3) | |
Share-based compensation expense related to employee stock options and restricted stock units | — | | | — | | | — | | | — | | | 46 | | | — | | | — | | | 46 | |
Balance at June 30, 2020 | 1,200 | | | $ | 0 | | | (429) | | | $ | (5,563) | | | $ | 11,300 | | | $ | 8,579 | | | $ | (634) | | | $ | 13,682 | |
Components of comprehensive income: | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 604 | | | — | | | 604 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
Issuance of common stock pursuant to employee stock options | 1 | | | — | | | — | | | — | | | 43 | | | — | | | — | | | 43 | |
| | | | | | | | | | | | | | | |
Restricted stock surrendered for employees’ tax liability | — | | | — | | | — | | | — | | | (6) | | | — | | | — | | | (6) | |
Share-based compensation expense related to employee stock options and restricted stock units | — | | | — | | | — | | | — | | | 58 | | | — | | | — | | | 58 | |
| | | | | | | | | | | | | | | |
Balance at September 30, 2020 | 1,201 | | | $ | 0 | | | (429) | | | $ | (5,563) | | | $ | 11,395 | | | $ | 9,183 | | | $ | (633) | | | $ | 14,382 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three and Nine Months Ended September 30, 2019
(Unaudited)
(Amounts and shares in millions, except per share data)
| | | Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders’ Equity | | Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders’ Equity |
| | Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | |
Balance at December 31, 2018 | 1,192 | | | $ | 0 | | | (429) | | | $ | (5,563) | | | $ | 10,963 | | | $ | 6,593 | | | $ | (601) | | | $ | 11,392 | | |
Balance at December 31, 2019 | | Balance at December 31, 2019 | 1,197 | | | $ | — | | | (429) | | | $ | (5,563) | | | $ | 11,174 | | | $ | 7,813 | | | $ | (619) | | | $ | 12,805 | |
Cumulative impact from adoption of new credit loss standard | | Cumulative impact from adoption of new credit loss standard | — | | | — | | | — | | | — | | | — | | | (3) | | | — | | | (3) | |
Components of comprehensive income: | Components of comprehensive income: | | Components of comprehensive income: | |
Net income | Net income | — | | | — | | | — | | | — | | | — | | | 447 | | | — | | | 447 | | Net income | — | | | — | | | — | | | — | | | — | | | 505 | | | — | | | 505 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | | |
Other comprehensive income (loss) | | Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | (9) | | | (9) | |
Issuance of common stock pursuant to employee stock options | Issuance of common stock pursuant to employee stock options | 2 | | | — | | | — | | | — | | | 30 | | | — | | | — | | | 30 | | Issuance of common stock pursuant to employee stock options | 1 | | | — | | | — | | | — | | | 27 | | | — | | | — | | | 27 | |
Issuance of common stock pursuant to restricted stock units | Issuance of common stock pursuant to restricted stock units | 2 | | | — | | | — | | | — | | | — | | | — | | | �� | | | 0 | | Issuance of common stock pursuant to restricted stock units | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Restricted stock surrendered for employees’ tax liability | Restricted stock surrendered for employees’ tax liability | (1) | | | — | | | — | | | — | | | (45) | | | — | | | — | | | (45) | | Restricted stock surrendered for employees’ tax liability | — | | | — | | | — | | | — | | | (31) | | | — | | | — | | | (31) | |
Share-based compensation expense related to employee stock options and restricted stock units | Share-based compensation expense related to employee stock options and restricted stock units | — | | | — | | | — | | | — | | | 56 | | | — | | | — | | | 56 | | Share-based compensation expense related to employee stock options and restricted stock units | — | | | — | | | — | | | — | | | 43 | | | — | | | — | | | 43 | |
Dividends ($0.37 per common share) | — | | | — | | | — | | | — | | | — | | | (283) | | | — | | | (283) | | |
Balance at March 31, 2019 | 1,195 | | | $ | 0 | | | (429) | | | $ | (5,563) | | | $ | 11,004 | | | $ | 6,757 | | | $ | (602) | | | $ | 11,596 | | |
Dividends ($0.41 per common share) | | Dividends ($0.41 per common share) | — | | | — | | | — | | | — | | | — | | | (316) | | | — | | | (316) | |
Balance at March 31, 2020 | | Balance at March 31, 2020 | 1,199 | | | $ | — | | | (429) | | | $ | (5,563) | | | $ | 11,213 | | | $ | 7,999 | | | $ | (628) | | | $ | 13,021 | |
Components of comprehensive income: | Components of comprehensive income: | | | | | | | | | | | | | | | | Components of comprehensive income: | | | | | | | | | | | | | | | |
Net income | Net income | — | | | — | | | — | | | — | | | — | | | 328 | | | — | | | 328 | | Net income | — | | | — | | | — | | | — | | | — | | | 580 | | | — | | | 580 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | | |
Other comprehensive income (loss) | | Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | |
Issuance of common stock pursuant to employee stock options | Issuance of common stock pursuant to employee stock options | 1 | | | — | | | — | | | — | | | 28 | | | — | | | — | | | 28 | | Issuance of common stock pursuant to employee stock options | 1 | | | — | | | — | | | — | | | 44 | | | — | | | — | | | 44 | |
| Restricted stock surrendered for employees’ tax liability | Restricted stock surrendered for employees’ tax liability | — | | | — | | | — | | | — | | | (4) | | | — | | | — | | | (4) | | Restricted stock surrendered for employees’ tax liability | — | | | — | | | — | | | — | | | (3) | | | — | | | — | | | (3) | |
Share-based compensation expense related to employee stock options and restricted stock units | Share-based compensation expense related to employee stock options and restricted stock units | — | | | — | | | — | | | — | | | 35 | | | — | | | — | | | 35 | | Share-based compensation expense related to employee stock options and restricted stock units | — | | | — | | | — | | | — | | | 46 | | | — | | | — | | | 46 | |
Balance at June 30, 2019 | 1,196 | | | $ | 0 | | | (429) | | | $ | (5,563) | | | $ | 11,063 | | | $ | 7,085 | | | $ | (608) | | | $ | 11,977 | | |
Balance at June 30, 2020 | | Balance at June 30, 2020 | 1,200 | | | $ | — | | | (429) | | | $ | (5,563) | | | $ | 11,300 | | | $ | 8,579 | | | $ | (634) | | | $ | 13,682 | |
Components of comprehensive income: | Components of comprehensive income: | | | | | | | | | | | | | | | | Components of comprehensive income: | | | | | | | | | | | | | | | |
Net income | Net income | — | | | — | | | — | | | — | | | — | | | 204 | | | — | | | 204 | | Net income | — | | | — | | | — | | | — | | | — | | | 604 | | | — | | | 604 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | | |
Other comprehensive income (loss) | | Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
Issuance of common stock pursuant to employee stock options | Issuance of common stock pursuant to employee stock options | 1 | | | — | | | — | | | — | | | 29 | | | — | | | — | | | 29 | | Issuance of common stock pursuant to employee stock options | 1 | | | — | | | — | | | — | | | 43 | | | — | | | — | | | 43 | |
Restricted stock surrendered for employees’ tax liability | Restricted stock surrendered for employees’ tax liability | — | | | — | | | — | | | — | | | (8) | | | — | | | — | | | (8) | | Restricted stock surrendered for employees’ tax liability | — | | | — | | | — | | | — | | | (6) | | | — | | | — | | | (6) | |
Share-based compensation expense related to employee stock options and restricted stock units | Share-based compensation expense related to employee stock options and restricted stock units | — | | | — | | | — | | | — | | | 32 | | | — | | | — | | | 32 | | Share-based compensation expense related to employee stock options and restricted stock units | — | | | — | | | — | | | — | | | 58 | | | — | | | — | | | 58 | |
Balance at September 30, 2019 | 1,197 | | | $ | 0 | | | (429) | | | $ | (5,563) | | | $ | 11,116 | | | $ | 7,289 | | | $ | (607) | | | $ | 12,235 | | |
Balance at September 30, 2020 | | Balance at September 30, 2020 | 1,201 | | | $ | — | | | (429) | | | $ | (5,563) | | | $ | 11,395 | | | $ | 9,183 | | | $ | (633) | | | $ | 14,382 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.Description of Business and Basis of Consolidation and Presentation
Activision Blizzard, Inc. is a leading global developer and publisher of interactive entertainment content and services. We develop and distribute content and services on video game consoles, personal computers (“PC”s)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. In connection with the 2008 business combination by and among the Company (then known as Activision, Inc.), Vivendi S.A, and Vivendi Games, Inc., pursuant to which we acquired Blizzard Entertainment, Inc. (“Blizzard”), we were renamed Activision Blizzard, Inc. On February 23, 2016, we acquired King Digital Entertainment plc ("King") by purchasing all of its outstanding shares.
Our Segments
Based upon our organizational structure, we conduct our business through 3 reportable segments, as follows:
(i) Activision Publishing, Inc.
Activision Publishing, Inc. (“Activision”)each of which is a leading global developer and publisher of interactive software products and entertainment content particularly for the console platform.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 by licensing software to third-party or related-party companies that distribute Activision products. Activision develops, markets, and sells products primarily based on our internally developed intellectual properties. Activision also includes the activities of the Call of Duty LeagueTM, a global professional esports league with city-based teams.
Activision’s key product franchise is Call of Duty®, a first-person action title forfranchise. Activision also includes the console, PC, and mobile platforms.activities of the Call of Duty League™, a 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 for the PC platform. Blizzard primarilyEntertainment, Inc. (“Blizzard”) delivers content through retailboth premium and digital channels, including subscription,free-to-play offerings and primarily generates revenue from full-game and in-game sales, as well assubscriptions, and by licensing software to third-party or related-party companies that distribute Blizzard products. Blizzard also maintains a proprietary online gaming service, Blizzard Battle.net®, which facilitates digital distribution of Blizzard content and selected Activision content, online social connectivity, and the creation of user-generated content. Blizzard also includes the activities of the Overwatch LeagueTM, a global professional esports league with city-based teams.
Blizzard’s key product franchises include: World of Warcraft®, a subscription-based massive multi-player online role-playing game for the PC platform; Diablo®, an action role-playing franchise for the PC and console platforms;franchise; Hearthstone®, an online collectible card franchise forbased in the PC and mobile platforms;Warcraft® universe; Diablo®, an action role-playing franchise; and Overwatch®, a team-based first-person action title forfranchise. 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, primarily forin-game advertising on the mobile platform. King also distributes its content and services on the PC platform, primarily via Facebook. King’s games are free to play; however, players can acquire in-game items, either with virtual currency or real currency, and we continue to focus on in-game advertising as a growing source of additional revenue.
King’s key product franchise is Candy Crush™, which featuresa “match three” games for the mobile and PC platforms.franchise.
Other
Other
We also engage in other businesses that do not represent reportable segments, including the Activision Blizzard Distribution (“Distribution”) business, which consists of operations in Europe that provide warehousing, logistics, and sales distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.
Basis of Consolidation and Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim reporting. Accordingly, certain notes or other information that are normally required by U.S. GAAP have been condensed or omitted if they substantially duplicate the disclosures contained in our annual audited consolidated financial statements. Additionally, the year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. Accordingly, the unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
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 (including, without limitation, the impact of the ongoing global COVID-19 pandemic) could change and impact our estimates. Additionally, actual results could differ from these estimates and assumptions. In the opinion of management, all adjustments considered necessary for the fair statement of our financial position and results of operations in accordance with U.S. GAAP (consisting of normal recurring adjustments) have been included in the accompanying unaudited condensed consolidated financial statements.
The accompanying condensed consolidated financial statements include the accounts and operations of the Company. All intercompany accounts and transactions have been eliminated.
Certain reclassifications have been made to prior-year amounts to conform to the current period presentation.
2.Recently Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Cloud Computing ArrangementsRecently adopted accounting pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued new guidance related to a customer’s accounting for implementation costs incurred in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract. The new guidance requires customers to capitalize implementation costs for these arrangements by applying the same criteria that are utilized for existing internal-use software guidance. The capitalized costs are required to be amortized over the associated term of the arrangement, generally on a straight-line basis, with amortization of these costs presented in the same financial statement line item as other costs associated with the arrangement. We adopted the new standard under a prospective approach during the first quarter of 2020 and it did not have a material impact on our condensed consolidated financial statements.
Goodwill
In January 2017, the FASB issued new guidance that eliminates Step 2 from the goodwill impairment test. Instead, if an entity forgoes a Step 0 test, that entity will be required to perform its annual or interim goodwill impairment test by (1) comparing the fair value of a reporting unit, as determined in Step 1 from the goodwill impairment test, with its carrying amount and (2) recognizing an impairment charge, if any, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. We adopted the new standard under a prospective approach during the first quarter of 2020 and it did not have a material impact on our condensed consolidated financial statements.
Financial Instruments - Credit Losses
In June 2016, the FASB issued new guidance related to accounting for credit losses on financial instruments. The update replaces the existing incurred loss impairment model with a methodology that reflects a current expected credit losses model which requires the use of historical and forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will generally result in earlier recognition of credit losses. We adopted the new standard under a modified retrospective basis, with the cumulative effect of adoption recorded as an adjustment to retained earnings during the first quarter of 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Simplifying the Accounting for Income Taxes
In December 2019, the FASBFinancial Accounting Standards Board (“FASB”) issued new guidance, which is intended to simplify various aspects ofassociated with the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 forfor recognizing deferred taxes for investments, performing an intraperiod allocation, and calculating income taxes in interim periods.periods. The amendment also clarifies and amends certain areas of existing guidance to reduce complexity and improve consistency in the application of Topic 740. The new standard is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. Generally, the topicsguidance must be applied prospectively upon adoption, with the exception of certain topics, which are required to be applied on a retrospective or modified retrospective basis. We are evaluating the impact, if any, of adoptingOn January 1, 2021, we adopted this new accounting guidancestandard and applied the topics in the manner required by the standard. The adoption of 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 ourOur total capitalized software development costs (amounts in millions):
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| At September 30, 2020 | | At December 31, 2019 |
Internally-developed software costs | $ | 510 | | | $ | 345 | |
Payments made to third-party software developers | 33 | | | 31 | |
Total software development costs | $ | 543 | | | $ | 376 | |
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of $576 million and $512 million, as of September 30, 2021 and December 31, 2020, respectively, primarily relate to internal development costs. As of both September 30, 20202021 and December 31, 2019,2020, capitalized intellectual property licenses were not material.
Amortization of capitalized software development costs and intellectual property licenses was as follows (amounts in millions):
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| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Amortization of capitalized software development costs and intellectual property licenses | $ | 37 | | | $ | 11 | | | $ | 149 | | | $ | 175 | |
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| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | |
| | 2021 | | 2020 | | 2021 | | 2020 | | | | | | |
Amortization of capitalized software development costs and intellectual property licenses | | $ | 71 | | | $ | 37 | | | $ | 270 | | | $ | 149 | | | | | | | |
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4.Intangible Assets, Net
Intangible assets, net, consist of the following (amounts in millions):
| | | At September 30, 2020 | | At September 30, 2021 |
| | Estimated useful lives | | Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Estimated useful lives | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Acquired definite-lived intangible assets: | Acquired definite-lived intangible assets: | | | | | | | | | Acquired definite-lived intangible assets: | | | | | | | |
Internally-developed franchises | Internally-developed franchises | 3 | - | 11 years | | $ | 1,154 | | | $ | (1,139) | | | $ | 15 | | Internally-developed franchises | 3 | - | 11 years | | $ | 1,154 | | | $ | (1,154) | | | $ | — | |
Developed software | 2 | - | 5 years | | 601 | | | (600) | | | 1 | | |
Trade names | 7 years | | 54 | | | (36) | | | 18 | | |
Other | 1 | - | 10 years | | 19 | | | (17) | | | 2 | | |
| | Trade names and other | | Trade names and other | 1 | - | 10 years | | 80 | | | (64) | | | 16 | |
Total definite-lived intangible assets(1) | Total definite-lived intangible assets(1) | | | | $ | 1,828 | | | $ | (1,792) | | | $ | 36 | | Total definite-lived intangible assets(1) | | $ | 1,234 | | | $ | (1,218) | | | $ | 16 | |
| Acquired indefinite-lived intangible assets: | Acquired indefinite-lived intangible assets: | | | | | | | | | Acquired indefinite-lived intangible assets: | | |
Activision trademark | Activision trademark | Indefinite | | | | | | 386 | | Activision trademark | Indefinite | | $ | 386 | |
Acquired trade names | Acquired trade names | Indefinite | | | | | | 47 | | Acquired trade names | Indefinite | | 47 | |
Total indefinite-lived intangible assets | Total indefinite-lived intangible assets | | | | | | | | $ | 433 | | Total indefinite-lived intangible assets | | $ | 433 | |
Total intangible assets, net | Total intangible assets, net | | $ | 469 | | Total intangible assets, net | | $ | 449 | |
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| At December 31, 2019 |
| Estimated useful lives | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Acquired definite-lived intangible assets: | | | | | | | | | |
Internally-developed franchises | 3 | - | 11 years | | $ | 1,154 | | | $ | (1,105) | | | $ | 49 | |
Developed software | 2 | - | 5 years | | 601 | | | (579) | | | 22 | |
Trade names | 7 | - | 10 years | | 54 | | | (30) | | | 24 | |
Other | 1 | - | 15 years | | 19 | | | (16) | | | 3 | |
Total definite-lived intangible assets | | | | | $ | 1,828 | | | $ | (1,730) | | | $ | 98 | |
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Acquired indefinite-lived intangible assets: | | | | | | | | | |
Activision trademark | Indefinite | | | | | | 386 | |
Acquired trade names | Indefinite | | | | | | 47 | |
Total indefinite-lived intangible assets | | | | | | | | | $ | 433 | |
Total intangible assets, net | | | | | | | | | $ | 531 | |
(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.
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| At December 31, 2020 |
| Estimated useful lives | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Acquired definite-lived intangible assets: | | | | | | | | | |
Internally-developed franchises | 3 | - | 11 years | | $ | 1,154 | | | $ | (1,151) | | | $ | 3 | |
Developed software | 2 | - | 5 years | | 601 | | | (601) | | | — | |
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Trade names and other | 1 | - | 10 years | | 73 | | | (58) | | | 15 | |
Total definite-lived intangible assets | | | | | $ | 1,828 | | | $ | (1,810) | | | $ | 18 | |
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Acquired indefinite-lived intangible assets: | | | | | | | | | |
Activision trademark | Indefinite | | | | | | $ | 386 | |
Acquired trade names | Indefinite | | | | | | 47 | |
Total indefinite-lived intangible assets | | | | | | | | | $ | 433 | |
Total intangible assets, net | | | | | | | | | $ | 451 | |
Amortization expense of our intangible assets was $2 million and $8 million for the three and nine months ended September 30, 2021, respectively. Amortization expense of our intangible assets was $16 million and $62 million for the three and nine months ended September 30, 2020, respectively. Amortization expense of our intangible assets was $50 million and $152 million for the three and nine months ended September 30, 2019, respectively.
At September 30, 2020, future amortization of definite-lived intangible assets is estimated as follows (amounts in millions):
| | | | | |
For the years ending December 31, | |
2020 (remaining three months) | $ | 17 | |
2021 | 10 | |
2022 | 7 | |
2023 | 1 | |
2024 | 0 | |
Thereafter | 1 | |
Total | $ | 36 | |
5.Goodwill
The carrying amount of goodwill by reportable segment at both September 30, 20202021 and December 31, 20192020, was as follows (amounts in millions):
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| Activision | | Blizzard | | King | | Total |
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Goodwill | $ | 6,898 | | | $ | 190 | | | $ | 2,676 | | | $ | 9,764 | |
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| Activision | | Blizzard | | King | | | | Total |
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Goodwill | $ | 6,899 | | | $ | 190 | | | $ | 2,676 | | | | | $ | 9,765 | |
6.Fair Value Measurements
The FASB literature regarding fair value measurements for certain assets and liabilities establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value are as follows:
•Level 1—Quoted prices in active markets for identical assets or liabilities;
•Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data; and
•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
Fair Value Measurements on a Recurring Basis
The table below segregates all of our financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date (amounts in millions):
| | | Fair Value Measurements at September 30, 2020 Using | | | | Fair Value Measurements at September 30, 2021 Using | |
| | As of September 30, 2020 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance Sheet Classification | | As of September 30, 2021 | | 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: | Financial Assets: | | | | | | | | | | Financial Assets: | | | | | | | | | |
Recurring fair value measurements: | Recurring fair value measurements: | | | | | | | | | | Recurring fair value measurements: | | | | | | | | | |
Money market funds | Money market funds | $ | 7,121 | | | $ | 7,121 | | | $ | 0 | | | $ | 0 | | | Cash and cash equivalents | Money market funds | $ | 9,422 | | | $ | 9,422 | | | $ | — | | | $ | — | | | Cash and cash equivalents |
Foreign government treasury bills | Foreign government treasury bills | 33 | | | 33 | | | 0 | | | 0 | | | Cash and cash equivalents | Foreign government treasury bills | 29 | | | 29 | | | — | | | — | | | Cash and cash equivalents |
U.S. treasuries and government agency securities | U.S. treasuries and government agency securities | 187 | | | 187 | | | 0 | | | 0 | | | Other current assets | U.S. treasuries and government agency securities | 224 | | | 224 | | | — | | | — | | | Other current assets |
| Total recurring fair value measurements | $ | 7,341 | | | $ | 7,341 | | | $ | 0 | | | $ | 0 | | | | |
Equity securities | | Equity securities | 58 | | | 58 | | | — | | | — | | | Other current assets |
Foreign currency forward contracts designated as hedges | | Foreign currency forward contracts designated as hedges | 15 | | | — | | | 15 | | | — | | | Other current assets & Other assets |
Foreign currency forward contracts not designated as hedges | | Foreign currency forward contracts not designated as hedges | 6 | | | — | | | 6 | | | — | | | Other current assets |
Total | | Total | $ | 9,754 | | | $ | 9,733 | | | $ | 21 | | | $ | — | | | |
| Financial Liabilities: | Financial Liabilities: | | Financial Liabilities: | |
Foreign currency forward contracts not designated as hedges | $ | (1) | | | $ | 0 | | | $ | (1) | | | $ | 0 | | | Accrued expenses and other liabilities | |
| Foreign currency forward contracts designated as hedges | Foreign currency forward contracts designated as hedges | $ | (18) | | | $ | 0 | | | $ | (18) | | | $ | 0 | | | Accrued expenses and other liabilities | Foreign currency forward contracts designated as hedges | $ | (3) | | | $ | — | | | $ | (3) | | | $ | — | | | Accrued expenses and other liabilities |
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| | | Fair Value Measurements at December 31, 2019 Using | | |
| As of December 31, 2019 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance Sheet Classification |
Financial Assets: | | | | | | | | | |
Recurring fair value measurements: | | | | | | | | | |
Money market funds | $ | 5,320 | | | $ | 5,320 | | | $ | 0 | | | $ | 0 | | | Cash and cash equivalents |
Foreign government treasury bills | 37 | | | 37 | | | 0 | | | 0 | | | Cash and cash equivalents |
U.S. treasuries and government agency securities | 65 | | | 65 | | | 0 | | | 0 | | | Other current assets |
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Total recurring fair value measurements | $ | 5,422 | | | $ | 5,422 | | | $ | 0 | | | $ | 0 | | | |
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Financial Liabilities: | | | | | | | | | |
Foreign currency forward contracts not designated as hedges | $ | (2) | | | $ | 0 | | | $ | (2) | | | $ | 0 | | | Accrued expenses and other liabilities |
Foreign currency forward contracts designated as hedges | $ | (2) | | | $ | 0 | | | $ | (2) | | | $ | 0 | | | Accrued expenses and other liabilities |
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| | | Fair Value Measurements at December 31, 2020 Using | | |
| As of December 31, 2020 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance Sheet Classification |
Financial Assets: | | | | | | | | | |
Recurring fair value measurements: | | | | | | | | | |
Money market funds | $ | 8,345 | | | $ | 8,345 | | | $ | — | | | $ | — | | | Cash and cash equivalents |
Foreign government treasury bills | 34 | | | 34 | | | — | | | — | | | Cash and cash equivalents |
U.S. treasuries and government agency securities | 164 | | | 164 | | | — | | | — | | | Other current assets |
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Total | $ | 8,543 | | | $ | 8,543 | | | $ | — | | | $ | — | | | |
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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) | | | $ | — | | | |
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Foreign Currency Forward Contracts
Foreign Currency Forward Contracts Designated as Hedges (“Cash Flow Hedges”)
The total gross notional amounts and fair values of our Cash Flow Hedges, all of which havehad remaining maturities of 1314 months or less as of September 30, 2020,2021, are as follows (amounts in millions):
| | | As of September 30, 2020 | | As of December 31, 2019 | | As of September 30, 2021 | | As of December 31, 2020 |
| | Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
Foreign Currency: | Foreign Currency: | | | | Foreign Currency: | | | |
Buy USD, Sell Euro | $ | 608 | | $ | (18) | | | $ | 350 | | $ | (2) | | |
Buy USD, Sell EUR | | Buy USD, Sell EUR | $ | 700 | | $ | 12 | | | $ | 542 | | $ | (24) | |
The amount ofFor the three and nine months ended September 30, 2021 and September 30, 2020, pre-tax net realized gains (losses) associated with our Cash Flow Hedges that were reclassified out of “Accumulated other comprehensive income (loss)” and into earnings was as follows (amounts in millions):were not material.
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| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | Statement of Operations Classification |
| 2020 | 2019 | | 2020 | 2019 | |
Cash Flow Hedges | $ | (5) | | $ | 7 | | | $ | 7 | | $ | 24 | | | Net revenues |
Foreign Currency Forward Contracts Not Designated as Hedges
The gross notional amounts and fair values of our foreign currency forward contracts not designated as hedges are as follows (amounts in millions):
| | | As of September 30, 2020 | | As of December 31, 2019 | | As of September 30, 2021 | | As of December 31, 2020 |
| | Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
Foreign Currency: | Foreign Currency: | | | | Foreign Currency: | | | |
| Buy USD, Sell EUR | | Buy USD, Sell EUR | $ | 68 | | $ | 3 | | | $ | — | | $ | — | |
| Buy USD, Sell GBP | Buy USD, Sell GBP | $ | 61 | | $ | (1) | | | $ | 25 | | $ | (2) | | Buy USD, Sell GBP | $ | 144 | | $ | 3 | | | $ | 116 | | $ | (2) | |
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For the three and nine months ended September 30, 20202021 and 2019,September 30, 2020, pre-tax net gains (losses) associated with these forward contracts were recorded in “General and administrative expenses” and were not material.
Equity Securities Fair Value Measurement
At December 31, 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 revenuesRevenues
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, 2019 and September 30, 2020, were $1.4$0.9 billion and $1.1$1.7 billion, respectively. For the nine months ended September 30, 2020,2021, 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. During the three and nine months ended September 30, 2019, $0.1 billion and $1.4 billion of revenues, respectively, were recognized that were included in the deferred revenues balance at December 31, 2018.
As of September 30, 2020,2021, the aggregate amount of contracted revenues allocated to our unsatisfied performance obligations was $1.9$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 $1.4$1.3 billion over the next 12 months, $0.4$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 new revenue accounting standard.
8. Debt
8.Debt
Credit Facilities
As of September 30, 20202021 and December 31, 2019,2020, we had $1.5 billion available under a revolving credit facility (the “Revolver”) pursuant to a credit agreement entered into on October 11, 2013 (as amended thereafter and from time to time, the “Credit Agreement”). To date, we have 0tnot drawn on the Revolver and we were in compliance with the terms of the Credit Agreement as of September 30, 2020.2021.
Unsecured Senior Notes
As of September 30, 20202021 and December 31, 2019,2020, we had $3.7 billion and $2.7 billion, respectively, of gross unsecured senior notes outstanding. A summary of our outstanding unsecured senior notes is as follows (amounts in millions):
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| | | | | | | | At September 30, 2020 | | At December 31, 2019 |
Unsecured Senior Notes | | Interest Rate | | Semi-Annual Interest Payments Due On | | Maturity | | Principal | | Fair Value (Level 2) | | Principal | | Fair Value (Level 2) |
2021 Notes | | 2.30% | | Mar. 15 & Sept. 15 | | Sept. 2021 | | $ | — | | | — | | | $ | 650 | | | $ | 653 | |
2022 Notes | | 2.60% | | Jun. 15 & Dec. 15 | | Jun. 2022 | | — | | | — | | | 400 | | | 405 | |
2026 Notes | | 3.40% | | Mar. 15 & Sept. 15 | | Sept. 2026 | | 850 | | | 968 | | | 850 | | | 893 | |
2027 Notes | | 3.40% | | Jun. 15 & Dec. 15 | | Jun. 2027 | | 400 | | | 453 | | | 400 | | | 417 | |
2030 Notes | | 1.35% | | Mar. 15 & Sept. 15 | | Sept. 2030 | | 500 | | | 488 | | | — | | | — | |
2047 Notes | | 4.50% | | Jun. 15 & Dec. 15 | | Jun. 2047 | | 400 | | | 508 | | | 400 | | | 456 | |
2050 Notes | | 2.50% | | Mar. 15 & Sept. 15 | | Sept. 2050 | | 1,500 | | | 1,386 | | | — | | | — | |
Total gross long-term debt | | $ | 3,650 | | | | | $ | 2,700 | | | |
Unamortized discount and deferred financing costs | | (46) | | | | | (25) | | | |
Total net carrying amount | | $ | 3,604 | | | | | $ | 2,675 | | | |
On August 5, 2020, we issued the 2030 Notes and 2050 Notes in a public underwritten offering, for an aggregate principal amount of $2.0 billion in new debt. In connection with the issuance, we incurred approximately $26 million of debt discount and financing costs that were capitalized and recorded within "Long-term debt, net" in our condensed consolidated balance sheet.
On September 4, 2020, we redeemed all of our outstanding 2021 Notes and 2022 Notes at a redemption price equal to 100% of their respective principal amounts plus (1) a “make-whole” premium of $28 million and (2) accrued and unpaid interest to the redemption date. The redemption of the 2021 Notes and 2022 Notes resulted in a “Loss on extinguishment of debt” recorded in the condensed consolidated statement of operations of $31 million.
We may redeem some or all of the 2030 Notes and 2050 Notes, in whole or in part, at any time on or after June 15, 2030 and March 15, 2050, respectively, in each case at 100% of the aggregate principal amount thereof plus accrued and unpaid interest. In addition, we may redeem some or all of the 2030 Notes and the 2050 Notes prior to June 15, 2030 and March 15, 2050, respectively, in each case at a price equal to 100% of the aggregate principal amount thereof plus a “make-whole” premium and accrued and unpaid interest. The other terms and covenants associated with the 2030 Notes and the 2050 Notes are generally consistent with those associated with the 2026 Notes, 2027 Notes and 2047 Notes. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | At September 30, 2021 | | At December 31, 2020 |
Unsecured Senior Notes | | Interest Rate | | Semi-Annual Interest Payments Due On | | Maturity | | Principal | | Fair Value (Level 2) | | Principal | | Fair Value (Level 2) |
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2026 Notes | | 3.40% | | Mar. 15 & Sept. 15 | | Sept. 2026 | | $ | 850 | | | $ | 927 | | | $ | 850 | | | $ | 970 | |
2027 Notes | | 3.40% | | Jun. 15 & Dec. 15 | | Jun. 2027 | | 400 | | | 439 | | | 400 | | | 454 | |
2030 Notes | | 1.35% | | Mar. 15 & Sept. 15 | | Sept. 2030 | | 500 | | | 466 | | | 500 | | | 490 | |
2047 Notes | | 4.50% | | Jun. 15 & Dec. 15 | | Jun. 2047 | | 400 | | | 492 | | | 400 | | | 525 | |
2050 Notes | | 2.50% | | Mar. 15 & Sept. 15 | | Sept. 2050 | | 1,500 | | | 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 in compliance with the terms of the notes outstanding as of September 30, 2020.2021. As of September 30, 2020, we have2021, with the exception of our 2026 Notes, which are scheduled to mature in September 2026, no other contractual principal repayments of our long-term debt were due within the next five years.
9.Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) were as follows (amounts in millions):
| | | For the Nine Months Ended September 30, 2020 | | For the Nine Months Ended September 30, 2021 |
| | Foreign currency translation adjustments | | Unrealized gain (loss) on forward contracts | | Unrealized gain (loss) on available-for-sale securities | | Total | | 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) | | | $ | 8 | | | $ | (3) | | | $ | (619) | | |
Balance at December 31, 2020 | | Balance at December 31, 2020 | $ | (589) | | | $ | (5) | | | $ | (28) | | | $ | (622) | |
Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | 13 | | | (19) | | | 0 | | | (6) | | Other comprehensive income (loss) before reclassifications | (8) | | | — | | | 27 | | | 19 | |
Amounts reclassified from accumulated other comprehensive income (loss) into earnings | Amounts reclassified from accumulated other comprehensive income (loss) into earnings | (2) | | | (7) | | | 1 | | | (8) | | Amounts reclassified from accumulated other comprehensive income (loss) into earnings | — | | | 3 | | | 13 | | | 16 | |
Balance at September 30, 2020 | $ | (613) | | | $ | (18) | | | $ | (2) | | | $ | (633) | | |
Balance at September 30, 2021 | | Balance at September 30, 2021 | $ | (597) | | | $ | (2) | | | $ | 12 | | | $ | (587) | |
| | | For the Nine Months Ended September 30, 2019 | | For the Nine Months Ended September 30, 2020 |
| | Foreign currency translation adjustments | | Unrealized gain (loss) on forward contracts | | Unrealized gain (loss) on available-for-sale securities | | Total | | Foreign currency translation adjustments | | Unrealized gain (loss) on available-for- sale securities | | Unrealized gain (loss) on forward contracts | | Total |
Balance at December 31, 2018 | $ | (629) | | | $ | 23 | | | $ | 5 | | | $ | (601) | | |
Balance at December 31, 2019 | | Balance at December 31, 2019 | $ | (624) | | | $ | (3) | | | $ | 8 | | | $ | (619) | |
Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | (5) | | | 28 | | | 3 | | | 26 | | Other comprehensive income (loss) before reclassifications | 13 | | | — | | | (19) | | | (6) | |
Amounts reclassified from accumulated other comprehensive income (loss) into earnings | Amounts reclassified from accumulated other comprehensive income (loss) into earnings | 0 | | | (24) | | | (8) | | | (32) | | Amounts reclassified from accumulated other comprehensive income (loss) into earnings | (2) | | | 1 | | | (7) | | | (8) | |
Balance at September 30, 2019 | $ | (634) | | | $ | 27 | | | $ | 0 | | | $ | (607) | | |
Balance at September 30, 2020 | | Balance at September 30, 2020 | $ | (613) | | | $ | (2) | | | $ | (18) | | | $ | (633) | |
10.Operating Segments and Geographic RegionRegions
We have 3 reportable segments—Activision, Blizzard, and King. Our operating segments are consistent with the manner in which our operations are reviewed and managed by our Chief Executive Officer, who is our chief operating decision maker (“CODM”). The CODM reviews segment performance exclusive of: the impact of the change in deferred revenues and related cost of revenues with respect to certain of our online-enabled games; share-based compensation expense; amortization of intangible assets as a result of purchase price accounting; fees and other expenses (including legal fees, expenses, and accruals) related to acquisitions, associated integration activities, and financings; certain restructuring and related costs; and certain other non-cash charges. The CODM does not review any information regarding total assets on an operating segment basis, and accordingly, no disclosure is made with respect thereto.
Our operating segments are also consistent with our internal organizational structure, the way we assess operating performance and allocate resources, and the availability of separate financial information. We do not aggregate operating segments.
Information on reportable segment net revenues and operating income for the three months ended September 30, 20202021 and 2019,2020, are presented below (amounts in millions):
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| Three Months Ended September 30, 2020 |
| Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | |
Net revenues from external customers | $ | 773 | | | $ | 393 | | | $ | 536 | | | $ | 1,702 | |
Intersegment net revenues (1) | 0 | | | 18 | | | 0 | | | 18 | |
Segment net revenues | $ | 773 | | | $ | 411 | | | $ | 536 | | | $ | 1,720 | |
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Segment operating income | $ | 345 | | | $ | 133 | | | $ | 248 | | | $ | 726 | |
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| Three Months Ended September 30, 2019 |
| Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | |
Net revenues from external customers | $ | 209 | | | $ | 392 | | | $ | 500 | | | $ | 1,101 | |
Intersegment net revenues (1) | 0 | | | 2 | | | 0 | | | 2 | |
Segment net revenues | $ | 209 | | | $ | 394 | | | $ | 500 | | | $ | 1,103 | |
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Segment operating income | $ | 26 | | | $ | 74 | | | $ | 194 | | | $ | 294 | |
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| | Three Months Ended September 30, 2021 |
| | Activision | | Blizzard | | King | | Total |
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 | |
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Segment operating income | | $ | 244 | | | $ | 188 | | | $ | 303 | | | $ | 735 | |
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| | Three Months Ended September 30, 2020 |
| | Activision | | Blizzard | | King | | Total |
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 | |
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Segment operating income | | $ | 345 | | | $ | 133 | | | $ | 248 | | | $ | 726 | |
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Information on reportable segment net revenues and operating income for the nine months ended September 30, 20202021 and 2019,2020, are presented below (amounts in millions):
| | | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2021 |
| | Activision | | Blizzard | | King | | Total | | Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | | |
Segment Revenues | | Segment Revenues | | | | | | | | |
Net revenues from external customers | Net revenues from external customers | $ | 2,285 | | | $ | 1,264 | | | $ | 1,587 | | | $ | 5,136 | | Net revenues from external customers | | $ | 2,321 | | | $ | 1,347 | | | $ | 1,896 | | | $ | 5,564 | |
Intersegment net revenues (1) | Intersegment net revenues (1) | 0 | | | 62 | | | 0 | | | 62 | | Intersegment net revenues (1) | | — | | | 62 | | | — | | | 62 | |
Segment net revenues | Segment net revenues | $ | 2,285 | | | $ | 1,326 | | | $ | 1,587 | | | $ | 5,198 | | Segment net revenues | | $ | 2,321 | | | $ | 1,409 | | | $ | 1,896 | | | $ | 5,626 | |
| Segment operating income | Segment operating income | $ | 1,088 | | | $ | 533 | | | $ | 615 | | | $ | 2,236 | | Segment operating income | | $ | 1,049 | | | $ | 537 | | | $ | 755 | | | $ | 2,341 | |
| | | Nine Months Ended September 30, 2019 | | Nine Months Ended September 30, 2020 |
| | Activision | | Blizzard | | King | | Total | | Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | | |
Segment Revenues | | Segment Revenues | | | | | | | | |
Net revenues from external customers | Net revenues from external customers | $ | 794 | | | $ | 1,113 | | | $ | 1,527 | | | $ | 3,434 | | Net revenues from external customers | | $ | 2,285 | | | $ | 1,264 | | | $ | 1,587 | | | $ | 5,136 | |
Intersegment net revenues (1) | Intersegment net revenues (1) | 0 | | | 9 | | | 0 | | | 9 | | Intersegment net revenues (1) | | — | | | 62 | | | — | | | 62 | |
Segment net revenues | Segment net revenues | $ | 794 | | | $ | 1,122 | | | $ | 1,527 | | | $ | 3,443 | | Segment net revenues | | $ | 2,285 | | | $ | 1,326 | | | $ | 1,587 | | | $ | 5,198 | |
| Segment operating income | Segment operating income | $ | 153 | | | $ | 204 | | | $ | 543 | | | $ | 900 | | Segment operating income | | $ | 1,088 | | | $ | 533 | | | $ | 615 | | | $ | 2,236 | |
(1)Intersegment revenues reflect licensing and service fees charged between segments.
Reconciliations of total segment net revenues and total segment operating income to consolidated net revenues and consolidated income before income tax expense are presented in the table below (amounts in millions):
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Reconciliation to consolidated net revenues: | | | | | | | |
Segment net revenues | $ | 1,720 | | | $ | 1,103 | | | $ | 5,198 | | | $ | 3,443 | |
Revenues from non-reportable segments (1) | 65 | | | 113 | | | 232 | | | 245 | |
Net effect from recognition (deferral) of deferred net revenues (2) | 187 | | | 68 | | | 306 | | | 824 | |
Elimination of intersegment revenues (3) | (18) | | | (2) | | | (62) | | | (9) | |
Consolidated net revenues | $ | 1,954 | | | $ | 1,282 | | | $ | 5,674 | | | $ | 4,503 | |
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Reconciliation to consolidated income before income tax expense: | | | | | | | |
Segment operating income | $ | 726 | | | $ | 294 | | | $ | 2,236 | | | $ | 900 | |
Operating income (loss) from non-reportable segments (1) | (20) | | | 5 | | | (27) | | | 10 | |
Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (2) | 150 | | | 53 | | | 169 | | | 629 | |
Share-based compensation expense | (53) | | | (27) | | | (138) | | | (127) | |
Amortization of intangible assets | (16) | | | (50) | | | (62) | | | (151) | |
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Restructuring and related costs (4) | (9) | | | (28) | | | (39) | | | (108) | |
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Consolidated operating income | 778 | | | 247 | | | 2,139 | | | 1,153 | |
Interest and other expense (income), net | 25 | | | (2) | | | 55 | | | (33) | |
Loss on extinguishment of debt | 31 | | | 0 | | | 31 | | | 0 | |
Consolidated income before income tax expense | $ | 722 | | | $ | 249 | | | $ | 2,053 | | | $ | 1,186 | |
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| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | | | | |
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 | | | | | | |
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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) | | | | | | |
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Consolidated operating income | | 824 | | | 778 | | | 2,578 | | | 2,139 | | | | | | |
Interest and other expense (income), net | | 65 | | | 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 Distribution business. Also includesbusiness 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.
(4)
Reflects restructuring initiatives, which include severance and other restructuring-related costs.Table of Contents
Net revenues by distribution channel, including a reconciliation to each of our reportable segment’s revenues, for the three months ended September 30, 20202021 and 2019,2020, were as follows (amounts in millions):
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| Three Months Ended September 30, 2020 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by distribution channel: | | | | | | | | | | | |
Digital online channels (1) | $ | 826 | | | $ | 405 | | | $ | 540 | | | $ | 0 | | | $ | (18) | | | $ | 1,753 | |
Retail channels | 110 | | | 7 | | | 0 | | | 0 | | | 0 | | | 117 | |
Other (2) | 8 | | | 11 | | | 0 | | | 65 | | | 0 | | | 84 | |
Total consolidated net revenues | $ | 944 | | | $ | 423 | | | $ | 540 | | | $ | 65 | | | $ | (18) | | | $ | 1,954 | |
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Change in deferred revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | (130) | | | $ | (14) | | | $ | (4) | | | $ | 0 | | | $ | 0 | | | $ | (148) | |
Retail channels | (41) | | | 2 | | | 0 | | | 0 | | | 0 | | | (39) | |
Other (2) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total change in deferred revenues | $ | (171) | | | $ | (12) | | | $ | (4) | | | $ | 0 | | | $ | 0 | | | $ | (187) | |
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Segment net revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | 696 | | | $ | 391 | | | $ | 536 | | | $ | 0 | | | $ | (18) | | | $ | 1,605 | |
Retail channels | 69 | | | 9 | | | 0 | | | 0 | | | 0 | | | 78 | |
Other (2) | 8 | | | 11 | | | 0 | | | 65 | | | 0 | | | 84 | |
Total segment net revenues | $ | 773 | | | $ | 411 | | | $ | 536 | | | $ | 65 | | | $ | (18) | | | $ | 1,767 | |
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| | Three Months Ended September 30, 2021 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by distribution channel: | | | | | | | | | | | | |
Digital online channels (1) | | $ | 723 | | | $ | 493 | | | $ | 651 | | | $ | — | | | $ | (15) | | | $ | 1,852 | |
Retail channels | | 63 | | | 6 | | | — | | | — | | | — | | | 69 | |
Other (2) | | 8 | | | 33 | | | — | | | 108 | | | — | | | 149 | |
Total consolidated net revenues | | $ | 794 | | | $ | 532 | | | $ | 651 | | | $ | 108 | | | $ | (15) | | | $ | 2,070 | |
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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) | |
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Segment net revenues: | | | | | | | | | | | | |
Digital online channels (1) | | $ | 595 | | | $ | 456 | | | $ | 652 | | | $ | — | | | $ | (15) | | | $ | 1,688 | |
Retail channels | | 38 | | | 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, 2019 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by distribution channel: | | | | | | | | | | | |
Digital online channels (1) | $ | 179 | | | $ | 335 | | | $ | 502 | | | $ | 0 | | | $ | (2) | | | $ | 1,014 | |
Retail channels | 73 | | | 20 | | | 0 | | | 0 | | | 0 | | | 93 | |
Other (2) | 0 | | | 62 | | | 0 | | | 113 | | | 0 | | | 175 | |
Total consolidated net revenues | $ | 252 | | | $ | 417 | | | $ | 502 | | | $ | 113 | | | $ | (2) | | | $ | 1,282 | |
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Change in deferred revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | (16) | | | $ | (21) | | | $ | (2) | | | $ | 0 | | | $ | 0 | | | $ | (39) | |
Retail channels | (27) | | | (2) | | | 0 | | | 0 | | | 0 | | | (29) | |
Other (2) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total change in deferred revenues | $ | (43) | | | $ | (23) | | | $ | (2) | | | $ | 0 | | | $ | 0 | | | $ | (68) | |
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Segment net revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | 163 | | | $ | 314 | | | $ | 500 | | | $ | 0 | | | $ | (2) | | | $ | 975 | |
Retail channels | 46 | | | 18 | | | 0 | | | 0 | | | 0 | | | 64 | |
Other (2) | 0 | | | 62 | | | 0 | | | 113 | | | 0 | | | 175 | |
Total segment net revenues | $ | 209 | | | $ | 394 | | | $ | 500 | | | $ | 113 | | | $ | (2) | | | $ | 1,214 | |
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| | Three Months Ended September 30, 2020 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by distribution channel: | | | | | | | | | | | | |
Digital online channels (1) | | $ | 826 | | | $ | 405 | | | $ | 540 | | | $ | — | | | $ | (18) | | | $ | 1,753 | |
Retail channels | | 110 | | | 7 | | | — | | | — | | | — | | | 117 | |
Other (2) | | 8 | | | 11 | | | — | | | 65 | | | — | | | 84 | |
Total consolidated net revenues | | $ | 944 | | | $ | 423 | | | $ | 540 | | | $ | 65 | | | $ | (18) | | | $ | 1,954 | |
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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) | |
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Segment net revenues: | | | | | | | | | | | | |
Digital online channels (1) | | $ | 696 | | | $ | 391 | | | $ | 536 | | | $ | — | | | $ | (18) | | | $ | 1,605 | |
Retail channels | | 69 | | | 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, 20202021 and 2019,2020, were as follows (amounts in millions):
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| Nine Months Ended September 30, 2020 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by distribution channel: | | | | | | | | | | | |
Digital online channels (1) | $ | 2,054 | | | $ | 1,203 | | | $ | 1,587 | | | $ | 0 | | | $ | (62) | | | $ | 4,782 | |
Retail channels | 485 | | | 23 | | | 1 | | | 0 | | | 0 | | | 509 | |
Other (2) | 55 | | | 87 | | | 0 | | | 241 | | | 0 | | | 383 | |
Total consolidated net revenues | $ | 2,594 | | | $ | 1,313 | | | $ | 1,588 | | | $ | 241 | | | $ | (62) | | | $ | 5,674 | |
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Change in deferred revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | (16) | | | $ | 16 | | | $ | (1) | | | $ | 0 | | | $ | 0 | | | $ | (1) | |
Retail channels | (293) | | | (2) | | | 0 | | | 0 | | | 0 | | | (295) | |
Other (2) | 0 | | | (1) | | | 0 | | | (9) | | | 0 | | | (10) | |
Total change in deferred revenues | $ | (309) | | | $ | 13 | | | $ | (1) | | | $ | (9) | | | $ | 0 | | | $ | (306) | |
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Segment net revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | 2,038 | | | $ | 1,219 | | | $ | 1,586 | | | $ | 0 | | | $ | (62) | | | $ | 4,781 | |
Retail channels | 192 | | | 21 | | | 1 | | | 0 | | | 0 | | | 214 | |
Other (2) | 55 | | | 86 | | | 0 | | | 232 | | | 0 | | | 373 | |
Total segment net revenues | $ | 2,285 | | | $ | 1,326 | | | $ | 1,587 | | | $ | 232 | | | $ | (62) | | | $ | 5,368 | |
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| | Nine Months Ended September 30, 2021 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by distribution channel: | | | | | | | | | | | | |
Digital online channels (1) | | $ | 2,625 | | | $ | 1,426 | | | $ | 1,894 | | | $ | — | | | $ | (62) | | | $ | 5,883 | |
Retail channels | | 334 | | | 20 | | | — | | | — | | | — | | | 354 | |
Other (2) | | 38 | | | 71 | | | — | | | 294 | | | — | | | 403 | |
Total consolidated net revenues | | $ | 2,997 | | | $ | 1,517 | | | $ | 1,894 | | | $ | 294 | | | $ | (62) | | | $ | 6,640 | |
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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 channels | | 149 | | | 13 | | | — | | | — | | | — | | | 162 | |
Other (2) | | 38 | | | 71 | | | — | | | 303 | | | — | | | 412 | |
Total segment net revenues | | $ | 2,321 | | | $ | 1,409 | | | $ | 1,896 | | | $ | 303 | | | $ | (62) | | | $ | 5,867 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by distribution channel: | | | | | | | | | | | |
Digital online channels (1) | $ | 894 | | | $ | 1,081 | | | $ | 1,527 | | | $ | 0 | | | $ | (9) | | | $ | 3,493 | |
Retail channels | 548 | | | 51 | | | 0 | | | 0 | | | 0 | | | 599 | |
Other (2) | 0 | | | 157 | | | 0 | | | 254 | | | 0 | | | 411 | |
Total consolidated net revenues | $ | 1,442 | | | $ | 1,289 | | | $ | 1,527 | | | $ | 254 | | | $ | (9) | | | $ | 4,503 | |
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | (285) | | | $ | (159) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (444) | |
Retail channels | (363) | | | (10) | | | 0 | | | 0 | | | 0 | | | (373) | |
Other (2) | 0 | | | 2 | | | 0 | | | (9) | | | 0 | | | (7) | |
Total change in deferred revenues | $ | (648) | | | $ | (167) | | | $ | 0 | | | $ | (9) | | | $ | 0 | | | $ | (824) | |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Digital online channels (1) | $ | 609 | | | $ | 922 | | | $ | 1,527 | | | $ | 0 | | | $ | (9) | | | $ | 3,049 | |
Retail channels | 185 | | | 41 | | | 0 | | | 0 | | | 0 | | | 226 | |
Other (2) | 0 | | | 159 | | | 0 | | | 245 | | | 0 | | | 404 | |
Total segment net revenues | $ | 794 | | | $ | 1,122 | | | $ | 1,527 | | | $ | 245 | | | $ | (9) | | | $ | 3,679 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by distribution channel: | | | | | | | | | | | | |
Digital online channels (1) | | $ | 2,054 | | | $ | 1,203 | | | $ | 1,587 | | | $ | — | | | $ | (62) | | | $ | 4,782 | |
Retail channels | | 485 | | | 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 channels | | 192 | | | 21 | | | 1 | | | — | | | — | | | 214 | |
Other (2) | | 55 | | | 86 | | | — | | | 232 | | | — | | | 373 | |
Total segment net revenues | | $ | 2,285 | | | $ | 1,326 | | | $ | 1,587 | | | $ | 232 | | | $ | (62) | | | $ | 5,368 | |
(1)Net revenues from “Digital online channels” include revenues from digitally-distributed subscriptions, downloadable content, microtransactions, subscriptions, and products, as well as licensing royalties.
(2)Net revenues from “Other” include revenues from our Distribution business, the Overwatch League, and the Call of Duty League.
(3)Intersegment revenues reflect licensing and service fees charged between segments.
Geographic information presented below is based on the location of the paying customer. Net revenues by geographic region, including a reconciliation to each of our reportable segment’s net revenues, for the three months ended September 30, 20202021 and 2019,2020, were as follows (amounts in millions):
| | | Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2021 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total | | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total |
Net revenues by geographic region: | Net revenues by geographic region: | | | | | | | | | | | | Net revenues by geographic region: | | | | | | | | | | | | |
Americas | Americas | $ | 595 | | | $ | 192 | | | $ | 350 | | | $ | 0 | | | $ | (10) | | | $ | 1,127 | | Americas | | $ | 515 | | | $ | 243 | | | $ | 417 | | | $ | — | | | $ | (9) | | | $ | 1,166 | |
EMEA (1) | EMEA (1) | 263 | | | 131 | | | 136 | | | 65 | | | (6) | | | 589 | | EMEA (1) | | 187 | | | 166 | | | 163 | | | 108 | | | (5) | | | 619 | |
Asia Pacific | Asia Pacific | 86 | | | 100 | | | 54 | | | 0 | | | (2) | | | 238 | | Asia Pacific | | 92 | | | 123 | | | 71 | | | — | | | (1) | | | 285 | |
Total consolidated net revenues | Total consolidated net revenues | $ | 944 | | | $ | 423 | | | $ | 540 | | | $ | 65 | | | $ | (18) | | | $ | 1,954 | | Total consolidated net revenues | | $ | 794 | | | $ | 532 | | | $ | 651 | | | $ | 108 | | | $ | (15) | | | $ | 2,070 | |
| Change in deferred revenues: | Change in deferred revenues: | | Change in deferred revenues: | |
Americas | Americas | $ | (77) | | | $ | (4) | | | $ | (4) | | | $ | 0 | | | $ | (1) | | | $ | (86) | | Americas | | $ | (110) | | | $ | (27) | | | $ | 1 | | | $ | — | | | $ | — | | | $ | (136) | |
EMEA (1) | EMEA (1) | (68) | | | (8) | | | 0 | | | 0 | | | 1 | | | (75) | | EMEA (1) | | (42) | | | (22) | | | — | | | 1 | | | — | | | (63) | |
Asia Pacific | Asia Pacific | (26) | | | 0 | | | 0 | | | 0 | | | 0 | | | (26) | | Asia Pacific | | (1) | | | 10 | | | — | | | — | | | — | | | 9 | |
Total change in deferred revenues | Total change in deferred revenues | $ | (171) | | | $ | (12) | | | $ | (4) | | | $ | 0 | | | $ | 0 | | | $ | (187) | | Total change in deferred revenues | | $ | (153) | | | $ | (39) | | | $ | 1 | | | $ | 1 | | | $ | — | | | $ | (190) | |
| Segment net revenues: | Segment net revenues: | | Segment net revenues: | |
Americas | Americas | $ | 518 | | | $ | 188 | | | $ | 346 | | | $ | 0 | | | $ | (11) | | | $ | 1,041 | | Americas | | $ | 405 | | | $ | 216 | | | $ | 418 | | | $ | — | | | $ | (9) | | | $ | 1,030 | |
EMEA (1) | EMEA (1) | 195 | | | 123 | | | 136 | | | 65 | | | (5) | | | 514 | | EMEA (1) | | 145 | | | 144 | | | 163 | | | 109 | | | (5) | | | 556 | |
Asia Pacific | Asia Pacific | 60 | | | 100 | | | 54 | | | 0 | | | (2) | | | 212 | | Asia Pacific | | 91 | | | 133 | | | 71 | | | — | | | (1) | | | 294 | |
Total segment net revenues | Total segment net revenues | $ | 773 | | | $ | 411 | | | $ | 536 | | | $ | 65 | | | $ | (18) | | | $ | 1,767 | | Total segment net revenues | | $ | 641 | | | $ | 493 | | | $ | 652 | | | $ | 109 | | | $ | (15) | | | $ | 1,880 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total |
Net revenues by geographic region: | | | | | | | | | | | |
Americas | $ | 141 | | | $ | 204 | | | $ | 311 | | | $ | 0 | | | $ | (1) | | | $ | 655 | |
EMEA (1) | 79 | | | 124 | | | 137 | | | 113 | | | (1) | | | 452 | |
Asia Pacific | 32 | | | 89 | | | 54 | | | 0 | | | 0 | | | 175 | |
Total consolidated net revenues | $ | 252 | | | $ | 417 | | | $ | 502 | | | $ | 113 | | | $ | (2) | | | $ | 1,282 | |
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Americas | $ | (20) | | | $ | (11) | | | $ | (2) | | | $ | 0 | | | $ | 0 | | | $ | (33) | |
EMEA (1) | (16) | | | (10) | | | 0 | | | 0 | | | 0 | | | (26) | |
Asia Pacific | (7) | | | (2) | | | 0 | | | 0 | | | 0 | | | (9) | |
Total change in deferred revenues | $ | (43) | | | $ | (23) | | | $ | (2) | | | $ | 0 | | | $ | 0 | | | $ | (68) | |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Americas | $ | 121 | | | $ | 193 | | | $ | 309 | | | $ | 0 | | | $ | (1) | | | $ | 622 | |
EMEA (1) | 63 | | | 114 | | | 137 | | | 113 | | | (1) | | | 426 | |
Asia Pacific | 25 | | | 87 | | | 54 | | | 0 | | | 0 | | | 166 | |
Total segment net revenues | $ | 209 | | | $ | 394 | | | $ | 500 | | | $ | 113 | | | $ | (2) | | | $ | 1,214 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total |
Net revenues by geographic region: | | | | | | | | | | | | |
Americas | | $ | 595 | | | $ | 192 | | | $ | 350 | | | $ | — | | | $ | (10) | | | $ | 1,127 | |
EMEA (1) | | 263 | | | 131 | | | 136 | | | 65 | | | (6) | | | 589 | |
Asia Pacific | | 86 | | | 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 Pacific | | 60 | | | 100 | | | 54 | | | — | | | (2) | | | 212 | |
Total segment net revenues | | $ | 773 | | | $ | 411 | | | $ | 536 | | | $ | 65 | | | $ | (18) | | | $ | 1,767 | |
Net revenues by geographic region, including a reconciliation to each of our reportable segment’s net revenues, for the nine months ended September 30, 20202021 and 2019,2020, were as follows (amounts in millions):
| | | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2021 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total | | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total |
Net revenues by geographic region: | Net revenues by geographic region: | | | | | | | | | | | | Net revenues by geographic region: | | | | | | | | | | | | |
Americas | Americas | $ | 1,615 | | | $ | 580 | | | $ | 1,024 | | | $ | 0 | | | $ | (31) | | | $ | 3,188 | | Americas | | $ | 1,942 | | | $ | 698 | | | $ | 1,215 | | | $ | — | | | $ | (36) | | | $ | 3,819 | |
EMEA (1) | EMEA (1) | 750 | | | 393 | | | 407 | | | 241 | | | (21) | | | 1,770 | | EMEA (1) | | 780 | | | 507 | | | 485 | | | 294 | | | (21) | | | 2,045 | |
Asia Pacific | Asia Pacific | 229 | | | 340 | | | 157 | | | 0 | | | (10) | | | 716 | | Asia Pacific | | 275 | | | 312 | | | 194 | | | — | | | (5) | | | 776 | |
Total consolidated net revenues | Total consolidated net revenues | $ | 2,594 | | | $ | 1,313 | | | $ | 1,588 | | | $ | 241 | | | $ | (62) | | | $ | 5,674 | | Total consolidated net revenues | | $ | 2,997 | | | $ | 1,517 | | | $ | 1,894 | | | $ | 294 | | | $ | (62) | | | $ | 6,640 | |
| Change in deferred revenues: | Change in deferred revenues: | | Change in deferred revenues: | |
Americas | Americas | $ | (124) | | | $ | 18 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (106) | | Americas | | $ | (420) | | | $ | (57) | | | $ | 2 | | | $ | — | | | $ | — | | | $ | (475) | |
EMEA (1) | EMEA (1) | (146) | | | (3) | | | (1) | | | (9) | | | 0 | | | (159) | | EMEA (1) | | (213) | | | (55) | | | (1) | | | 9 | | | — | | | (260) | |
Asia Pacific | Asia Pacific | (39) | | | (2) | | | 0 | | | 0 | | | 0 | | | (41) | | Asia Pacific | | (43) | | | 4 | | | 1 | | | — | | | — | | | (38) | |
Total change in deferred revenues | Total change in deferred revenues | $ | (309) | | | $ | 13 | | | $ | (1) | | | $ | (9) | | | $ | 0 | | | $ | (306) | | Total change in deferred revenues | | $ | (676) | | | $ | (108) | | | $ | 2 | | | $ | 9 | | | $ | — | | | $ | (773) | |
| Segment net revenues: | Segment net revenues: | | Segment net revenues: | |
Americas | Americas | $ | 1,491 | | | $ | 598 | | | $ | 1,024 | | | $ | 0 | | | $ | (31) | | | $ | 3,082 | | Americas | | $ | 1,522 | | | $ | 641 | | | $ | 1,217 | | | $ | — | | | $ | (36) | | | $ | 3,344 | |
EMEA (1) | EMEA (1) | 604 | | | 390 | | | 406 | | | 232 | | | (21) | | | 1,611 | | EMEA (1) | | 567 | | | 452 | | | 484 | | | 303 | | | (21) | | | 1,785 | |
Asia Pacific | Asia Pacific | 190 | | | 338 | | | 157 | | | 0 | | | (10) | | | 675 | | Asia Pacific | | 232 | | | 316 | | | 195 | | | — | | | (5) | | | 738 | |
Total segment net revenues | Total segment net revenues | $ | 2,285 | | | $ | 1,326 | | | $ | 1,587 | | | $ | 232 | | | $ | (62) | | | $ | 5,368 | | Total segment net revenues | | $ | 2,321 | | | $ | 1,409 | | | $ | 1,896 | | | $ | 303 | | | $ | (62) | | | $ | 5,867 | |
| | | Nine Months Ended September 30, 2019 | | Nine Months Ended September 30, 2020 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total | | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (2) | | Total |
Net revenues by geographic region: | Net revenues by geographic region: | | | | | | | | | | | | Net revenues by geographic region: | | | | | | | | | | | | |
Americas | Americas | $ | 852 | | | $ | 613 | | | $ | 946 | | | $ | 0 | | | $ | (5) | | | $ | 2,406 | | Americas | | $ | 1,615 | | | $ | 580 | | | $ | 1,024 | | | $ | — | | | $ | (31) | | | $ | 3,188 | |
EMEA (1) | EMEA (1) | 457 | | | 400 | | | 417 | | | 254 | | | (3) | | | 1,525 | | EMEA (1) | | 750 | | | 393 | | | 407 | | | 241 | | | (21) | | | 1,770 | |
Asia Pacific | Asia Pacific | 133 | | | 276 | | | 164 | | | 0 | | | (1) | | | 572 | | Asia Pacific | | 229 | | | 340 | | | 157 | | | — | | | (10) | | | 716 | |
Total consolidated net revenues | Total consolidated net revenues | $ | 1,442 | | | $ | 1,289 | | | $ | 1,527 | | | $ | 254 | | | $ | (9) | | | $ | 4,503 | | Total consolidated net revenues | | $ | 2,594 | | | $ | 1,313 | | | $ | 1,588 | | | $ | 241 | | | $ | (62) | | | $ | 5,674 | |
| Change in deferred revenues: | Change in deferred revenues: | | Change in deferred revenues: | |
Americas | Americas | $ | (390) | | | $ | (80) | | | $ | 1 | | | $ | 0 | | | $ | 0 | | | $ | (469) | | Americas | | $ | (124) | | | $ | 18 | | | $ | — | | | $ | — | | | $ | — | | | $ | (106) | |
EMEA (1) | EMEA (1) | (205) | | | (71) | | | 0 | | | (9) | | | 0 | | | (285) | | EMEA (1) | | (146) | | | (3) | | | (1) | | | (9) | | | — | | | (159) | |
Asia Pacific | Asia Pacific | (53) | | | (16) | | | (1) | | | 0 | | | 0 | | | (70) | | Asia Pacific | | (39) | | | (2) | | | — | | | — | | | — | | | (41) | |
Total change in deferred revenues | Total change in deferred revenues | $ | (648) | | | $ | (167) | | | $ | 0 | | | $ | (9) | | | $ | 0 | | | $ | (824) | | Total change in deferred revenues | | $ | (309) | | | $ | 13 | | | $ | (1) | | | $ | (9) | | | $ | — | | | $ | (306) | |
| Segment net revenues: | Segment net revenues: | | Segment net revenues: | |
Americas | Americas | $ | 462 | | | $ | 533 | | | $ | 947 | | | $ | 0 | | | $ | (5) | | | $ | 1,937 | | Americas | | $ | 1,491 | | | $ | 598 | | | $ | 1,024 | | | $ | — | | | $ | (31) | | | $ | 3,082 | |
EMEA (1) | EMEA (1) | 252 | | | 329 | | | 417 | | | 245 | | | (3) | | | 1,240 | | EMEA (1) | | 604 | | | 390 | | | 406 | | | 232 | | | (21) | | | 1,611 | |
Asia Pacific | Asia Pacific | 80 | | | 260 | | | 163 | | | 0 | | | (1) | | | 502 | | Asia Pacific | | 190 | | | 338 | | | 157 | | | — | | | (10) | | | 675 | |
Total segment net revenues | Total segment net revenues | $ | 794 | | | $ | 1,122 | | | $ | 1,527 | | | $ | 245 | | | $ | (9) | | | $ | 3,679 | | Total segment net revenues | | $ | 2,285 | | | $ | 1,326 | | | $ | 1,587 | | | $ | 232 | | | $ | (62) | | | $ | 5,368 | |
(1) “EMEA” consists of the Europe, Middle East, and Africa geographic regions.
(2) Intersegment revenues reflect licensing and service fees charged between segments.
The Company’s net revenues in the U.S. were 50%49% and 46%50% of consolidated net revenues for the three months ended September 30, 20202021 and 2019,2020, respectively. The Company’s net revenues in the United Kingdom (the “U.K.(“U.K.”) were 9%10% and 13%9% of consolidated net revenues for the three months ended September 30, 20202021 and 2019,2020, respectively. No other country’s net revenues exceeded 10% of consolidated net revenues for either the three months ended September 30, 20202021 or 2019.
2020.
The Company’s net revenues in the U.S. were 50% and 48% of consolidated net revenues for both the nine months ended September 30, 20202021 and 2019, respectively.2020. The Company’s net revenues in the U.K. were 10% of consolidated net revenues for both the nine months ended September 30, 20202021 and 2019.2020. No other country’s net revenues exceeded 10% of consolidated net revenues for either the nine months ended September 30, 20202021 or 2019.2020.
Net revenues by platform, including a reconciliation to each of our reportable segment’s net revenues, for the three months ended September 30, 20202021 and 2019,2020, were as follows (amounts in millions):
| | | Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2021 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total | | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by platform: | Net revenues by platform: | | | | | | | | | | | | Net revenues by platform: | | | | | | | | | | | | |
Console | Console | $ | 664 | | | $ | 31 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 695 | | Console | | $ | 480 | | | $ | 43 | | | $ | — | | | $ | — | | | $ | — | | | $ | 523 | |
PC | PC | 152 | | | 357 | | | 23 | | | 0 | | | (18) | | | 514 | | PC | | 140 | | | 434 | | | 19 | | | — | | | (15) | | | 578 | |
Mobile and ancillary (1) | Mobile and ancillary (1) | 120 | | | 24 | | | 517 | | | 0 | | | 0 | | | 661 | | Mobile and ancillary (1) | | 166 | | | 22 | | | 632 | | | — | | | — | | | 820 | |
Other (2) | Other (2) | 8 | | | 11 | | | 0 | | | 65 | | | 0 | | | 84 | | Other (2) | | 8 | | | 33 | | | — | | | 108 | | | — | | | 149 | |
Total consolidated net revenues | Total consolidated net revenues | $ | 944 | | | $ | 423 | | | $ | 540 | | | $ | 65 | | | $ | (18) | | | $ | 1,954 | | Total consolidated net revenues | | $ | 794 | | | $ | 532 | | | $ | 651 | | | $ | 108 | | | $ | (15) | | | $ | 2,070 | |
| Change in deferred revenues: | Change in deferred revenues: | | Change in deferred revenues: | |
Console | Console | $ | (125) | | | $ | (4) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (129) | | Console | | $ | (119) | | | $ | 5 | | | $ | — | | | $ | — | | | $ | — | | | $ | (114) | |
PC | PC | (35) | | | (9) | | | (1) | | | 0 | | | 0 | | | (45) | | PC | | (33) | | | (47) | | | — | | | — | | | — | | | (80) | |
Mobile and ancillary (1) | Mobile and ancillary (1) | (11) | | | 1 | | | (3) | | | 0 | | | 0 | | | (13) | | Mobile and ancillary (1) | | (1) | | | 3 | | | 1 | | | — | | | — | | | 3 | |
Other (2) | Other (2) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Other (2) | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
Total change in deferred revenues | Total change in deferred revenues | $ | (171) | | | $ | (12) | | | $ | (4) | | | $ | 0 | | | $ | 0 | | | $ | (187) | | Total change in deferred revenues | | $ | (153) | | | $ | (39) | | | $ | 1 | | | $ | 1 | | | $ | — | | | $ | (190) | |
| Segment net revenues: | Segment net revenues: | | Segment net revenues: | |
Console | Console | $ | 539 | | | $ | 27 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 566 | | Console | | $ | 361 | | | $ | 48 | | | $ | — | | | $ | — | | | $ | — | | | $ | 409 | |
PC | PC | 117 | | | 348 | | | 22 | | | 0 | | | (18) | | | 469 | | PC | | 107 | | | 387 | | | 19 | | | — | | | (15) | | | 498 | |
Mobile and ancillary (1) | Mobile and ancillary (1) | 109 | | | 25 | | | 514 | | | 0 | | | 0 | | | 648 | | Mobile and ancillary (1) | | 165 | | | 25 | | | 633 | | | — | | | — | | | 823 | |
Other (2) | Other (2) | 8 | | | 11 | | | 0 | | | 65 | | | 0 | | | 84 | | Other (2) | | 8 | | | 33 | | | — | | | 109 | | | — | | | 150 | |
Total segment net revenues | Total segment net revenues | $ | 773 | | | $ | 411 | | | $ | 536 | | | $ | 65 | | | $ | (18) | | | $ | 1,767 | | Total segment net revenues | | $ | 641 | | | $ | 493 | | | $ | 652 | | | $ | 109 | | | $ | (15) | | | $ | 1,880 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by platform: | | | | | | | | | | | | |
Console | | $ | 664 | | | $ | 31 | | | $ | — | | | $ | — | | | $ | — | | | $ | 695 | |
PC | | 152 | | | 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 | |
PC | | 117 | | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by platform: | | | | | | | | | | | |
Console | $ | 214 | | | $ | 27 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 241 | |
PC | 29 | | | 286 | | | 28 | | | 0 | | | (2) | | | 341 | |
Mobile and ancillary (1) | 9 | | | 42 | | | 474 | | | 0 | | | 0 | | | 525 | |
Other (2) | 0 | | | 62 | | | 0 | | | 113 | | | 0 | | | 175 | |
Total consolidated net revenues | $ | 252 | | | $ | 417 | | | $ | 502 | | | $ | 113 | | | $ | (2) | | | $ | 1,282 | |
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Console | $ | (36) | | | $ | (9) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (45) | |
PC | (7) | | | (14) | | | 0 | | | 0 | | | 0 | | | (21) | |
Mobile and ancillary (1) | 0 | | | 0 | | | (2) | | | 0 | | | 0 | | | (2) | |
Other (2) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total change in deferred revenues | $ | (43) | | | $ | (23) | | | $ | (2) | | | $ | 0 | | | $ | 0 | | | $ | (68) | |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Console | $ | 178 | | | $ | 18 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 196 | |
PC | 22 | | | 272 | | | 28 | | | 0 | | | (2) | | | 320 | |
Mobile and ancillary (1) | 9 | | | 42 | | | 472 | | | 0 | | | 0 | | | 523 | |
Other (2) | 0 | | | 62 | | | 0 | | | 113 | | | 0 | | | 175 | |
Total segment net revenues | $ | 209 | | | $ | 394 | | | $ | 500 | | | $ | 113 | | | $ | (2) | | | $ | 1,214 | |
Net revenues by platform, including a reconciliation to each of our reportable segment’s net revenues, for the nine months ended September 30, 20202021 and 2019,2020, were as follows (amounts in millions):
| | | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2021 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total | | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by platform: | Net revenues by platform: | | | | | | | | | | | | Net revenues by platform: | | | | | | | | | | | | |
Console | Console | $ | 1,855 | | | $ | 89 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,944 | | Console | | $ | 1,971 | | | $ | 90 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,061 | |
PC | PC | 423 | | | 1,060 | | | 73 | | | 0 | | | (62) | | | 1,494 | | PC | | 532 | | | 1,293 | | | 64 | | | — | | | (62) | | | 1,827 | |
Mobile and ancillary (1) | Mobile and ancillary (1) | 261 | | | 77 | | | 1,515 | | | 0 | | | 0 | | | 1,853 | | Mobile and ancillary (1) | | 456 | | | 63 | | | 1,830 | | | — | | | — | | | 2,349 | |
Other (2) | Other (2) | 55 | | | 87 | | | 0 | | | 241 | | | 0 | | | 383 | | Other (2) | | 38 | | | 71 | | | — | | | 294 | | | — | | | 403 | |
Total consolidated net revenues | Total consolidated net revenues | $ | 2,594 | | | $ | 1,313 | | | $ | 1,588 | | | $ | 241 | | | $ | (62) | | | $ | 5,674 | | Total consolidated net revenues | | $ | 2,997 | | | $ | 1,517 | | | $ | 1,894 | | | $ | 294 | | | $ | (62) | | | $ | 6,640 | |
| Change in deferred revenues: | Change in deferred revenues: | | Change in deferred revenues: | |
Console | Console | $ | (295) | | | $ | (6) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (301) | | Console | | $ | (530) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (530) | |
PC | PC | (50) | | | 24 | | | (1) | | | 0 | | | 0 | | | (27) | | PC | | (145) | | | (108) | | | — | | | — | | | — | | | (253) | |
Mobile and ancillary (1) | Mobile and ancillary (1) | 36 | | | (4) | | | 0 | | | 0 | | | 0 | | | 32 | | Mobile and ancillary (1) | | (1) | | | — | | | 2 | | | — | | | — | | | 1 | |
Other (2) | Other (2) | 0 | | | (1) | | | 0 | | | (9) | | | 0 | | | (10) | | Other (2) | | — | | | — | | | — | | | 9 | | | — | | | 9 | |
Total change in deferred revenues | Total change in deferred revenues | $ | (309) | | | $ | 13 | | | $ | (1) | | | $ | (9) | | | $ | 0 | | | $ | (306) | | Total change in deferred revenues | | $ | (676) | | | $ | (108) | | | $ | 2 | | | $ | 9 | | | $ | — | | | $ | (773) | |
| Segment net revenues: | Segment net revenues: | | Segment net revenues: | |
Console | Console | $ | 1,560 | | | $ | 83 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,643 | | Console | | $ | 1,441 | | | $ | 90 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,531 | |
PC | PC | 373 | | | 1,084 | | | 72 | | | 0 | | | (62) | | | 1,467 | | PC | | 387 | | | 1,185 | | | 64 | | | — | | | (62) | | | 1,574 | |
Mobile and ancillary (1) | Mobile and ancillary (1) | 297 | | | 73 | | | 1,515 | | | 0 | | | 0 | | | 1,885 | | Mobile and ancillary (1) | | 455 | | | 63 | | | 1,832 | | | — | | | — | | | 2,350 | |
Other (2) | Other (2) | 55 | | | 86 | | | 0 | | | 232 | | | 0 | | | 373 | | Other (2) | | 38 | | | 71 | | | — | | | 303 | | | — | | | 412 | |
Total segment net revenues | Total segment net revenues | $ | 2,285 | | | $ | 1,326 | | | $ | 1,587 | | | $ | 232 | | | $ | (62) | | | $ | 5,368 | | Total segment net revenues | | $ | 2,321 | | | $ | 1,409 | | | $ | 1,896 | | | $ | 303 | | | $ | (62) | | | $ | 5,867 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by platform: | | | | | | | | | | | |
Console | $ | 1,222 | | | $ | 102 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,324 | |
PC | 204 | | | 909 | | | 92 | | | 0 | | | (9) | | | 1,196 | |
Mobile and ancillary (1) | 16 | | | 121 | | | 1,435 | | | 0 | | | 0 | | | 1,572 | |
Other (2) | 0 | | | 157 | | | 0 | | | 254 | | | 0 | | | 411 | |
Total consolidated net revenues | $ | 1,442 | | | $ | 1,289 | | | $ | 1,527 | | | $ | 254 | | | $ | (9) | | | $ | 4,503 | |
| | | | | | | | | | | |
Change in deferred revenues: | | | | | | | | | | | |
Console | $ | (563) | | | $ | (26) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (589) | |
PC | (84) | | | (133) | | | (1) | | | 0 | | | 0 | | | (218) | |
Mobile and ancillary (1) | (1) | | | (10) | | | 1 | | | 0 | | | 0 | | | (10) | |
Other (2) | 0 | | | 2 | | | 0 | | | (9) | | | 0 | | | (7) | |
Total change in deferred revenues | $ | (648) | | | $ | (167) | | | $ | 0 | | | $ | (9) | | | $ | 0 | | | $ | (824) | |
| | | | | | | | | | | |
Segment net revenues: | | | | | | | | | | | |
Console | $ | 659 | | | $ | 76 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 735 | |
PC | 120 | | | 776 | | | 91 | | | 0 | | | (9) | | | 978 | |
Mobile and ancillary (1) | 15 | | | 111 | | | 1,436 | | | 0 | | | 0 | | | 1,562 | |
Other (2) | 0 | | | 159 | | | 0 | | | 245 | | | 0 | | | 404 | |
Total segment net revenues | $ | 794 | | | $ | 1,122 | | | $ | 1,527 | | | $ | 245 | | | $ | (9) | | | $ | 3,679 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
| | Activision | | Blizzard | | King | | Non-reportable segments | | Elimination of intersegment revenues (3) | | Total |
Net revenues by platform: | | | | | | | | | | | | |
Console | | $ | 1,855 | | | $ | 89 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,944 | |
PC | | 423 | | | 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 | |
PC | | 373 | | | 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 physical merchandise and accessories.
(2)Net revenues from “Other” includeprimarily includes revenues from our Distribution business, the Overwatch League, and the Call of Duty League.
(3)Intersegment revenues reflect licensing and service fees charged between segments.
Long-lived assets by geographic region were as follows (amounts in millions):
| | | At September 30, 2020 | | At December 31, 2019 | |
Long-lived assets (1) by geographic region: | | | | |
| | | | At September 30, 2021 | | At December 31, 2020 | |
Long-lived assets* by geographic region: | | Long-lived assets* by geographic region: | | | | | |
Americas | Americas | $ | 269 | | | $ | 322 | | Americas | | $ | 273 | | | $ | 270 | | |
EMEA | EMEA | 174 | | | 142 | | EMEA | | 131 | | | 166 | | |
Asia Pacific | Asia Pacific | 16 | | | 21 | | Asia Pacific | | 17 | | | 17 | | |
Total long-lived assets by geographic region | Total long-lived assets by geographic region | $ | 459 | | | $ | 485 | | Total long-lived assets by geographic region | | $ | 421 | | | $ | 453 | | |
(1)* The only long-lived assets that we classify by region are our long-term tangible fixed assets, which consist of property, plant, and equipment assets and our lease right-of-use assets; allassets. All other long-term assets are not allocated by location.
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, 2020 | 11,297 | | | $ | 53.84 | | | | | |
Granted | 754 | | | 92.56 | | | | | |
Exercised | (1,677) | | | 46.27 | | | | | |
Forfeited | (700) | | | 63.58 | | | | | |
Expired | (18) | | | 56.58 | | | | | |
Outstanding stock options at September 30, 2021 | 9,656 | | | $ | 57.47 | | | 7.18 | | $ | 211 | |
Vested and expected to vest at September 30, 2021 | 9,260 | | | $ | 56.62 | | | 7.10 | | $ | 208 | |
Exercisable at September 30, 2021 | 5,015 | | | $ | 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.
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 shares | | Weighted- average grant date fair value per RSU |
Unvested RSUs at December 31, 2020 | 7,102 | | | $ | 82.50 | |
Granted | 4,657 | | | 95.05 | |
Vested | (3,177) | | | 96.63 | |
Forfeited | (1,085) | | | 72.94 | |
Unvested RSUs at September 30, 2021 | 7,497 | | | $ | 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 restructuring plan aimed at refocusing our resources on our largest opportunities and removing unnecessary levels of complexity from certain parts of our business. We have been:
•increasing our investment in development for our largest, internally-owned franchises—across upfront releases, in-game content, mobile, and geographic expansion;
•reducing certain non-development and administrative-related costs across our business; and
•integrating our global and regional sales and “go-to-market,” partnerships, and sponsorshipssponsorship capabilities across the business, which we believe will enable us to provide better opportunities for talent and greater expertise and scale on behalf of our business units.
The restructuringTo date, substantially all actions remain in progress as we continueunder our plan have been accrued for, with remaining activity primarily being related to focus on these goals and execute against our plan.cash outlays to be made to impacted personnel.
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 costs | | Facilities and related costs | | Other costs | | Total |
Balance at December 31, 2019 | $ | 32 | | | $ | 0 | | | $ | 3 | | | $ | 35 | |
Costs charged to expense | 23 | | | 0 | | | 0 | | | 23 | |
Cash payments | (6) | | | 0 | | | (2) | | | (8) | |
| | | | | | | |
Balance at March 31, 2020 | $ | 49 | | | $ | 0 | | | $ | 1 | | | $ | 50 | |
Costs charged to expense | 3 | | | 0 | | | 1 | | | 4 | |
Cash payments | (3) | | | 0 | | | (2) | | | (5) | |
| | | | | | | |
Balance at June 30, 2020 | $ | 49 | | | $ | 0 | | | $ | 0 | | | $ | 49 | |
Costs charged to expense | 6 | | | 3 | | | 0 | | | 9 | |
Cash payments | (7) | | | 0 | | | 0 | | | (7) | |
Non-cash charge adjustment (1) | 0 | | | (3) | | | 0 | | | (3) | |
Balance at September 30, 2020 | $ | 48 | | | $ | 0 | | | $ | 0 | | | $ | 48 | |
| | | | | | | |
Cumulative charges incurred through September 30, 2020 | $ | 108 | | | $ | 32 | | | $ | 33 | | | $ | 173 | |
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(1) Adjustments relate to non-cash charges included in “Costs charged to expense” for the write-down of assets for our lease facilities that were vacated. | | | | | | | | | | | | | | | | | | | | | | | |
| Severance and employee related costs | | Facilities and related costs | | Other costs | | Total |
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Balance at December 31, 2020 | $ | 88 | | | $ | — | | | $ | 3 | | | $ | 91 | |
Costs charged to expense | 24 | | | 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 expense | 3 | | | 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 expense | 1 | | | 2 | | | 1 | | | 4 | |
Cash payments | (17) | | | — | | | (1) | | | (18) | |
Non-cash charge adjustment | (1) | | | (2) | | | — | | | (3) | |
Balance at September 30, 2021 | $ | 76 | | | $ | — | | | $ | 3 | | | $ | 79 | |
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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, | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 | |
Activision | Activision | | $ | 1 | | | $ | 1 | | | $ | 5 | | | $ | 12 | | Activision | | $ | — | | | $ | 1 | | | $ | 1 | | | $ | 5 | | |
Blizzard | Blizzard | | 7 | | | 12 | | | 30 | | | 52 | | Blizzard | | 4 | | | 7 | | | 42 | | | 30 | | |
King | King | | 1 | | | 4 | | | (1) | | | 17 | | King | | — | | | 1 | | | 1 | | | (1) | | |
Other segments (1) | Other segments (1) | | 0 | | | 7 | | | 2 | | | 23 | | Other segments (1) | | — | | | — | | | 4 | | | 2 | | |
Total | Total | | $ | 9 | | | $ | 24 | | | $ | 36 | | | $ | 104 | | Total | | $ | 4 | | | $ | 9 | | | $ | 48 | | | $ | 36 | | |
(1)
(1) Includes charges related to operating segments managed outside theof our reportable segments, including our Distribution business. Also includes restructuring 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 restructuring plan discussed above. Such amounts were not material.
As of September 30, 2020, we had board approval to incur up to $190 million of pre-taxWe have substantially completed our accruals for all actions under the plan. The charges under our restructuring plan. These charges were expected toassociated with the plan primarily relate to severance and employee-related costs (approximately 60% of the aggregate charge), including, in many cases, amounts above those that are legally required, facilities and related costs (approximately 20% of the aggregate charge), and other costs (approximately 20% of the aggregate charge), including charges for restructuring related fees and the write-down of assets. A majority of these charges were expected be paid in cash and such outlays were largely expected to be completed by the end of 2021.
The total charges incurred through September 30, 2020 and total expected pre-tax restructuring charges related to the $190 million restructuring plan, by segment, inclusive of amounts already incurred, are presented below (amounts in millions):
| | | | | | | | | | | |
| Total Charges Incurred Through September 30, 2020 | | Total Charges Expected as of September 30, 2020 |
Activision | $ | 24 | | | $ | 25 | |
Blizzard | 103 | | | 105 | |
King | 19 | | | 20 | |
Other segments (1) | 27 | | | 40 | |
Total | $ | 173 | | | $ | 190 | |
(1) Includes charges related to operating segments managed outside the reportable segments, including our Distribution business. Also includes restructuring charges for our corporate and administrative functions.
On October 27, 2020, our Board of Directors approved an expansion to the scope of certain actions within our restructuring plan that are aimed at integrating our global and regional functions to allow continued focus on investing in our largest, internally-owned franchises and to provide us with the ability to better leverage our scale across the organization. As a result, subsequent to the end of the third quarter, we now expect to incur total aggregate pre-tax restructuring charges of approximately $310 million associated with the restructuring plan, of which the remaining charges that have not yet been incurred are expected to largely be incurred within the next 12 months. The charges associated with the restructuring plan are expected to relate to severance and employee-related costs (approximately 60%65% of the aggregate charge), facilities and related costs (approximately 20% of the aggregate charge), and other costs (approximately 20%15% of the aggregate charge), including charges for restructuring relatedrestructuring-related fees and the write-down of assets. A substantial majority (approximately 70%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.
The total charges incurred through September 30, 2021, and total expected pre-tax restructuring charges related to the endplan, by segment, inclusive of 2021.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, 2021 | | Total charges expected as of September 30, 2021 |
Activision | | $ | 33 | | | $ | 33 | |
Blizzard | | 186 | | | 187 | |
King | | 20 | | | 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.
12.13. 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, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 | |
Interest income | Interest income | | $ | (1) | | | $ | (20) | | | $ | (20) | | | $ | (61) | | Interest income | | $ | (1) | | | $ | (1) | | | $ | (4) | | | $ | (20) | | |
Interest expense from debt and amortization of debt discount and deferred financing costs | Interest expense from debt and amortization of debt discount and deferred financing costs | | 27 | | | 23 | | | 72 | | | 68 | | Interest expense from debt and amortization of debt discount and deferred financing costs | | 27 | | | 27 | | | 81 | | | 72 | | |
Unrealized gain on equity investment | | (3) | | | 0 | | | (3) | | | (38) | | |
Realized and unrealized loss (gain) on equity investment (Note 6) | | Realized and unrealized loss (gain) on equity investment (Note 6) | | 36 | | | (3) | | | (35) | | | (3) | | |
Other expense (income), net | Other expense (income), net | | 2 | | | (5) | | | 6 | | | (2) | | Other expense (income), net | | 3 | | | 2 | | | 10 | | | 6 | | |
Interest and other expense (income), net | Interest and other expense (income), net | | $ | 25 | | | $ | (2) | | | $ | 55 | | | $ | (33) | | Interest and other expense (income), net | | $ | 65 | | | $ | 25 | | | $ | 52 | | | $ | 55 | | |
13.
Income Taxes
We account for our provision for income taxes in accordance with ASC 740, Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the interim period, taking into account year-to-date amounts and projected results for the full year. The provision for income taxes represents federal, foreign, state, and local income taxes. Our effective tax rate could be different from the statutory U.S. income tax rate due to: the effect of state and local income taxes; tax rates that apply to our foreign income (including U.S. tax on foreign income); research and development credits; and certain nondeductible expenses. Our effective tax rate could fluctuate significantly from quarter to quarter based on recurring and nonrecurring factors including, but not limited to: variations in the estimated and actual level of pre-tax income or loss by jurisdiction; changes in enacted tax laws and regulations, and interpretations thereof, including with respect to tax credits and state and local income taxes; developments in tax audits and other matters; recognition of excess tax benefits and tax deficiencies from share-based payments; and certain nondeductible expenses. Changes in judgment from the evaluation of new information resulting in the recognition, derecognition, or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.
The income tax expense of $118$120 million for the three months ended September 30, 2020,2021, 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 lower than the effective tax rate of 18% for the threenine months ended September 30, 2019. This2020. The decrease is primarily due to discrete tax benefits recognized in the current quarter for the remeasurement of deferred tax assets, partially offset by an increase inlower U.S. taxes on foreign earnings.
The effective tax rates of 16% and 18%15% for the three and nine months ended September 30, 2020,2021, respectively, are lower than the U.S. statutory rate of 21%, primarily due to discrete tax benefits recognized for the remeasurement of deferred tax assetslower U.S. taxes on foreign earnings and the recognition of excess tax benefits from share-based payments.
DuringIn addition, a discrete tax benefit was recognized from the quarterremeasurement of a deferred tax asset as a result of a change in the U.K. tax rate for the nine months ended September 30, 2020, the U.S. Treasury Department issued tax regulations under various provisions of the 2017 Tax Cuts and Jobs Act, including the global intangible low-taxed income high tax exclusion. While these regulations did not result in a material impact to our financial statements in the current quarter, we will continue to assess their impact on future periods.2021.
Activision Blizzard’s tax years after 2008 remain open to examination by certain major taxing jurisdictions to which we are subject. The Internal Revenue Service is currently examining our federal tax returns for the 2012 through 20162019 tax years. We 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 transfer pricing matters. We anticipate resolving King’s transfer pricing for both pre- and post-acquisition tax years through a collaborative multilateral process with the tax authorities in the relevant jurisdictions, which include the U.K. and Sweden. While the outcome of this process remains uncertain, it could result in an agreement that changes the allocation of profits and losses between these and other relevant jurisdictions or a failure to reach an agreement that results in unilateral adjustments to the amount and timing of taxable income in the jurisdictions in which King operates.
In December 2018, we received a decision from the Swedish Tax Agency (“STA”) informing us of an audit assessment of a Swedish subsidiary of King for the 2016 tax year (“Initial Decision”). The Initial Decision described the basis for issuing a transfer pricing assessment of approximately 3.5kr billion (approximately $386 million), primarily concerning an alleged intercompany asset transfer. On June 17, 2019, we received a reassessment from the STA (the “Reassessment”) which changed the Initial Decision based on a revision of the transfer pricing approach reflected in King’s 2016 Swedish tax return and removal of the alleged intercompany asset transfer that was the basis of the Initial Decision. The STA also, at the same time, reassessed the 2017 tax year on the same transfer pricing basis as 2016. The transfer pricing approach reflected in the Reassessment for both 2016 and 2017 remains subject to further review by taxing authorities in other jurisdictions. In July 2019, the Company made a payment to the STA for the Reassessment for the 2016 and 2017 tax years, which did not result in a significant impact to our condensed consolidated financial statements.
In December 2017, we received a Notice of Reassessment from the French Tax Authority (“FTA”) related to transfer pricing for intercompany transactions involving one of our French subsidiaries for the 2011 through 2013 tax years. The total assessment, including penalties and interest, was approximately €571 million (approximately $666 million). In December 2019, the Company reached a settlement with the FTA for the 2011 through 2018 tax years, resulting in the recognition of $54 million of tax expense in the period ended December 31, 2019, and a tax payment of €161 million (approximately $188 million), including interest and penalties, in January 2020.
In addition, certain of our subsidiaries are under examination or investigation, or may be subject to examination or investigation, by tax authorities in various jurisdictions. These proceedings may lead to adjustments or proposed adjustments to our taxes or provisions for uncertain tax positions. Such proceedings may have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations in the earlier of the period or periods in which the matters are resolved and in which appropriate tax provisions are taken into account in our financial statements. If we were to receive a materially adverse assessment from a taxing jurisdiction, we would plan to vigorously contest it and consider all of our options, including the pursuit of judicial remedies.
We regularly assess the likelihood of adverse outcomes resulting from these examinations and monitor the progress of ongoing discussions with tax authorities in determining the appropriateness of our tax provisions. The final resolution of the Company’s global tax disputes is uncertain. There is significant judgment required in the analysis of disputes, including the probability determination and estimation of the potential exposure. Based on current information, in the opinion of the Company’s management, the ultimate resolution of these matters is not expected to have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations, except as noted above.operations.
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, | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2021 | | 2020 | |
Numerator: | Numerator: | | | | | | | | Numerator: | | | | | | | | | |
Consolidated net income | Consolidated net income | $ | 604 | | | $ | 204 | | | $ | 1,688 | | | $ | 978 | | Consolidated net income | | $ | 639 | | | $ | 604 | | | $ | 2,135 | | | $ | 1,688 | | |
| | Denominator: | Denominator: | | | | | | | | Denominator: | | |
Denominator for basic earnings per common share—weighted-average common shares outstanding | Denominator for basic earnings per common share—weighted-average common shares outstanding | 772 | | | 767 | | | 771 | | | 766 | | Denominator for basic earnings per common share—weighted-average common shares outstanding | | 778 | | | 772 | | | 777 | | | 771 | | |
Effect of potential dilutive common shares under the treasury stock method—employee stock options and awards | 7 | | | 4 | | | 6 | | | 4 | | |
Denominator for basic earnings per common share—weighted-average dilutive common shares outstanding | 779 | | | 771 | | | 777 | | | 770 | | |
Effect of dilutive stock options and awards under the treasury stock method | | Effect of dilutive stock options and awards under the treasury stock method | | 5 | | | 7 | | | 7 | | | 6 | | |
Denominator for diluted earnings per common share—weighted-average common shares outstanding plus dilutive common shares under the treasury stock method | | Denominator for diluted earnings per common share—weighted-average common shares outstanding plus dilutive common shares under the treasury stock method | | 783 | | | 779 | | | 784 | | | 777 | | |
| Basic earnings per common share | Basic earnings per common share | $ | 0.78 | | | $ | 0.27 | | | $ | 2.19 | | | $ | 1.28 | | Basic earnings per common share | | $ | 0.82 | | | $ | 0.78 | | | $ | 2.75 | | | $ | 2.19 | | |
Diluted earnings per common share | Diluted earnings per common share | $ | 0.78 | | | $ | 0.26 | | | $ | 2.17 | | | $ | 1.27 | | 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 is 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. Additionally, potential common shares are not included in the denominator of the diluted earnings per common share calculation when the inclusion of such shares would be anti-dilutive.
Weighted-average shares excluded from the computation of diluted earnings per share were as follows (amounts in millions):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 | |
Restricted stock units and options with performance measures not yet met | 3 | | | 4 | | | 2 | | | 3 | | |
Restricted stock units with performance measures not yet met | | Restricted stock units with performance measures not yet met | | 3 | | | 3 | | | 3 | | | 2 | | |
Anti-dilutive employee stock options | Anti-dilutive employee stock options | 0 | | | 6 | | | 1 | | | 6 | | Anti-dilutive employee stock options | | 2 | | | — | | | 2 | | | 1 | | |
15.16. Capital Transactions
Repurchase ProgramPrograms
On January 31, 2019,27, 2021, our Board of Directors authorized a stock repurchase program under which we are authorized to repurchase up to $1.5$4 billion of our common stock during the two-year period from February 14, 2019,2021 until the earlier of February 13, 2021,2023 and a determination by the Board of Directors to discontinue the repurchase program. As of September 30, 2020,2021, we have 0thad not repurchased any shares under this program.
Dividends
On February 4, 2021, our Board of Directors declared a cash dividend of $0.47 per common share. On May 6, 2021, we made an aggregate cash dividend payment of $365 million to shareholders of record at the close of business on April 15, 2021.
On February 6, 2020, our Board of Directors declared a cash dividend of $0.41 per common share. On May 6, 2020, we made an aggregate cash dividend payment of $316 million to shareholders of record at the close of business on April 15, 2020.
On February 12, 2019, our Board of Directors declared a cash dividend of $0.37 per common share. On May 9, 2019, we made an aggregate cash dividend payment of $283 million to shareholders of record at the close of business on March 28, 2019.
17. Commitments and Contingencies
16.Commitments and Contingencies
Legal Proceedings
We are party to routine claims, suits, investigations, audits, and other proceedings arising from the ordinary course of business, including with respect to intellectual property rights, contractual claims, labor and employment matters, regulatory matters, tax matters, unclaimed property matters, compliance matters, and collection matters. In the opinion of management, after consultation with legal counsel, such routine claims and lawsuits are not significant, and we do not expect them to have a material adverse effect on our business, financial condition, results of operations, or liquidity. 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.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Activision Blizzard, Inc. is a leading global developer and publisher of interactive entertainment content and services. We develop and distribute content and services on video game consoles, personal computers (“PC”s)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. In connection with the 2008 business combination by and among the Company (then known as Activision, Inc.), Vivendi S.A, and Vivendi Games, Inc., pursuant to which we acquired Blizzard Entertainment, Inc. (“Blizzard”), we were renamed Activision Blizzard, Inc. On February 23, 2016, we acquired King Digital Entertainment plc ("King") by purchasing all of its outstanding shares.
Our Segments
Based 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 for the console platform.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 by licensing software to third-party or related-party companies that distribute Activision products. Activision develops, markets, and sells products primarily based on our internally developed intellectual properties. Activision also includes the activities of the Call of Duty LeagueTM, a global professional esports league with city-based teams.
Activision’s key product franchise is Call of Duty®, a first-person action title forfranchise. Activision also includes the console, PC, and mobile platforms.activities of the Call of Duty League™, a 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 for the PC platform. 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 assubscriptions, and by licensing software to third-party or related-party companies that distribute Blizzard products. Blizzard also maintains a proprietary online gaming service, Blizzard Battle.net®, which facilitates digital distribution of Blizzard content and selected Activision content, online social connectivity, and the creation of user-generated content. Blizzard also includes the activities of the Overwatch LeagueTM, a global professional esports league with city-based teams.
Blizzard’s key product franchises include: World of Warcraft®, a subscription-based massive multi-player online role-playing game for the PC platform; Diablo®, an action role-playing franchise for the PC and console platforms;franchise; Hearthstone®, an online collectible card franchise forbased in the PC and mobile platforms;Warcraft® universe; Diablo®, an action role-playing franchise; and Overwatch®, a team-based first-person action title forfranchise. 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, particularly forin-game advertising on the mobile platform. King also distributes its content and services on the PC platform, primarily via Facebook. King’s games are free to play; however, players can acquire in-game items, either with virtual currency or real currency, and we continue to focus on in-game advertising as a growing source of revenue.
King’s key product franchise is Candy CrushTMCrush™, which featuresa “match three” games for the mobile and PC platforms.franchise.
Other
We also engage in other businesses that do not represent reportable segments, including the Activision Blizzard Distribution (“Distribution”) business, which consists of operations in Europe that provide warehousing, logistics, and sales distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.
Impacts of the Global COVID-19 Pandemic
In December 2019, a novel strain of coronavirus (“COVID-19”) emerged and has since extensively impacted global health and the economic environment. On February 28,March 11, 2020, the World Health Organization (“WHO”) raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. In an effort to contain the spread of COVID-19, domestic and international governments around the world enacted various measures, including orders to close all businesses not deemed “essential,” quarantine orders for individuals to stay in their homes or places of residence, and to practice social distancing when engaging in essential activities.
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 anticipate thathave, however, seen a moderation in these actionstrends 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 globalcurrent 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 crisisand 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 by COVID-19 will continueminimal disruption to negatively impact many business activitiesour game titles’ published release dates. Please see “Management’s Overview of Business Trends” section included in Part II, Item 2 “Management’s Discussion and financial markets across the globe.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, orand stock price will depend on numerous evolving factors that we are not able to fully predict at this time. However, we believe that given our strong balance sheet, with cash and cash equivalents and short-term investments of $7.6 billion as of September 30, 2020, and the fact that our business has increasingly shifted to digital channels, we have substantial flexibility as we navigate through the uncertain environment and near-term implications of the COVID-19 pandemic.
During the COVID-19 pandemic, our business has experienced an increase in demand for certain of our products and services as a result of the stay-at-home orders enacted in various regions as players have more time, to engage with our games. These trends contributed to strong full game and in-game content sales for Call of Duty: Modern Warfare®, which also benefited from the launch of Call of Duty: WarzoneTM in March. In addition, we saw further demand for World of Warcraft, including its in-game content, which also continued to benefit from the release of World of Warcraft Classic in August 2019. Beginning in the month of March, our business also experienced an increase in monthly active users for certain franchises. We have, however, seen a moderation in these trends since the stay-at-home orders were originally enacted earlier in the year.
As a result of the COVID-19 pandemic and stay-at-home orders enacted in various regions, both the Overwatch League and the Call of Duty League pivoted all matches from their originally planned local homestand formats to online play and remote production for the remainder of the regular and postseason in order to keep players and fans safe while still delivering premium esports content to a global audience. Additionally, to support our Overwatch League and Call of Duty League team owners and ecosystems amid a challenging environment, which includes losing the ability to have live fan-attended home venue events, we have taken certain actions to support their short-term cash flow needs, adjusted our league operations to reduce operating costs and improve franchise terms, and made certain investments which have impacted our operating results in the third quarter of 2020. This impact was primarily in the Blizzard segment.
The sustainability of these trends and long-term implications to our business is dependent on future developments, including the duration and spread of the COVID-19 pandemic and associated macroeconomic impacts including labor shortages and supply chain disruption, the related lengthspeed and effectiveness of itsregional and worldwide containment and vaccination efforts including vaccine mandates, and the impact on the global economy, which are uncertainof these and cannot be predicted at this time. See Item 1A “Risk Factors” within Part II of this Quarterly Report on Form 10-Q for additional details on risks and uncertainties regarding the impacts of the global COVID-19 pandemicother factors on our business, reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity,employees, customers, and stock price.
In an effort to protect the health and safety of our employees, the majority of our workforce is currently working from home and we have placed restrictions on non-essential business travel. We have implemented business continuity plans and have increased support and resources to enable our employees to work remotely and, thus far, our business has been able to operate with minimal disruption to our game titles’ published release dates. The global COVID-19 pandemic remains a rapidly evolving situation.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. It is not clear what effects any such potential actions may have
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, including the effects on our employees, players and consumers, customers, partners, game development and content pipelines, or on our reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, orand 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.
Business Results and Highlights
Financial Results
For the three months ended September 30, 2020:2021:
•consolidated net revenues increased 52%6% to $1.95$2.1 billion whileand consolidated operating income increased 215%6% to $778$824 million, as compared to consolidated net revenues of $1.28$2.0 billion and consolidated operating income of $247$778 million for the three months ended September 30, 2019;
•revenues from digital online channels were $1.75 billion, or 90% of consolidated net revenues, as compared to $1.01 billion, or 79% of consolidated net revenues, for the three months ended September 30, 2019;
•operating margin was 39.8%, which includes $9 million in restructuring and related costs, as compared to 19.3%, for the three months ended September 30, 2019, which included $28 million in restructuring and related costs;
•consolidated net income increased 196% to $604 million, as compared to $204 million for the three months ended September 30, 2019;2020; and
•diluted earnings per common share increased 200%5% to $0.78,$0.82, as compared to $0.26$0.78 for the three months ended September 30, 2019.2020.
For the nine months ended September 30, 2020:2021:
•consolidated net revenues increased 26%17% to $5.67$6.6 billion whileand consolidated operating income increased 86%21% to $2.14$2.6 billion, as compared to consolidated net revenues of $4.50$5.7 billion and consolidated operating income of $1.15$2.1 billion for the nine months ended September 30, 2019;
•revenues from digital online channels were $4.78 billion, or 84% of consolidated net revenues, as compared to $3.49 billion, or 78% of consolidated net revenues, for the nine months ended September 30, 2019;
•operating margin was 37.7%, which includes $39 million in restructuring and related costs, as compared to 25.6%, for the nine months ended September 30, 2019, which included $108 million in restructuring and related costs;
•consolidated net income increased 73% to $1.69 billion, as compared to $978 million for the nine months ended September 30, 2019;2020;
•diluted earnings per common share increased 71%25% to $2.17,$2.72, as compared to $1.27 for the nine months ended September 30, 2019;$2.17 in 2020; and
•cash flows from operating activities were $1.11approximately $1.8 billion, an increase of 22%58%, as compared to $913 million for the nine months ended September 30, 2019.$1.1 billion in 2020.
Since certain of our games are hosted online or include significant online functionality that represents a separate performance obligation, we defer the transaction price allocable to the online functionality from the sale of these games and 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, 2020,2021, include a net effect of $187$190 million and $150$154 million, respectively, from the recognition of deferred net revenues and related cost of revenues. Net revenues and operating income for the nine months ended September 30, 2020,2021, include a net effect of $306$773 million and $169$562 million, respectively, from the recognition of deferred net revenues and related cost of revenues.
Additionally, for the three months ended September 30, 2020 and 2019, 12% and 14%, respectively, of totalour consolidated net revenues that are recognized were from revenue sources that were recognized at a “point-in-time,” while “over-time and other” revenues were the remaining 88% and 86%, respectively, of total net revenues. For the nine months ended September 30, 2020 and 2019, 12% and 13%, respectively, of total net revenues recognized were from revenue sources that were recognized at a “point-in-time,” while “over-time and other” revenues were the remaining 88% and 87%, respectively, of total net revenues. Revenuesare 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, |
| 2021 | | 2020 | | 2021 | | 2020 |
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. “Over-time
(2) Revenue recognized “over-time and other revenues” arerevenue” is primarily comprised of revenue associated with the online functionality of our games, in-game purchases, and subscriptions.
Content Release and Event Highlights
Games and other major content releases during the three months ended September 30, 2020, include Activision’s Tony Hawk’sTM Pro SkaterTM 1 and 2, a remaster of the first two titles in the Tony Hawk video game franchise.
Operating Metrics
The following operating metrics are key performance indicators that we use to evaluate our business. The key drivers of changes in our operating metrics are presented in the order of significance.
Net bookings and In-gamein-game net bookings
We monitor net bookings and in-game net bookings as a key operating metricmetrics in evaluating the performance of our business because it enablesthey enable an analysis of performance based on the timing of actual transactions with our customers and providesprovide a more timely indicationsindication 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 and microtransactions sold during the period and is equal to in-game net revenues excluding the impact from deferrals.
Net bookings and in-game net bookings were as follows (amounts in millions):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2020 | | 2019 | | Increase (Decrease) | | 2020 | | 2019 | | Increase (Decrease) | | 2021 | | 2020 | | Increase (Decrease) | | 2021 | | 2020 | | Increase (Decrease) | |
Net bookings | Net bookings | $ | 1,767 | | | $ | 1,214 | | | $ | 553 | | | $ | 5,368 | | | $ | 3,679 | | | $ | 1,689 | | Net bookings | $ | 1,880 | | | $ | 1,767 | | | $ | 113 | | | $ | 5,867 | | | $ | 5,368 | | | $ | 499 | | |
| In-game net bookings | In-game net bookings | $ | 1,200 | | | $ | 709 | | | $ | 491 | | | $ | 3,529 | | | $ | 2,281 | | | $ | 1,248 | | In-game net bookings | $ | 1,198 | | | $ | 1,200 | | | $ | (2) | | | $ | 3,859 | | | $ | 3,529 | | | $ | 330 | | |
|
Q3 2021 vs. Q3 2020
Net bookings
Q3 2020 vs. Q3 2019
The increase in net bookings for the three months ended September 30, 2020,2021, as compared to the three months ended September 30, 2019,2020, was primarily due to:
•a $564$116 million increase in ActivisionKing 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: Black Ops Cold War (which was released in November 2020, and when referred to herein, is inclusive of Call of Duty: Warzone™ 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: Warzonefrom its release in March 2020 through December 16, 2020), and (2) Tony Hawk’s™ Pro Skater™ 1 + 2,which was released in March 2020)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: Black Ops 4,which was released in October 2018, (2) Call of Duty: MobileModern Warfare, which was released in October 2019, and (3) Tony Hawk’s Pro Skater 1 and 2, which was released in September 2020; and
•largely offset by a $17$75 million increase in BlizzardKing in-game net bookings, driven by higher net bookings from World of Warcraft,primarily from higher in-game and subscription net bookings, partially offset by lower net bookings from the Overwatch League.Candy Crush franchise.
YTD Q3 20202021 vs. YTD Q3 20192020
Net bookings
The increase in net bookings for the nine months ended September 30, 2020,2021, as compared to the nine months ended September 30, 2019,2020, was primarily due to:
•a $1.49 billion$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
•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, and (3) the Call of Duty franchise catalog titles,which was released in October 2019, partially offset by lower net bookings from SekiroTM: Shadows Die TwiceCall of Duty: Black Ops Cold War, as compared to which was released in March 2019; and
•a $204 million increase in Blizzard net bookings, driven by higher net bookings from WorldCall of Warcraft,primarily from higher subscription and in-game net bookings.Duty: Modern Warfare.
In-game net bookings
Q3 2020 vs. Q3 2019
The increase in in-game net bookings for the threenine months ended September 30, 2020,2021, as compared to the threenine months ended September 30, 2019,2020, was primarily due to:
•a $432$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, as compared to Call of Duty: Black Ops 4, and (2)partially offset by lower in-game net bookings from Call of Duty: MobileBlack Ops Cold War; and
•, as compared to a $40 million increase in Blizzard in-game net bookings, driven by WorldCall of WarcraftDuty: Modern Warfare.
YTD Q3 2020 vs. YTD Q3 2019
The increase in in-game net bookings for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was primarily due to a $1.15 billion increase in Activision in-game net bookings and an $88 million increase in Blizzard in-game net bookings, driven by the same factors as noted for the three-month period above.
Monthly Active Users
We monitor monthly active users (“MAUs”) as a key measure of the overall size of our user base. MAUs are the number of individuals who accessed a particular game in a given month. We calculate average MAUs in a period by adding the total number of MAUs in each of the months in a given period and dividing that total by the number of months in the period. An individual who accesses two of our games would be counted as two users. In addition, due to technical limitations, for Activision and King, an individual who accesses the same game on two platforms or devices in the relevant period would be counted as two users. For Blizzard, an individual who accesses the same game on two platforms or devices in the relevant period would generally be counted as a single user. In certain instances, we rely on third parties to publish our games. In these instances, MAU data is based on information provided to us by those third parties or, if final data is not available, reasonable estimates of MAUs for these third-party published games.
The number of MAUs for a given period can be significantly impacted by the timing of new content releases, since new releases may cause a temporary surge in MAUs. Accordingly, although we believe that overall 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, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | | September 30, 2021 | | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | |
Activision | Activision | 111 | | | 125 | | | 102 | | | 128 | | | 36 | | | Activision | 119 | | | 127 | | | 150 | | | 128 | | | 111 | | |
Blizzard | Blizzard | 30 | | | 32 | | | 32 | | | 32 | | | 33 | | | Blizzard | 26 | | | 26 | | | 27 | | | 29 | | | 30 | | |
King | King | 249 | | | 271 | | | 273 | | | 249 | | | 247 | | | King | 245 | | | 255 | | | 258 | | | 240 | | | 249 | | |
Total | Total | 390 | | | 428 | | | 407 | | | 409 | | | 316 | | | Total | 390 | | | 408 | | | 435 | | | 397 | | | 390 | | |
Average MAUs decreased by 3818 million, or 9%4%, for the three months ended September 30, 2021, as compared to the three months ended June 30, 2021. The decrease was primarily due to (1) lower average MAUs for King, primarily driven by Crash Bandicoot: On the Run!™, which was released in March 2021, and (2) lower average MAUs for Activision, primarily driven by the Call of Duty franchise.
Average MAUs for the three months ended September 30, 2021 are comparable to those for the three months ended September 30, 2020, as compared to the three months ended June 30, 2020, primarily due to:
•a decrease in average MAUs for King, driven by a decrease in average MAUs for the Candy Crush franchise; and
•a decreaseincrease in average MAUs for Activision, driven by a decrease in average MAUs for Call of Duty: Modern Warfare, which was released in October 2019.
Average MAUs increased by 74 million, or 23%, for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, primarily due to:
•an increase in Activision’s average MAUs, driven by an increase in average MAUs for Call of Duty: Mobile, which launched due to the December 2020 launch in October 2019, and Call of Duty: Modern Warfare, which benefited from the launch of Call of Duty: Warzone in March 2020; and
•a slight increase in King’s average MAUs drivenChina, was largely offset by an increase inlower average MAUs for the Candy Crush franchise, partially offsetBlizzard and King driven by decreases in various other franchises.franchises and titles.
Management’s Overview of Business Trends
Interactive EntertainmentManagement’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 grew, on average, 13% annually from 2016trends to 2019. The industry continues to benefit from additional players entering the market as interactive entertainment becomes more commonplace across age groups and as more developing regions gain access to this form of entertainment.
Further, wide adoption of smartphones globally and the free-to-play business model on those platforms has increased the total addressable audience for gaming significantly by introducing gaming to new age groups and new regions and allowing gaming to occur more widely outside the home. Mobile gaming is estimated to be larger than console and PC gaming, and continues to grow at a significant rate. King is a leading developer of mobile and free-to-play games, and our other business units have mobile efforts underway that present the opportunity for us to expand the reach of, and drive additional player investmentpreviously disclosed in our franchises. The October 2019 launch of Call of Duty: Mobile is an example of these efforts.2020 Form 10-K, except as set forth below.
Concentration of Sales Among the Most Popular FranchisesIncreased Competition for Talent
The concentration of retail revenues among key titles hasWe believe that our continued as a trendsuccess and growth is directly related to our ability to attract, retain, and develop top talent. We have seen increased competition in the overall interactive entertainment industry. Accordingmarket for talent and expect the competitive environment to The NPD Group, the top 10 titles accounted for 33% of the retail salescontinue at least in the U.S. interactive entertainment industryshort term. We have experienced challenges in 2019. Similarly, a significant portionboth the retention of our revenues historically has been derived from video games based on a few popular franchises,existing talent and these video games have also been responsible for a disproportionately high percentageattraction 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 profits. For example,company. This competition, voluntary turnover and recruiting difficulty, has negatively impacted our ability to deliver future game releases, and if they persist, could continue to negatively impact our ability to deliver content in 2019, the Call of Duty, Candy Crush, and World of Warcraft franchises, collectively, accounteda cadence that will be optimal for 67% of our consolidated net revenues—and a significantly higher percentage of our operating income.business.
Updates to Upcoming Content Releases
In addition to investing in, and developing sequels and contentWe are now planning for a later launch for our topOverwatch 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 set the franchises withup for success over a multi-year period. As a result, we will not have the aim of releasing content more frequently,financial uplift that we are continually exploring additional ways to expand those franchises, such as our March 2020had expected next year from the release of Activision’s Call of Duty: Warzone, a free-to-play experience fromthese two titles. Additionally, as previously announced, Blizzard’s mobile title based on the world of Call of Duty:Modern Warfarefor the console and PC platforms. We also have been focusing on expanding our franchises to the mobile platform, as demonstrated by the release of Call of Duty: Mobile in the fourth quarter of 2019, as well as our plans forDiablo franchise, Diablo ImmortalTM and recently announced Crash Bandicoot: On the Run!™Immortal™, which are both currently in development.
Overall, we do expect that a limited number of popular franchises will continuewas anticipated to produce a disproportionately high percentage of our, and the industry’s, revenues and profitsrelease in the near future. Accordingly, our abilitysecond half of 2021, is anticipated to maintain our top franchises and our abilityrelease in 2022 as game testing revealed additional opportunities the team is going to successfully compete against our competitors’ top franchises can significantly impact our performance.
pursue which are expected to make the title more engaging for a wider audience.
Consolidated Statements of Operations Data
The following table sets forth condensed consolidated statements of operations data for the periods indicated (amounts in millions) and as a percentage of total net revenues, except for cost of revenues, which are presented as a percentage of associated revenues:
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 | |
Net revenues | Net revenues | | | | | | | | Net revenues | | | | | | | | |
Product sales | Product sales | $ | 408 | | 21 | % | | $ | 260 | | 20 | % | | $ | 1,484 | | 26 | % | | $ | 1,276 | | 28 | % | Product sales | $ | 423 | | | 20 | % | | $ | 408 | | | 21 | % | | $ | 1,666 | | | 25 | % | | $ | 1,484 | | | 26 | % | |
Subscription, licensing, and other revenues | 1,546 | | 79 | | | 1,022 | | 80 | | | 4,190 | | 74 | | | 3,227 | | 72 | | |
In-game, subscription, and other revenues | | In-game, subscription, and other revenues | 1,647 | | | 80 | | | 1,546 | | | 79 | | | 4,974 | | | 75 | | | 4,190 | | | 74 | | |
Total net revenues | Total net revenues | 1,954 | | 100 | | | 1,282 | | 100 | | | 5,674 | | 100 | | | 4,503 | | 100 | | Total net revenues | 2,070 | | | 100 | | | 1,954 | | | 100 | | | 6,640 | | | 100 | | | 5,674 | | | 100 | | |
| Costs and expenses | Costs and expenses | | | | | | | | Costs and expenses | | |
Cost of revenues—product sales: | Cost of revenues—product sales: | | Cost of revenues—product sales: | | |
Product costs | Product costs | 101 | | 25 | | | 137 | | 53 | | | 357 | | 24 | | | 388 | | 30 | | Product costs | 120 | | | 28 | | | 101 | | | 25 | | | 375 | | | 23 | | | 357 | | | 24 | | |
Software royalties, amortization, and intellectual property licenses | Software royalties, amortization, and intellectual property licenses | 37 | | 9 | | | 9 | | 3 | | | 152 | | 10 | | | 171 | | 13 | | Software royalties, amortization, and intellectual property licenses | 72 | | | 17 | | | 37 | | | 9 | | | 272 | | | 16 | | | 152 | | | 10 | | |
Cost of revenues—subscription, licensing, and other revenues: | | |
Cost of revenues—in-game, subscription, and other: | | Cost of revenues—in-game, subscription, and other: | | |
Game operations and distribution costs | Game operations and distribution costs | 290 | | 19 | | | 246 | | 24 | | | 819 | | 20 | | | 714 | | 22 | | Game operations and distribution costs | 307 | | | 19 | | | 290 | | | 19 | | | 925 | | | 19 | | | 819 | | | 20 | | |
Software royalties, amortization, and intellectual property licenses | Software royalties, amortization, and intellectual property licenses | 41 | | 3 | | | 50 | | 5 | | | 115 | | 3 | | | 164 | | 5 | | Software royalties, amortization, and intellectual property licenses | 28 | | | 2 | | | 41 | | | 3 | | | 87 | | | 2 | | | 115 | | | 3 | | |
Product development | Product development | 274 | | 14 | | | 210 | | 16 | | | 802 | | 14 | | | 702 | | 16 | | Product development | 329 | | | 16 | | | 274 | | | 14 | | | 1,016 | | | 15 | | | 802 | | | 14 | | |
Sales and marketing | Sales and marketing | 238 | | 12 | | | 182 | | 14 | | | 722 | | 13 | | | 580 | | 13 | | Sales and marketing | 244 | | | 12 | | | 238 | | | 12 | | | 727 | | | 11 | | | 722 | | | 13 | | |
General and administrative | General and administrative | 186 | | 10 | | | 177 | | 14 | | | 529 | | 9 | | | 527 | | 12 | | General and administrative | 143 | | | 7 | | | 186 | | | 10 | | | 614 | | | 9 | | | 529 | | | 9 | | |
Restructuring and related costs | Restructuring and related costs | 9 | | — | | | 24 | | 2 | | | 39 | | 1 | | | 104 | | 2 | | Restructuring and related costs | 3 | | | — | | | 9 | | | — | | | 46 | | | 1 | | | 39 | | | 1 | | |
Total costs and expenses | Total costs and expenses | 1,176 | | 60 | | | 1,035 | | 81 | | | 3,535 | | 62 | | | 3,350 | | 74 | | Total costs and expenses | 1,246 | | | 60 | | | 1,176 | | | 60 | | | 4,062 | | | 61 | | | 3,535 | | | 62 | | |
| Operating income | Operating income | 778 | | 40 | | | 247 | | 19 | | | 2,139 | | 38 | | | 1,153 | | 26 | | Operating income | 824 | | | 40 | | | 778 | | | 40 | | | 2,578 | | | 39 | | | 2,139 | | | 38 | | |
Interest and other expense (income), net | Interest and other expense (income), net | 25 | | 1 | | | (2) | | — | | | 55 | | 1 | | | (33) | | (1) | | Interest and other expense (income), net | 65 | | | 3 | | | 25 | | | 1 | | | 52 | | | 1 | | | 55 | | | 1 | | |
Loss on extinguishment of debt (1) | Loss on extinguishment of debt (1) | 31 | | 2 | | | — | | — | | | 31 | | 1 | | | — | | — | | Loss on extinguishment of debt (1) | — | | | — | | | 31 | | | 2 | | | — | | | — | | | 31 | | | 1 | | |
Income before income tax expense | Income before income tax expense | 722 | | 37 | | | 249 | | 19 | | | 2,053 | | 36 | | | 1,186 | | 26 | | Income before income tax expense | 759 | | | 37 | | | 722 | | | 37 | | | 2,526 | | | 38 | | | 2,053 | | | 36 | | |
Income tax expense | Income tax expense | 118 | | 6 | | | 45 | | 4 | | | 365 | | 6 | | | 208 | | 5 | | Income tax expense | 120 | | | 6 | | | 118 | | | 6 | | | 391 | | | 6 | | | 365 | | | 6 | | |
Net income | Net income | $ | 604 | | 31 | % | | $ | 204 | | 16 | % | | $ | 1,688 | | 30 | % | | $ | 978 | | 22 | % | Net income | $ | 639 | | | 31 | % | | $ | 604 | | | 31 | % | | $ | 2,135 | | | 32 | % | | $ | 1,688 | | | 30 | % | |
(1) Represents the loss on extinguishment of debt we recognized in connection with our debt financing activities during the three months ended September 30, 2020. Refer to Note 8 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for further disclosures regarding our debt obligations.
Consolidated Net Revenues
The key drivers of changes in our consolidated net revenues,results, operating segment results, consolidated 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 and increase (decrease) in deferred net revenues recognized (amounts in millions):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2020 | | 2019 | | Increase (Decrease) | | % Change | | 2020 | | 2019 | | Increase (Decrease) | | % Change | | 2021 | | 2020 | | Increase (Decrease) | | % Change | | 2021 | | 2020 | | Increase (Decrease) | | % Change | |
Consolidated net revenues | Consolidated net revenues | $ | 1,954 | | | $ | 1,282 | | | $ | 672 | | | 52 | % | | $ | 5,674 | | | $ | 4,503 | | | $ | 1,171 | | | 26 | % | Consolidated net revenues | $ | 2,070 | | | $ | 1,954 | | | $ | 116 | | | 6 | % | | $ | 6,640 | | | $ | 5,674 | | | $ | 966 | | | 17 | % | |
Net effect from recognition (deferral) of deferred net revenues | 187 | | | 68 | | | 119 | | | 306 | | | 824 | | | (518) | | | |
| In-game net revenues (1) | In-game net revenues (1) | 1,283 | | | 734 | | | 549 | | | 75 | % | | 3,331 | | | 2,479 | | | 852 | | | 34 | % | 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 net amount of revenuerevenues recognized for microtransactions and downloadable content and microtransactions during the period.
Consolidated Net RevenuesQ3 2021 vs. Q3 2020
Q3 2020 vs. Q3 2019Consolidated net revenues
The increase in consolidated net revenues for the three months ended September 30, 2020,2021, as compared to the three months ended September 30, 2019,2020, was primarily driven by an increase in revenues of $752$249 million due to higher revenues from:
•in-game player purchases and advertising in the Candy 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 4, which was released in October 2018;2018.
This increase was partially offset by a decrease in revenues of $203 million due to lower revenues from:
•Call of Duty: Black Ops Cold War, which was released in November 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 three 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;2019.
•This increase was offset by a decrease in in-game net revenues of $97 million due to lower in-game net revenues from Tony Hawk’s Pro Skater 1 and 2Call of Duty: Black Ops Cold War, which was released in September 2020;as compared to Call of Duty: Modern Warfare.
•WorldThe remaining net increase in in-game net revenues of Warcraft, primarily from higher revenues associated with in-game content and subscriptions; and
•the Call of Duty franchise catalog titles.
This increase$18 million was partially offset by a net decrease of $80 million, driven by various other franchises and titles.
YTD Q3 20202021 vs. YTD Q3 20192020
Consolidated net revenues
The increase in consolidated net revenues for the nine months ended September 30, 2020,2021, as compared to the nine months ended September 30, 2019,2020, was primarily driven by an increase in revenues of $1.23$1.1 billion due to higher revenues from:
•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4;
•Call of Duty: Mobile;the Candy Crush franchise;
•World of Warcraft, primarily from higher subscription revenues;which includes the release of World of Warcraft: Shadowlands in November 2020 and World of Warcraft: Burning Crusade™ Classic in June 2021; and
•Tony Hawk’s Pro Skater 1 and 2.Call of Duty: Mobile.
ThisThe increase was partially offset by a net decrease in revenues of $102$119 million, due to lower revenues from Sekiro: Shadows Die Twice,which was released in March 2019.
The remaining net increase of $44 million was driven by various other franchises and titles.
Change in Deferred Revenues Recognized
Q3 2020 vs. Q3 2019
The increase inIn-game net deferred revenues recognized for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was driven by an increase of $128 million in net deferred revenues recognized from Activision, primarily due to higher net deferred revenues recognized from Call of Duty: Modern Warfare, which was released in October 2019, as compared to Call of Duty: Black Ops 4, which was released in October 2018.
YTD Q3 2020 vs. YTD Q3 2019
The decrease in net deferred revenues recognized for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was driven by (1) a decrease of $339 million in net deferred revenues recognized from Activision, primarily due to lower net deferred revenues recognized from Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4, and (2) a decrease of $180 million in net deferred revenues recognized from Blizzard, primarily due to lower net deferred revenues recognized from World of Warcraft, as the prior year included the recognition of deferred revenues from the August 2018 release of World of Warcraft: Battle for Azeroth®, with no comparable recognition of deferred revenues in the current period given the lack of a comparable release in 2019.
In-game Net Revenues
Q3 2020 vs. Q3 2019
The increase in in-game net revenues for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily driven by an increase in in-game net revenues of $528 million due to higher in-game revenues from:
•Call of Duty: Modern Warfare, which was released in October 2019, as compared to Call of Duty: Black Ops 4, which was released in October 2018;
•Call of Duty: Mobile,which was released in October 2019;
•World of Warcraft; and
•the Call of Duty franchise catalog titles.
The remaining net increase of $21 million was driven by various other franchises and titles.
YTD Q3 2020 vs. YTD Q3 2019
The increase in in-game net revenues for the nine months ended September 30, 2020,2021, as compared to the nine months ended September 30, 2019,2020, was primarily driven by an increase in in-game net revenues of $843$830 million due to higher in-game net revenues from:
•Call of Duty: Modern Warfare,, as compared to Call of Duty: Black Ops 4; and
•the Candy Crush franchise;
•Call of Duty: Mobile.; and
•World of Warcraft.
The remainingincrease was partially offset by a net increasedecrease in in-game net revenues of $9$103 million, was driven by various other franchises and titles.
Foreign Exchange Impact
Changes in foreign exchange rates had a positive impact of $37approximately $19 million and $9$181 million on our consolidated net revenues for the three and nine months ended September 30, 2020,2021, respectively, as compared to the same periods in the previous year. The changes are primarily due to changes in the value of the U.S. dollar relative to the euro and the British pound.
Operating Segment Results
We have three reportable segments—Activision, Blizzard, and King. Our operating segments are consistent with the manner in which our operations are reviewed and managed by our Chief Executive Officer, who is our chief operating decision maker (“CODM”). The CODM reviews segment performance exclusive of: the impact of the change in deferred revenues and related cost of revenues with respect to certain of our online-enabled games; share-based compensation expense; amortization of intangible assets as a result of purchase price accounting; fees and other expenses (including legal fees, expenses, and accruals) related to acquisitions, associated integration activities, and financings; certain restructuring and related costs; and certain other non-cash charges. The CODM does not review any information regarding total assets on an operating segment basis, and accordingly, no disclosure is made with respect thereto.
Our operating segments are also consistent with our internal organizational structure, the way we assess operating performance and allocate resources, and the availability of separate financial information. We do not aggregate operating segments.
Information on the reportable segment net revenues and segment operating income for the three and nine months ended September 30, 2020 and 2019, are presented below (amounts in millions):
| | | Three Months Ended September 30, 2020 | | $ Increase / (Decrease) | | For the Three Months Ended September 30, 2021 | | Increase / (decrease) |
| | Activision | | Blizzard | | King | | Total | | Activision | | Blizzard | | King | | Total | | Activision | | Blizzard | | King | | Total | | Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | | | | | | | | | | |
Segment Revenues | | Segment Revenues | | | | | | | | | | | | | | | | |
Net revenues from external customers | Net revenues from external customers | $ | 773 | | | $ | 393 | | | $ | 536 | | | $ | 1,702 | | | $ | 564 | | | $ | 1 | | | $ | 36 | | | $ | 601 | | Net revenues from external customers | | $ | 641 | | | $ | 478 | | | $ | 652 | | | $ | 1,771 | | | $ | (132) | | | $ | 85 | | | $ | 116 | | | $ | 69 | |
Intersegment net revenues (1) | Intersegment net revenues (1) | — | | | 18 | | | — | | | 18 | | | — | | | 16 | | | — | | | 16 | | Intersegment net revenues (1) | | — | | | 15 | | | — | | | 15 | | | — | | | (3) | | | — | | | (3) | |
Segment net revenues | Segment net revenues | $ | 773 | | | $ | 411 | | | $ | 536 | | | $ | 1,720 | | | $ | 564 | | | $ | 17 | | | $ | 36 | | | $ | 617 | | Segment net revenues | | $ | 641 | | | $ | 493 | | | $ | 652 | | | $ | 1,786 | | | $ | (132) | | | $ | 82 | | | $ | 116 | | | $ | 66 | |
| Segment operating income | Segment operating income | $ | 345 | | | $ | 133 | | | $ | 248 | | | $ | 726 | | | $ | 319 | | | $ | 59 | | | $ | 54 | | | $ | 432 | | Segment operating income | | $ | 244 | | | $ | 188 | | | $ | 303 | | | $ | 735 | | | $ | (101) | | | $ | 55 | | | $ | 55 | | | $ | 9 | |
| | | Three Months Ended September 30, 2019 | | | For the Three Months Ended September 30, 2020 | | |
| | Activision | | Blizzard | | King | | Total | | | Activision | | Blizzard | | King | | Total | |
Segment Net Revenues | | | | | | | | | |
Segment Revenues | | Segment Revenues | | | | | | | | | |
Net revenues from external customers | Net revenues from external customers | $ | 209 | | | $ | 392 | | | $ | 500 | | | $ | 1,101 | | | Net revenues from external customers | | $ | 773 | | | $ | 393 | | | $ | 536 | | | $ | 1,702 | | |
Intersegment net revenues (1) | Intersegment net revenues (1) | — | | | 2 | | | — | | | 2 | | | Intersegment net revenues (1) | | — | | | 18 | | | — | | | 18 | | |
Segment net revenues | Segment net revenues | $ | 209 | | | $ | 394 | | | $ | 500 | | | $ | 1,103 | | | Segment net revenues | | $ | 773 | | | $ | 411 | | | $ | 536 | | | $ | 1,720 | | |
| Segment operating income | Segment operating income | $ | 26 | | | $ | 74 | | | $ | 194 | | | $ | 294 | | | Segment operating income | | $ | 345 | | | $ | 133 | | | $ | 248 | | | $ | 726 | | |
| | |
| | | Nine Months Ended September 30, 2020 | | Increase / (Decrease) | | For the Nine Months Ended September 30, 2021 | | Increase / (decrease) |
| | Activision | | Blizzard | | King | | Total | | Activision | | Blizzard | | King | | Total | | Activision | | Blizzard | | King | | Total | | Activision | | Blizzard | | King | | Total |
Segment Net Revenues | | | | | | | | | | | | | | | | |
Segment Revenues | | Segment Revenues | | | | | | | | | | | | | | | | |
Net revenues from external customers | Net revenues from external customers | $ | 2,285 | | | $ | 1,264 | | | $ | 1,587 | | | $ | 5,136 | | | $ | 1,491 | | | $ | 151 | | | $ | 60 | | | $ | 1,702 | | Net revenues from external customers | | $ | 2,321 | | | $ | 1,347 | | | $ | 1,896 | | | $ | 5,564 | | | $ | 36 | | | $ | 83 | | | $ | 309 | | | $ | 428 | |
Intersegment net revenues (1) | Intersegment net revenues (1) | — | | | 62 | | | — | | | 62 | | | — | | | 53 | | | — | | | 53 | | Intersegment net revenues (1) | | — | | | 62 | | | — | | | 62 | | | — | | | — | | | — | | | — | |
Segment net revenues | Segment net revenues | $ | 2,285 | | | $ | 1,326 | | | $ | 1,587 | | | $ | 5,198 | | | $ | 1,491 | | | $ | 204 | | | $ | 60 | | | $ | 1,755 | | Segment net revenues | | $ | 2,321 | | | $ | 1,409 | | | $ | 1,896 | | | $ | 5,626 | | | $ | 36 | | | $ | 83 | | | $ | 309 | | | $ | 428 | |
| Segment operating income | Segment operating income | $ | 1,088 | | | $ | 533 | | | $ | 615 | | | $ | 2,236 | | | $ | 935 | | | $ | 329 | | | $ | 72 | | | $ | 1,336 | | Segment operating income | | $ | 1,049 | | | $ | 537 | | | $ | 755 | | | $ | 2,341 | | | $ | (39) | | | $ | 4 | | | $ | 140 | | | $ | 105 | |
| | | Nine Months Ended September 30, 2019 | | | For the Nine Months Ended September 30, 2020 | | |
| | Activision | | Blizzard | | King | | Total | | | Activision | | Blizzard | | King | | Total | |
Segment Net Revenues | | | | | | | | | |
Segment Revenues | | Segment Revenues | | | | | | | | | |
Net revenues from external customers | Net revenues from external customers | $ | 794 | | | $ | 1,113 | | | $ | 1,527 | | | $ | 3,434 | | | Net revenues from external customers | | $ | 2,285 | | | $ | 1,264 | | | $ | 1,587 | | | $ | 5,136 | | |
Intersegment net revenues (1) | Intersegment net revenues (1) | — | | | 9 | | | — | | | 9 | | | Intersegment net revenues (1) | | — | | | 62 | | | — | | | 62 | | |
Segment net revenues | Segment net revenues | $ | 794 | | | $ | 1,122 | | | $ | 1,527 | | | $ | 3,443 | | | Segment net revenues | | $ | 2,285 | | | $ | 1,326 | | | $ | 1,587 | | | $ | 5,198 | | |
| Segment operating income | Segment operating income | $ | 153 | | | $ | 204 | | | $ | 543 | | | $ | 900 | | | Segment operating income | | $ | 1,088 | | | $ | 533 | | | $ | 615 | | | $ | 2,236 | | |
| | |
(1)Intersegment revenues reflect licensing and service fees charged between segments.
Reconciliations of total segment net revenues and total segment operating income to consolidated net revenues and consolidated income before income tax expense are presented in the table below (amounts in millions):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 | |
Reconciliation to consolidated net revenues: | Reconciliation to consolidated net revenues: | | | | | | | | Reconciliation to consolidated net revenues: | | | | | | | | | |
Segment net revenues | Segment net revenues | $ | 1,720 | | | $ | 1,103 | | | $ | 5,198 | | | $ | 3,443 | | Segment net revenues | | $ | 1,786 | | | $ | 1,720 | | | $ | 5,626 | | | $ | 5,198 | | |
Revenues from non-reportable segments (1) | Revenues from non-reportable segments (1) | 65 | | | 113 | | | 232 | | | 245 | | Revenues from non-reportable segments (1) | | 109 | | | 65 | | | 303 | | | 232 | | |
Net effect from recognition (deferral) of deferred net revenues (2) | Net effect from recognition (deferral) of deferred net revenues (2) | 187 | | | 68 | | | 306 | | | 824 | | Net effect from recognition (deferral) of deferred net revenues (2) | | 190 | | | 187 | | | 773 | | | 306 | | |
Elimination of intersegment revenues (3) | Elimination of intersegment revenues (3) | (18) | | | (2) | | | (62) | | | (9) | | Elimination of intersegment revenues (3) | | (15) | | | (18) | | | (62) | | | (62) | | |
Consolidated net revenues | Consolidated net revenues | $ | 1,954 | | | $ | 1,282 | | | $ | 5,674 | | | $ | 4,503 | | Consolidated net revenues | | $ | 2,070 | | | $ | 1,954 | | | $ | 6,640 | | | $ | 5,674 | | |
| Reconciliation to consolidated income before income tax expense: | Reconciliation to consolidated income before income tax expense: | | Reconciliation to consolidated income before income tax expense: | | |
Segment operating income | Segment operating income | $ | 726 | | | $ | 294 | | | $ | 2,236 | | | $ | 900 | | Segment operating income | | $ | 735 | | | $ | 726 | | | $ | 2,341 | | | $ | 2,236 | | |
Operating income (loss) from non-reportable segments (1) | Operating income (loss) from non-reportable segments (1) | (20) | | | 5 | | | (27) | | | 10 | | 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) | Net effect from recognition (deferral) of deferred net revenues and related cost of revenues(2) | 150 | | | 53 | | | 169 | | | 629 | | Net effect from recognition (deferral) of deferred net revenues and related cost of revenues(2) | | 154 | | | 150 | | | 562 | | | 169 | | |
Share-based compensation expense | Share-based compensation expense | (53) | | | (27) | | | (138) | | | (127) | | Share-based compensation expense | | (64) | | | (53) | | | (259) | | | (138) | | |
Amortization of intangible assets | Amortization of intangible assets | (16) | | | (50) | | | (62) | | | (151) | | Amortization of intangible assets | | (2) | | | (16) | | | (8) | | | (62) | | |
| Restructuring and related costs (4) | (9) | | | (28) | | | (39) | | | (108) | | |
Restructuring and related costs (Note 12) | | Restructuring and related costs (Note 12) | | (3) | | | (9) | | | (46) | | | (39) | | |
| Consolidated operating income | Consolidated operating income | 778 | | | 247 | | | 2,139 | | | 1,153 | | Consolidated operating income | | 824 | | | 778 | | | 2,578 | | | 2,139 | | |
Interest and other expense (income), net | Interest and other expense (income), net | 25 | | | (2) | | | 55 | | | (33) | | Interest and other expense (income), net | | 65 | | | 25 | | | 52 | | | 55 | | |
Loss on extinguishment of debt | Loss on extinguishment of debt | 31 | | | — | | | 31 | | | — | | Loss on extinguishment of debt | | — | | | 31 | | | — | | | 31 | | |
Consolidated income before income tax expense | Consolidated income before income tax expense | $ | 722 | | | $ | 249 | | | $ | 2,053 | | | $ | 1,186 | | 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 Distribution business. Also includesbusiness 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.
(4)
Reflects restructuring initiatives, which include severance and other restructuring-related costs.Table of ContentsSegment Results
Segment Net RevenuesQ3 2021 vs. Q3 2020
Activision
Q3 2020 vs. Q3 2019
The increasedecrease in Activision’s segment net revenues and operating income for the three months ended September 30, 2020,2021, as compared to the three months ended September 30, 2019,2020, was primarily due to lower revenues from:
•Call of Duty: Black Ops Cold War, which was released in November 2020, as compared to Call of Duty: Modern Warfare, which was released in October 2019; and
•Tony Hawk’s Pro Skater 1 + 2, which was released in 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,, which was released in October 2019, 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;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:
•Tony Hawk’s Pro Skater 1 and 2Diablo II: Resurrected, , which was released in September 2020; 2021;and
•the CallOverwatch League, as the prior-year period was negatively impacted from actions taken to support team owners as a result of Duty franchise catalog titles.the COVID-19 pandemic, with no similar actions taken in the current year.
TheThis increase to segment net revenues and operating income was partially offset by lower revenues from CrashWorld of WarcraftTM.
In addition, the increase in Blizzard’s segment operating income was partially offset by higher cost of revenues driven by software amortization and royalties for Team Racing Nitro-Fueled, Diablo II: Resurrected.
King
The increase in King’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 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:
•which was released in June 2019.higher sales and marketing costs to support its franchises; and
•higher service provider fees, primarily digital storefront fees, driven by the higher revenues from in-game player purchases.
YTD Q3 20202021 vs. YTD Q3 20192020
Activision
The increase in Activision’s segment net revenues for the nine months ended September 30, 2020,2021, as compared to the nine months ended September 30, 2019,2020, was primarily due to higher 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 offset by lower revenues from Call of Duty: Black Ops Cold War, as compared to Call of Duty: Modern Warfare.
The decrease in Activision’s segment operating income, despite the increase in segment net revenues, was driven by higher product development costs, driven by increased costs to support the Call of Duty franchise. This decrease to segment operating income was partially offset by lower sales and marketing costs for the Call of Duty franchise catalog titles;
•and for Tony Hawk’s Pro Skater 1 + 2 and 2;
•the Call of Duty League, which began its first season in January 2020; and
•CrashCall of Duty:TM Bandicoot 4: It’s About TimeModern Warfare 2 Campaign RemasteredTM, both of which was firstwere released on March 31,in 2020.
The increase was partially offset by lower revenues from:
•Sekiro: Shadows Die Twice, which was released in March 2019;
•Crash Team Racing Nitro-Fueled; and
•the Destiny franchise (reflecting our sale of the publishing rights for Destiny to Bungie in December 2018).
Blizzard
Q3 2020 vs. Q3 2019
The increase in Blizzard’s segment net revenues for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily due to higher revenues from World of Warcraft, primarily from higher revenues associated with in-game content and subscriptions, partially offset by lower revenues from the Overwatch League.
YTD Q3 2020 vs. YTD Q3 2019
The increase in Blizzard’s segment net revenues and operating income for the nine months ended September 30, 2020,2021, as compared to the nine months ended September 30, 2019,2020, 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 same factors as notedabove was largely offset by:
•higher product development costs to support game development efforts; and
•higher cost of revenues driven by software amortization and royalties for the three-month period above.Diablo II: Resurrected.
King
Q3 2020 vs. Q3 2019
The increase in King’s segment net revenues for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily due to higher revenues from player purchases and advertising in the Candy Crush franchise.
YTD Q3 2020 vs. YTD Q3 2019
The increase in King’s segment net revenuesoperating income for the nine months ended September 30, 2020,2021, as compared to the nine months ended September 30, 2019,2020, was primarily due to higher revenues from in-game player purchases and advertising, revenuesprimarily in the Candy Crush franchise.
Segment Income from Operations
Activision
Q3 2020 vs. Q3 2019
The increase in Activision’sKing’s segment operating income forfrom the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily due to higher segment net revenues.
This increaseabove was partially offset by:
•higher cost ofservice provider fees, primarily digital storefront fees, driven by the higher revenues from in-game player purchases; and marketing costs for Call of Duty: Mobile;
•higher product development costs driven by higher personnel bonuses as a result of strong business performance;
•higher cost of revenues and marketing costs for Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4; and
•cost of revenues and marketing costs associated with the release of Tony Hawk’s Pro Skater 1 and 2 in the current quarter.
YTD Q3 2020 vs. YTD Q3 2019
The increase in Activision’s segment operating income for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was primarily due to higher segment net revenues.
This increase was partially offset by:
•higher cost of revenues and marketing costs for Call of Duty: Mobile;
•higher product development costs driven by higher personnel bonuses as a result of strong business performance; and
•higher cost of revenues and marketing costs for Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4.
Blizzard
Q3 2020 vs. Q3 2019
The increase in Blizzard’s segment operating income for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily due to higher segment net revenues and lower esport production and marketing costs, partially offset by costs associated with the Overwatch League to support team owners during the COVID-19 pandemic.
YTD Q3 2020 vs. YTD Q3 2019
The increase in Blizzard’s segment operating income for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was primarily due to:
•higher segment net revenues;
•lower product development costs, despite an increase in personnel costs, driven by higher capitalization of software development costs from the timing of game development cycles; and
•lower general and administrative costs.
King
Q3 2020 vs. Q3 2019
The increase in King’s segment operating income for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily due to:
•higher segment net revenues; and
•lower general and administrative costs.
YTD Q3 2020 vs. YTD Q3 2019
The increase in King’s segment operating income for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was primarily due to:
•higher segment net revenues; and
•lower general and administrative costs.
This increase was partially offset by higher sales and marketing costs for the Candy Crush franchise.costs.
Foreign Exchange Impact
Changes in foreign exchange rates had a positive impact of $28$10 million and a negative impact of $13$124 million on reportableActivision Blizzard’s segment net revenues for the three and nine months ended September 30, 2020,2021, respectively, as compared to the same periodperiods in the previous year. The changes are primarily due to changes in the value of the U.S. dollar relative to the euro and the British pound.
Consolidated Results
Net Revenues by Distribution Channel
The following table details our consolidated net revenues by distribution channel (amounts in millions):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2020 | | 2019 | | Increase (Decrease) | | 2020 | | 2019 | | Increase (Decrease) | | 2021 | | 2020 | | Increase/ (decrease) | | 2021 | | 2020 | | Increase/ (decrease) |
Net revenues by distribution channel: | Net revenues by distribution channel: | | | | | | | | | | | | Net revenues by distribution channel: | | | | | | | | | | | |
Digital online channels (1) | Digital online channels (1) | $ | 1,753 | | | $ | 1,014 | | | $ | 739 | | | $ | 4,782 | | | $ | 3,493 | | | $ | 1,289 | | Digital online channels (1) | $ | 1,852 | | | $ | 1,753 | | | $ | 99 | | | $ | 5,883 | | | $ | 4,782 | | | $ | 1,101 | |
Retail channels | Retail channels | 117 | | | 93 | | | 24 | | | 509 | | | 599 | | | (90) | | Retail channels | 69 | | | 117 | | | (48) | | | 354 | | | 509 | | | (155) | |
Other (2) | Other (2) | 84 | | | 175 | | | (91) | | | 383 | | | 411 | | | (28) | | Other (2) | 149 | | | 84 | | | 65 | | | 403 | | | 383 | | | 20 | |
Total consolidated net revenues | Total consolidated net revenues | $ | 1,954 | | | $ | 1,282 | | | $ | 672 | | | $ | 5,674 | | | $ | 4,503 | | | $ | 1,171 | | 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, downloadable content, microtransactions, subscriptions, and products, as well as licensing royalties.
(2)Net revenues from “Other” includeprimarily includes revenues from our Distribution business, the Overwatch League, and the Call of Duty League.
Q3 2021 vs. Q3 2020
Digital Online Channel Net Revenues
Q3 2020 vs. Q3 2019
The increase in net revenues from digital online channels for the three months ended September 30, 2020,2021, as compared to the three months ended September 30, 2019,2020, was primarily due to higher revenues from:
•in-game player purchases and advertising in the Candy 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 4,which was released in October 2018;2018.
•The increase was partially offset by lower revenues from Call of Duty: MobileBlack Ops Cold War, which was released in October 2019; andNovember 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 three months ended September 30, 2020, was primarily due to lower revenues from World of WarcraftTony Hawk’s Pro Skater 1 + 2, primarily from higher revenues associated with in-game content and subscriptions.which was released in September 2020.
YTD Q3 20202021 vs. YTD Q3 20192020
Digital Online Channel Net Revenues
The increase in net revenues from digital online channels for the nine months ended September 30, 2020,2021, as compared to the nine months ended September 30, 2019,2020, was primarily due to higher revenues from:
•Call of Duty: Modern Warfare, as compared toCall of Duty: Black Ops 4;
•in-game player purchases and advertising in the Candy Crush franchise;
•World of Warcraft, which includes the release of World of Warcraft: Shadowlands in November 2020 and World of Warcraft: Burning Crusade Classic™ in June 2021;
•Call of Duty: Mobile; and
•WorldCall of WarcraftDuty: Black Ops Cold War, primarily from higher subscription revenuesas compared to. Call of Duty: Modern Warfare.
Retail Channel Net Revenues
Q3 2020 vs. Q3 2019
The increase in net revenues from retail channels for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily due to higher revenues from:
•Tony Hawk’s Pro Skater 1 and 2, which was released in September 2020; and
•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4.
YTD Q3 2020 vs. YTD Q3 2019
The decrease in net revenues from retail channels for the nine months ended September 30, 2020,2021, as compared to the nine months ended September 30, 2019,2020, was primarily due to lower revenues from Sekiro: Shadows Die Twice, which was released in March 2019, partially offset by higher revenues from Tony Hawk’s Pro Skater 1 and 2.
Net Revenues by Geographic Region
The following table details our consolidated net revenues by geographic region (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2020 | | 2019 | | Increase (Decrease) | | 2020 | | 2019 | | Increase (Decrease) |
Net revenues by geographic region: | | | | | | | | | | | |
Americas | $ | 1,127 | | | $ | 655 | | | $ | 472 | | | $ | 3,188 | | | $ | 2,406 | | | $ | 782 | |
EMEA (1) | 589 | | | 452 | | | 137 | | | 1,770 | | | 1,525 | | | 245 | |
Asia Pacific | 238 | | | 175 | | | 63 | | | 716 | | | 572 | | | 144 | |
Consolidated net revenues | $ | 1,954 | | | $ | 1,282 | | | $ | 672 | | | $ | 5,674 | | | $ | 4,503 | | | $ | 1,171 | |
(1) “EMEA” consists of the Europe, Middle East, and Africa geographic regions.
Americas
Q3 2020 vs. Q3 2019
The increase in net revenues in the Americas region for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily due to higher revenues from:
•Call of Duty: Modern WarfareBlack Ops Cold War, which was released in October 2019, as compared toCall of Duty: Black Ops 4, which was released in October 2018;
•Call of Duty: Mobile, which was released in October 2019;
•Tony Hawk’s Pro Skater 1 and 2, which was released in September 2020; and
•the Call of Duty franchise catalog titles.
The increase was partially offset by lower revenues from our professional esport leagues.
YTD Q3 2020 vs. YTD Q3 2019
The increase in net revenues in the Americas region for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was primarily due to higher revenues from:
•Call of Duty: Modern Warfare as compared to Call of Duty: Black Ops 4; and
•Call of Duty: MobileCrash™ Team Racing Nitro-Fueled., released in June 2019.
EMEA
Q3 2020 vs. Q3 2019
The increase in net revenues in the EMEA region for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily due to higher revenues from:
•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4; and
•Call of Duty: Mobile.
The increase was partially offset by lower revenues from our Distribution business.
YTD Q3 2020 vs. YTD Q3 2019
The increase in net revenues in the EMEA region for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was primarily due to higher revenues from Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4.
Asia Pacific
Q3 2020 vs. Q3 2019
The increase in net revenues in the Asia Pacific region for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily due to higher revenues from:
•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4;
•World of Warcraft, primarily from higher revenues associated with subscriptions and in-game content; and
•Call of Duty: Mobile.
YTD Q3 2020 vs. YTD Q3 2019
The increase in net revenues in the Asia Pacific region for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was primarily due to higher revenues from:
•World of Warcraft, primarily from higher subscription revenues;
•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4; and
•Call of Duty: Mobile.
Net Revenues by Platform
The following table detailstables detail our consolidated net revenues by platform (amounts in millions):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2020 | | 2019 | | Increase (Decrease) | | 2020 | | 2019 | | Increase (Decrease) | | 2021 | | 2020 | | Increase/ (decrease) | | 2021 | | 2020 | | Increase/ (decrease) |
Net revenues by platform: | Net revenues by platform: | | | | | | | | | | | | Net revenues by platform: | | | | | | | | | | | |
Console | Console | $ | 695 | | | $ | 241 | | | $ | 454 | | | $ | 1,944 | | | $ | 1,324 | | | $ | 620 | | Console | $ | 523 | | | $ | 695 | | | $ | (172) | | | $ | 2,061 | | | $ | 1,944 | | | $ | 117 | |
PC | PC | 514 | | | 341 | | | 173 | | | 1,494 | | | 1,196 | | | 298 | | PC | 578 | | | 514 | | | 64 | | | 1,827 | | | 1,494 | | | 333 | |
Mobile and ancillary (1) | Mobile and ancillary (1) | 661 | | | 525 | | | 136 | | | 1,853 | | | 1,572 | | | 281 | | Mobile and ancillary (1) | 820 | | | 661 | | | 159 | | | 2,349 | | | 1,853 | | | 496 | |
Other (2) | Other (2) | 84 | | | 175 | | | (91) | | | 383 | | | 411 | | | (28) | | Other (2) | 149 | | | 84 | | | 65 | | | 403 | | | 383 | | | 20 | |
Total consolidated net revenues | Total consolidated net revenues | $ | 1,954 | | | $ | 1,282 | | | $ | 672 | | | $ | 5,674 | | | $ | 4,503 | | | $ | 1,171 | | 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 physical merchandisetoys and accessories.
(2)Net revenues from “Other” includeprimarily includes revenues from our Distribution business, the Overwatch League, and the Call of Duty League.
Q3 2021 vs. Q3 2020
Console
Q3 2020 vs. Q3 2019
The increasedecrease in net revenues from the console platform for the three months ended September 30, 2020,2021, as compared to the three months ended September 30, 2019,2020, was primarily due to higherlower revenues from:
•Call of Duty: Black Ops Cold War, which was released in November 2020, as compared toCall of Duty: Modern Warfare, which was released in October 2019, as compared to Call of Duty: Black Ops 4, which was released in October 2018;
•Tony Hawk’s Pro Skater 1 and 2, which was released in September 2020; and
•the Call of Duty franchise catalog titles.
YTD Q3 2020 vs. YTD Q3 2019
The increase in net revenues from the console platform for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was primarily due to higher revenues from:
•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4;2019; and
•Tony Hawk’s Pro Skater 1 and 2.
The increase was partially offset by lower revenues from Sekiro: Shadows Die Twice+ 2, which was released in March 2019.September 2020.
PCThe decrease was partly 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.
PC
The increase in net revenues from the PC platform for the three months ended September 30, 2020,2021, as compared to the three months ended September 30, 2019,2020, was primarily due to higher revenues from:
•Call of Duty: Modern Warfare,Diablo II: Resurrected, as compared to Call of Duty: Black Ops 4; and
•World of Warcraft, primarily from higher revenues associated with in-game content and subscriptions.
YTD Q3 2020 vs. YTD Q3 2019
The increasewhich was released in net revenues from the PC platform for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was primarily due to higher revenues from:2021;
•Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4; and
•World of Warcraft,, primarily from higher subscription revenues.which includes the release of World of Warcraft: Shadowlands in November 2020 and World of Warcraft: Burning Crusade Classic in June 2021.
The increase was partially offset by lower revenues from Call of Duty: Black Ops Cold War, as compared to Call of Duty: Modern Warfare.
Mobile and Ancillary
Q3 2020 vs. Q3 2019
The increase in net revenues from mobile and ancillary for the three months ended September 30, 2020,2021, as compared to net revenues for the three months ended September 30, 2019,2020, 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 2021 vs. YTD Q3 2020
Console
The increase in net revenues from the console platform for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, was primarily due to higher revenues from Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4.
PC
The increase in net revenues from the PC platform for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, was primarily due to higher revenues from:
•World of Warcraft; and
•the Candy Crush franchise, driven by higher revenues from player purchases and advertising.Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4.
YTD Q3 2020 vs. YTD Q3 2019Mobile and Ancillary
The increase in net revenues from mobile and ancillary for the nine months ended September 30, 2020,2021, as compared to net revenues for the nine months ended September 30, 2019,2020, was primarily due to higher revenues from from:
•in-game player purchases and advertising in the Candy Crush franchise; and
•Call of Duty: Mobile.
Costs and Expenses
Cost of Revenues
The following table detailstables detail the components of cost of revenues in dollars (amounts in millions) and as a percentage of associated net revenues:
| | | Three Months Ended September 30, 2020 | | % of associated net revenues | | Three Months Ended September 30, 2019 | | % of associated net revenues | | Increase (Decrease) | | 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: | Cost of revenues—product sales: | | | | | | | | | | Cost of revenues—product sales: | | | | | | | | | | | |
Product costs | Product costs | $ | 101 | | | 25 | % | | $ | 137 | | | 53 | % | | $ | (36) | | Product costs | $ | 120 | | | 28 | % | | $ | 101 | | | 25 | % | | | $ | 19 | | |
Software royalties, amortization, and intellectual property licenses | Software royalties, amortization, and intellectual property licenses | 37 | | | 9 | | | 9 | | | 3 | | | 28 | | Software royalties, amortization, and intellectual property licenses | 72 | | | 17 | | | 37 | | | 9 | | | | 35 | | |
Cost of revenues—subscription, licensing, and other revenues: | | |
Cost of revenues—in-game, subscription, and other: | | Cost of revenues—in-game, subscription, and other: | | | | |
Game operations and distribution costs | Game operations and distribution costs | 290 | | | 19 | | | 246 | | | 24 | | | 44 | | Game operations and distribution costs | 307 | | | 19 | | | 290 | | | 19 | | | | 17 | | |
Software royalties, amortization, and intellectual property licenses | Software royalties, amortization, and intellectual property licenses | 41 | | | 3 | | | 50 | | | 5 | | | (9) | | Software royalties, amortization, and intellectual property licenses | 28 | | | 2 | | | 41 | | | 3 | | | | (13) | | |
Total cost of revenues | Total cost of revenues | $ | 469 | | | 24 | % | | $ | 442 | | | 34 | % | | $ | 27 | | Total cost of revenues | $ | 527 | | | 25 | % | | $ | 469 | | | 24 | % | | | $ | 58 | | |
| | Nine Months Ended September 30, 2020 | | % of associated net revenues | | Nine Months Ended September 30, 2019 | | % of associated net revenues | | Increase (Decrease) | |
Cost of revenues—product sales: | | | | | | | | | | |
Product costs | $ | 357 | | | 24 | % | | $ | 388 | | | 30 | % | | $ | (31) | | |
Software royalties, amortization, and intellectual property licenses | 152 | | | 10 | | | 171 | | | 13 | | | (19) | | |
Cost of revenues—subscription, licensing, and other revenues: | | |
Game operations and distribution costs | 819 | | | 20 | | | 714 | | | 22 | | | 105 | | |
Software royalties, amortization, and intellectual property licenses | 115 | | | 3 | | | 164 | | | 5 | | | (49) | | |
Total cost of revenues | $ | 1,443 | | | 25 | % | | $ | 1,437 | | | 32 | % | | $ | 6 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 licenses | 272 | | | 16 | | | 152 | | | 10 | | | | | | | 120 | | | |
Cost of revenues—in-game, subscription, and other: | | | | | | | | | | | | | | | |
Game operations and distribution costs | 925 | | | 19 | | | 819 | | | 20 | | | | | | | 106 | | | |
Software royalties, amortization, and intellectual property licenses | 87 | | | 2 | | | 115 | | | 3 | | | | | | | (28) | | | |
Total cost of revenues | $ | 1,659 | | | 25 | % | | $ | 1,443 | | | 25 | % | | | | | | $ | 216 | | | |
Cost of Revenues—Product Sales:Sales:
Q3 20202021 vs. Q3 20192020
The decreaseincrease in product costs for the three months ended September 30, 2020,2021, as compared to the three months ended September 30, 2019,2020, was primarily due todriven by a $34$35 million decreaseincrease in product costs forfrom our Distribution business, as a result of lowerhigher revenues.
The increase in software royalties, amortization, and intellectual property licenses related to product sales for the three months ended September 30, 2020,2021, as compared to the three months ended September 30, 2019,2020, was primarily due to a $25$56 million increase in software amortization and royalties from Activision,Blizzard, driven by higher software amortization and royalties from (1) Tony Hawk’s Pro Skater 1 and 2Diablo II: Resurrected, , which was released in September 2020.2021, 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 20202021 vs. YTD Q3 20192020
The decreaseincrease in product costs for the nine months ended September 30, 2020,2021, as compared to the nine months ended September 30, 2019,2020, was primarily due todriven by a $19$71 million decreaseincrease in product costs from Sekiro: Shadows Die Twice, which was released in March 2019.our Distribution business, partially offset by lower product costs as a result of 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, 2020,2021, as compared to the nine months ended September 30, 2019,2020, was primarily due to:
•a $12$110 million decreaseincrease in software amortization and royalties from Blizzard, driven by lowerhigher software amortization and royalties from (1) World of Warcraft,, asgiven the prior year included software amortization expense from the August 2018 release of World of Warcraft: Battle for AzerothShadowlands in November 2020, with no comparable amortization in the current year;prior year, and (2) Diablo II: Resurrected; and
•a $6$10 million decrease inincrease software amortization and royalties from Activision, driven by lowerhigher software amortization and royalties from (1) Sekiro: Shadows Die TwiceCall of Duty: Black Ops Cold War, which was released in November 2020, as compared to and (2) Call of Duty: Modern Warfare, which was released in October 2019, as compared topartially offset by lower software amortization and royalties from Call of Duty: Black Ops 4Tony Hawk’s Pro Skater 1 + 2, which was released in October 2018, partially offset by software amortization and royalties from (1) Tony Hawk’s Pro Skater 1 and 2, and (2) Call of Duty:Modern Warfare 2 Campaign Remastered, which was first released on March 31,September 2020.
Cost of Revenues—In-game, Subscription, Licensing, and Other Revenues:Revenues:
Q3 20202021 vs. Q3 20192020
The increase in game operations and distribution costs for the three months ended September 30, 2020,2021, as compared to the three months ended September 30, 2019,2020, was primarily due to (1) ana $28 million increase of $43 million in service provider fees, such as digital storefront fees (e.g., fees retained by Apple and Google for our sales on their platforms), and payment processor fees, and server bandwidth fees, as a result of higher revenues, and (2) an increase of $14 million associated with our professional esports leagues.revenues.
The decrease in softwareSoftware royalties, amortization, and intellectual property licenses related to in-game, subscription, licensing, and other revenues for the three months ended September 30, 2020, as compared2021 are comparable to those for the three months ended September 30, 2019, was primarily due to a decrease of $36 million in amortization of internally-developed franchise and developed software intangible assets acquired as part of our acquisition of King. The decrease was partially offset by an increase in software amortization and royalties from Activision of $24 million, driven by Call of Duty: Mobile, which was released in October 2019.2020.
YTD Q3 20202021 vs. YTD Q3 20192020
The increase in game operations and distribution costs for the nine months ended September 30, 2020,2021, as compared to the nine months ended September 30, 2019,2020, was primarily due to a $93$98 million increase in service provider fees, such as digital storefront fees and payment processor fees, and server bandwidth fees, as a result of higher revenues.
The decrease in software royalties, amortization, and intellectual property licenses related to in-game, subscription, licensing, and other revenues for the nine months ended September 30, 2020,2021, as compared to the nine months ended September 30, 2019,2020, was primarily due to a decrease of $92$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 software amortization and royalties from Activision of $39$28 million, driven by Call of Duty: Mobile., which was released in October 2019.
Product Development (amounts in millions)
| | | September 30, 2020 | | % of consolidated net revenues | | September 30, 2019 | | % of consolidated net revenues | | Increase (Decrease) | | September 30, 2021 | | % of consolidated net revenues | | September 30, 2020 | | % of consolidated net revenues | | | Increase (Decrease) | |
Three Months Ended | Three Months Ended | $ | 274 | | | 14 | % | | $ | 210 | | | 16 | % | | $ | 64 | | Three Months Ended | $ | 329 | | | 16 | % | | $ | 274 | | | 14 | % | | | $ | 55 | | |
Nine Months Ended | Nine Months Ended | $ | 802 | | | 14 | % | | $ | 702 | | | 16 | % | | $ | 100 | | Nine Months Ended | $ | 1,016 | | | 15 | % | | $ | 802 | | | 14 | % | | | $ | 214 | | |
Q3 20202021 vs. Q3 20192020
The increase in product development costs for the three months ended September 30, 2020,2021, as compared to the three months ended September 30, 2019,2020, was primarily due to higher development costsspending of $92$72 million, driven by higherincreased personnel bonuses as a result of strong business performance. The increase was partially offset by a $29 million increase in capitalization of development costs driven by the timing of Blizzard’s game development cycles.and outside developer fees to support our franchises.
YTD Q3 20202021 vs. YTD Q3 20192020
The increase in product development costs for the nine months ended September 30, 2020,2021, as compared to the nine months ended September 30, 2019,2020, was primarily due to higher development costsspending of $219$230 million, driven by higherincreased personnel bonuses as a result of strong business performance. The increase was partially offset by a $120 million increase in capitalization of development costs driven by the timing of Blizzard’s game development cycles.and outside developer fees to support our franchises.
Sales and Marketing (amounts in millions)
| | | September 30, 2020 | | % of consolidated net revenues | | September 30, 2019 | | % of consolidated net revenues | | Increase (Decrease) | | September 30, 2021 | | % of consolidated net revenues | | September 30, 2020 | | % of consolidated net revenues | | | Increase (Decrease) | |
Three Months Ended | Three Months Ended | $ | 238 | | | 12 | % | | $ | 182 | | | 14 | % | | $ | 56 | | Three Months Ended | $ | 244 | | | 12 | % | | $ | 238 | | | 12 | % | | | $ | 6 | | |
Nine Months Ended | Nine Months Ended | $ | 722 | | | 13 | % | | $ | 580 | | | 13 | % | | $ | 142 | | Nine Months Ended | $ | 727 | | | 11 | % | | $ | 722 | | | 13 | % | | | $ | 5 | | |
Q3 20202021 vs. Q3 20192020
The increase in salesSales and marketing expenses for the three months ended September 30, 2020, as compared2021, were comparable to the three months ended September 30, 2019, was primarily due to an increase2020, as higher sales and marketing costs for the Candy Crush franchise were largely offset by lower sales and marketing costs for prior year releases of $49 million in marketing spending, driven by the Call of Duty franchise.Tony Hawk’s Pro Skater 1 + 2 and Crash BandicootTM 4: It’s About TimeTM.
YTD Q3 20202021 vs. YTD Q3 20192020
The increase in salesSales and marketing expenses for the nine months ended September 30, 2020,2021, as compared to the nine months ended September 30, 2019, was primarily due to an increase2020, were comparable, as higher sales and marketing costs for the Candy Crush franchise and World of $145 million inWarcraft were offset by lower sales and marketing spending, driven bycosts for the Call of Duty franchise and the Candy Crush franchise.lower personnel-related costs.
General and Administrative (amounts in millions)
| | | September 30, 2020 | | % of consolidated net revenues | | September 30, 2019 | | % of consolidated net revenues | | Increase (Decrease) | | September 30, 2021 | | % of consolidated net revenues | | September 30, 2020 | | % of consolidated net revenues | | | Increase (Decrease) | |
Three Months Ended | Three Months Ended | $ | 186 | | | 10 | % | | $ | 177 | | | 14 | % | | $ | 9 | | Three Months Ended | $ | 143 | | | 7 | % | | $ | 186 | | | 10 | % | | | $ | (43) | | |
Nine Months Ended | Nine Months Ended | $ | 529 | | | 9 | % | | $ | 527 | | | 12 | % | | $ | 2 | | Nine Months Ended | $ | 614 | | | 9 | % | | $ | 529 | | | 9 | % | | | $ | 85 | | |
Q3 20202021 vs. Q3 20192020
The decrease in general and administrative expenses for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, was due to (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 of $18 million as a result of lower share-based compensation.
YTD Q3 2021 vs. YTD Q3 2020
The increase in general and administrative expenses for the threenine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily due to an $18a $71 million increase in personnel costs as a result of higher share-based compensation.
YTD Q3 2020 vs. YTD Q3 2019
General and administrative expenses for the nine months ended September 30, 2020, were comparable to expenses for the nine months ended September 30, 2019.
Restructuring and related costs (amounts in millions)
| | | September 30, 2020 | | % of consolidated net revenues | | September 30, 2019 | | % of consolidated net revenues | | Increase (Decrease) | | September 30, 2021 | | % of consolidated net revenues | | September 30, 2020 | | % of consolidated net revenues | | | Increase (Decrease) | |
Three Months Ended | Three Months Ended | $ | 9 | | | — | % | | $ | 24 | | | 2 | % | | $ | (15) | | Three Months Ended | $ | 3 | | | — | % | | $ | 9 | | | — | % | | | $ | (6) | | |
Nine Months Ended | Nine Months Ended | $ | 39 | | | 1 | % | | $ | 104 | | | 2 | % | | $ | (65) | | Nine Months Ended | $ | 46 | | | 1 | % | | $ | 39 | | | 1 | % | | | $ | 7 | | |
During 2019, we began implementing a restructuring plan aimed at refocusing our resources on our largest opportunities and removing unnecessary levels of complexity and duplication from certain parts of our business. Since the roll out of the plan,then, we have been, and will continue focusing on these goals as we continue to execute against our plan. The restructuring and related costs incurred during the three and nine months ended September 30, 2020,2021 relate primarily to severance costs for actions under thiscosts. We do not expect to realize significant net savings in our total operating expenses as a result of our plan, being executedas cost reductions in 2020.our selling, general and administrative activities are expected to be offset by increased investment in product development. Refer to Note 1112 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for further discussion.
Interest and Other Expense (Income), Net (amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | % of consolidated net revenues | | September 30, 2019 | | % of consolidated net revenues | | Increase (Decrease) |
Three Months Ended | $ | 25 | | | 1 | % | | $ | (2) | | | — | % | | $ | 27 | |
Nine Months Ended | $ | 55 | | | 1 | % | | $ | (33) | | | (1) | % | | $ | 88 | |
Q3 2020 vs. Q3 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 increase in interest and other expense (income), net, for the three months ended September 30, 2020,2021, as compared to the three months ended September 30, 2019,2020, was primarily due to a $19$39 million decreaseloss recorded on an equity investment. Refer to Note 6 of the notes to the condensed consolidated financial statements included in interest income due to lower returnsItem 1 of this Quarterly Report on our investment portfolio as a result of interest rate cuts, reflecting actions by central banks around the world.Form 10-Q for further discussion.
YTD Q3 20202021 vs. YTD Q3 20192020
The increase in interestInterest and other expense (income), net, for the nine months ended September 30, 2020, as compared2021, was comparable to the nine months ended September 30, 2019 was primarily due to:2020, with a $32 million increase in gains on equity investments being offset by:
•a $41$16 million decrease in interest income driven by lower returns on our investment portfolio as a result of lower interest rate cuts, reflecting actions by central banks around the world;rates; and
•a $38$10 million gain recognizedincrease in interest expense on our debt obligations as a result of a higher average debt outstanding in 2021, when compared to the prior-yearprior year period, as a result of adjusting a cost-method equity investment to fair value, as compared to only a $3 million gain recorded inour debt financing activities during the current year.
As ofthree months ended September 30, 2020, based on the composition of our investment portfolio and recent actions by central banks around the world, including the interest rate cuts by the U.S. Federal Reserve, we anticipate investment yields may remain low, which would continue to negatively impact our future interest income. Such impact is not expected to be material to the Company’s liquidity.2020.
Income Tax Expense (amounts in millions)
| | | September 30, 2020 | | % of pretax income | | September 30, 2019 | | % of pretax income | | Increase (Decrease) | | September 30, 2021 | | % of Pretax income | | September 30, 2020 | | % of Pretax income | | | Increase (Decrease) | |
Three Months Ended | Three Months Ended | $ | 118 | | | 16 | % | | $ | 45 | | | 18 | % | | $ | 73 | | Three Months Ended | $ | 120 | | | 16 | % | | $ | 118 | | | 16 | % | | | $ | 2 | | |
Nine Months Ended | Nine Months Ended | $ | 365 | | | 18 | % | | $ | 208 | | | 18 | % | | $ | 157 | | Nine Months Ended | $ | 391 | | | 15 | % | | $ | 365 | | | 18 | % | | | $ | 26 | | |
The income tax expense of $118$120 million for the three months ended September 30, 20202021 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 lower than the effective tax rate of 18% for the threenine months ended September 30, 2019. This2020. The decrease is primarily due to discrete tax benefits recognized in the current quarter for the remeasurement of deferred tax assets, partially offset by an increase inlower U.S. taxes on foreign earnings.
The income tax expense of $365 million for the nine months ended September 30, 2020, reflects an effective tax rate of 18%, which is comparable to the effective tax rate of 18% for the nine months ended September 30, 2019. Discrete tax benefits recognized in the current year for the remeasurement of deferred tax assets were offset by an increase in taxes on foreign earnings.
The effective tax rates of 16% and 18%15% for the three and nine months ended September 30, 2020,2021, respectively, are lower than the U.S. statutory rate of 21%, primarily due to discretelower U.S. tax benefits recognized for the remeasurement of deferred tax assetson foreign earnings and the recognition of excess tax benefits from share-based payments. In addition, a discrete tax benefit was recognized from the remeasurement of a deferred tax asset as a result of a change in the U.K. tax rate for the nine months ended September 30, 2021.
Further information about our income taxes is provided in Note 1314 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. Despite the impacts of the COVID-19 pandemic on the global economy, in the near term, we expect our business and financial condition to remain strong and to continue to generate significant operating cash flows, which, we believe, in combination with our existing balance of cash and cash equivalents and short-term investments of $7.6$10.0 billion, our access to capital, and the availability of our $1.5 billion revolving credit facility, will be sufficient to finance our operational and financing requirements for at least the next 12 months. Our primary sources of 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 not untilin 2026), include our cash and cash equivalents, short-term investments, and cash flows provided by operating activities.
As of September 30, 2020,2021, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $1.9$3.3 billion, as compared to $2.8$2.5 billion as of December 31, 2019.2020. These cash balances are generally available for use in the U.S., subject in some cases to certain restrictions.
Our cash provided from operating activities is somewhat impacted by seasonality. Working capital needs are impacted by weekly sales, which are generally highest in the fourth quarter due to seasonal and holiday-related sales patterns. We consider, on a continuing basis, various transactions to increase shareholder value and enhance our business results, including acquisitions, divestitures, joint ventures, share repurchases, and other structural changes. These transactions may result in future cash proceeds or payments.
Sources of Liquidity (amounts in millions)
| | | | September 30, 2020 | | December 31, 2019 | | Increase (Decrease) | | September 30, 2021 | | December 31, 2020 | | Increase (Decrease) |
Cash and cash equivalents | Cash and cash equivalents | $ | 7,415 | | | $ | 5,794 | | | $ | 1,621 | | Cash and cash equivalents | $ | 9,718 | | | $ | 8,647 | | | $ | 1,071 | |
Short-term investments | Short-term investments | 188 | | | 69 | | | 119 | | Short-term investments | 300 | | | 170 | | | 130 | |
| | $ | 7,603 | | | $ | 5,863 | | | $ | 1,740 | | | $ | 10,018 | | | $ | 8,817 | | | $ | 1,201 | |
Percentage of total assets | Percentage of total assets | 35 | % | | 30 | % | | | Percentage of total assets | 42 | % | | 38 | % | | |
| | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2020 | | 2019 | | Increase (Decrease) |
Net cash provided by operating activities | $ | 1,112 | | | $ | 913 | | | $ | 199 | |
Net cash provided by (used in) investing activities | (178) | | | 79 | | | (257) | |
Net cash provided by (used in) financing activities | 653 | | | (251) | | | 904 | |
Effect of foreign exchange rate changes | 32 | | | (24) | | | 56 | |
Net increase in cash and cash equivalents and restricted cash | $ | 1,619 | | | $ | 717 | | | $ | 902 | |
| | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2021 | | 2020 | | | | Increase (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 driver of net cash flows associated with our operating activities is 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, 2020,2021, was $1.11$1.8 billion, as compared to $913 million$1.1 billion for the nine months ended September 30, 2019.2020. The increase was primarily due to higher net income partially offset by higherand lower tax payments andin the 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 resulting from the timing of collections and payments.
Net Cash Used in Investing Activities
The primary drivers of net cash flows associated with our investing activities typically include capital expenditures, purchases and sales of investments, changes in restricted cash balances, and cash used for acquisitions.
Net cash used in investing activities for the nine months ended September 30, 2020,2021, was $178$101 million, as compared to net cash provided by investing activities of $79$178 million for the nine months ended September 30, 2019.2020. The changedecrease in cash used in investing activities was primarily due to the net purchases of $122 million of available-for-sale investments in the nine months ended September 30, 2020, as compared to proceeds from maturities of available-for-sale investments of $153 million in the prior-year period. This was partially offset by capital expenditures of $56$62 million for the nine months ended September 30, 2020, which were lower than the capital expenditures2021, as compared to net purchases of $79$122 million forin the prior-year period.
Net Cash provided byUsed in Financing Activities
The primary drivers of net cash flows associated with our financing activities typically include the proceeds from, and repayments of, our long-term debt and transactions involving our common stock, including the issuance of shares of common stock to employees upon the exercise of stock options, as well as the payment of dividends.
Net cash provided byused in financing activities for the nine months ended September 30, 2020,2021, was $653$533 million, as compared to net cash used inprovided by financing activities of $251$653 million for the nine months ended September 30, 2019.2020. The changeincrease in cash used in financing activities was primarily attributed to ourdue to:
•net debt financing activities—proceeds of $896 million received for the nine months ended September 30, 2020, we had net debt proceeds of approximately $896 million resulting from the issuance of an aggregate principal amount of $2.0 billion of new notes and the early redemption of $1.05 billion of our previously outstanding notes, with no comparable activity 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 prior year-period. Refernine months ended September 30, 2021, as compared to $41 million in the prior-year period; and
•Note 8higher dividends paid, with $365 million of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for further discussion. The cash flows provided by our debt financing activitiesdividend payments for the nine months ended September 30, 2020, were partially offset by higher dividends paid of $316 million,2021, as compared to $283$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 $32 million on our cash and cash equivalents and restricted cash for the nine months ended September 30, 2020, as compared to a negative impact of $24 million for the nine months ended2021 and September 30, 2019.2020, respectively. The change was primarily due to changes in the value of the U.S. dollar relative to the euro and the British pound.
Debt
On August 5, 2020, we issued $500 million of unsecured senior notes due 2030, (i.e., the 2030 Notes) and $1.5 billion of unsecured senior notes due 2050, (i.e., the 2050 Notes) in a public underwritten offering. In connection with the issuance, we incurred approximately $26 million of discounts and financing costs that were capitalized and recorded within "Long-term debt, net" in our condensed consolidated balance sheet. On September 4, 2020, we redeemed all of our outstanding 2021 Notes and 2022 Notes at a redemption price equal to 100% of their respective principal amounts plus (1) a “make-whole” premium of $28 million and (2) accrued and unpaid interest to the redemption date. The redemption of the 2021 Notes and 2022 Notes resulted in a “Loss on extinguishment of debt” recorded in the condensed consolidated statement of operations of $31 million.
At September 30, 20202021 and December 31, 2019,2020, our total outstanding debt was $3.7 billion, and $2.7 billion, respectively, bearing interest at a weighted average rate of 2.87% and 3.18%, respectively..
A summary of our outstanding debt is as follows (amounts in millions):
| | | | At September 30, 2020 | | At December 31, 2019 | | At September 30, 2021 | | At December 31, 2020 |
| 2021 Notes | | $ | — | | | $ | 650 | | |
2022 Notes | | — | | | 400 | | |
2026 Notes | 2026 Notes | | 850 | | | 850 | | 2026 Notes | $ | 850 | | | $ | 850 | |
2027 Notes | 2027 Notes | | 400 | | | 400 | | 2027 Notes | 400 | | | 400 | |
2030 Notes | 2030 Notes | | 500 | | | — | | 2030 Notes | 500 | | | 500 | |
2047 Notes | 2047 Notes | | 400 | | | 400 | | 2047 Notes | 400 | | | 400 | |
2050 Notes | 2050 Notes | | 1,500 | | | — | | 2050 Notes | 1,500 | | | 1,500 | |
Total gross long-term debt | Total gross long-term debt | | $ | 3,650 | | | $ | 2,700 | | Total gross long-term debt | $ | 3,650 | | | $ | 3,650 | |
Unamortized discount and deferred financing costs | Unamortized discount and deferred financing costs | | (46) | | | (25) | | Unamortized discount and deferred financing costs | (43) | | | (45) | |
Total net carrying amount | Total net carrying amount | | $ | 3,604 | | | $ | 2,675 | | Total net carrying amount | $ | 3,607 | | | $ | 3,605 | |
Refer to Note 8 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for further disclosures regarding our debt obligations.
Dividends
On February 6, 2020,4, 2021, our Board of Directors declared a cash dividend of $0.41$0.47 per common share. On May 6, 2020,2021, we made an aggregate cash dividend payment of $316$365 million to shareholders of record at the close of business on April 15, 2020.
Capital Expenditures
For the year ending December 31, 2020, we anticipate total capital expenditures of approximately $110 million, primarily for computer and network hardware and leasehold improvements. During the nine months ended September 30, 2020, capital expenditures were $56 million.2021.
Off-BalanceOff-balance Sheet Arrangements
At each of September 30, 20202021 and December 31, 2019,2020, 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.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that they are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments, and assumptions, and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results, include the following:
•Revenue Recognition;
•Income Taxes; and
•Software Development Costs; and
•Fair Value Estimates (including Assessment of Impairment of Assets).Costs.
Recently Issued Accounting Pronouncements
For a detailed discussion of all relevant recently issued accounting pronouncements, see Note 2 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily include fluctuations in foreign currency exchange rates and interest rates.
Foreign Currency Exchange Rate Risk
We transact business in many different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, with a heightened risk for volatility in the future due to potential impacts of COVID-19 on global financial markets. Revenues and related expenses generated from our international operations are generally denominated in their respective local currencies. Primary currencies include euros, British pounds, Australian dollars, South Korean won, Chinese yuan, and Swedish krona. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions will result in reduced revenues, operating expenses, net income, and cash flows from our international operations. Similarly, our revenues, operating expenses, net income, and cash flows will increase for our international operations if the U.S. dollar weakens against foreign currencies. Since we have significant international sales but incur the majority of our costs in the United States, the impact of foreign currency fluctuations, particularly the strengthening of the U.S. dollar, may have an asymmetric and disproportional impact on our business. We monitor currency volatility throughout the year.
To mitigate our foreign currency risk resulting from our foreign currency-denominated monetary assets, liabilities, and earnings and our foreign currency risk related to functional currency-equivalent cash flows resulting from our intercompany transactions, we periodically enter into currency derivative contracts, principally forward contracts. These forward contracts generally have a maturity of less than one year. The counterparties for our currency derivative contracts are large and reputable commercial or investment banks.
The fair values of our foreign currency contracts are estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period.
We do not hold or purchase any foreign currency forward contracts for trading or speculative purposes.
Foreign Currency Forward Contracts Designated as Hedges (“Cash Flow Hedges”)
The total gross notional amounts and fair values of our Cash Flow Hedges, all of which have remaining maturities of 13 months or less as of September 30, 2020, are as follows (amounts in millions):
| | | | | | | | | | | | | | | | | |
| As of September 30, 2020 | | As of December 31, 2019 |
| Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
Foreign Currency: | | | | | |
Buy USD, Sell Euro | $ | 608 | | $ | (18) | | | $ | 350 | | $ | (2) | |
The amount of pre-tax net realized gains (losses) associated with our Cash Flow Hedges that were reclassified out of “Accumulated other comprehensive income (loss)” and into earnings was as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | Statement of Operations Classification |
| 2020 | 2019 | | 2020 | 2019 | |
Cash Flow Hedges | $ | (5) | | $ | 7 | | | $ | 7 | | $ | 24 | | | Net revenues |
Foreign Currency Forward Contracts Not Designated as Hedges
The total gross notional amounts and fair valuesRefer 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 disclosures regarding our foreign currency forward contracts not designated as hedges are as follows (amounts in millions):contracts.
| | | | | | | | | | | | | | | | | |
| As of September 30, 2020 | | As of December 31, 2019 |
| Notional amount | Fair value gain (loss) | | Notional amount | Fair value gain (loss) |
Foreign Currency: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Buy USD, Sell GBP | $ | 61 | | $ | (1) | | | $ | 25 | | $ | (2) | |
| | | | | |
For the three and nine months ended September 30, 2020 and 2019, pre-tax net gains (losses) associated with these forward contracts were recorded in “General and administrative expenses” and were not material.
In the absence of hedging activities for the nine months ended September 30, 2020,2021, a hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in a theoretical decline of our net income of approximately $116 million.approximately $124 million. This sensitivity analysis assumes a parallel adverse shift of all foreign currency exchange rates against the U.S. dollar; however,however, all foreign currency exchange rates do not always move in this manner, and actual results may differ materially.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio, as our outstanding debt is all at fixed rates. Our investment portfolio consists primarily of money market funds and government securities with high credit quality and short average maturities. Because short-term securities mature relatively quickly and must be reinvested at the then-current market rates, interest income on a portfolio consisting of cash, cash equivalents, or short-term securities is more subject to market fluctuations than a portfolio of longer-term securities. Conversely, the fair value of such a portfolio is less sensitive to market fluctuations than a portfolio of longer-term securities. At September 30, 2020,2021, our cash and cash equivalents were comprised primarily of money market funds.
As of September 30, 2020,2021, based on the composition of our investment portfolio, and recent actions by central banks around the world, including the interest rate cuts by the U.S. Federal Reserve, we anticipate investment yields may remain low, which would continue to negatively impact our future interest income. Such impact is not expected to be material to the Company’s liquidity.
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, 2020,2021, 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, 2020,2021, 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 (1) recorded, processed, summarized, and reported on a timely basis and (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, 2020.2021. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at September 30, 2020,2021, 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. Additionally, we have not experienced any material impact to our internal control over financial reporting or our disclosure controls and procedures despite the fact that most of our employees are working remotely for their health and safety during the COVID-19 pandemic. We are continually monitoring and assessing the potential impact of COVID-19 on our internal controls to minimize the impact on their design and operating effectiveness.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are party to routine claims, suits, investigations, audits, and other proceedings arising from the ordinary course of business, including with respect to intellectual property rights, contractual claims, labor and employment matters, regulatory matters, tax matters, unclaimed property matters, compliance matters, and collection matters. In the opinion of management, after consultation with legal counsel, such routine claims and lawsuits are not significant, and we do not expect them to have a material adverse effect on our business, financial condition, results of operations, or liquidity. 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.
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, 2019 (the “2019 Form 10-K”), Part II, Item 1A, “Risk Factors,” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the “First Quarter 10-Q”), and Part II, Item 1A, “Risk Factors,” of our Quarterly Report on“2020 Form 10-Q for the quarter ended June 30, 2020 (the “Second Quarter 10-Q”10-K”).
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Risk Factors” in each of the 20192020 Form 10-K, the First Quarter 10-Q, and the Second Quarter 10-Q, any of which could materially affect our business, reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, or stock price. The ongoing global COVID-19 pandemic has heightened, and in some cases manifested, certain of the risks we normally face in operating our business, including those disclosed in the 20192020 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 First Quartermobile 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 Second Quarter 10-Q,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.
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 risk factor disclosurelonger 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 2019 Form 10-K is qualified by the information relatingordinary course of our business, including with respect to the ongoing global COVID-19 pandemic that isintellectual 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 First QuarterEEOC 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 Second Quarter 10-Q.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.
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.
Item 5. Other Information
During 2019, we began implementing a restructuring plan aimed at refocusing our resources on our largest opportunities and removing unnecessary levels of complexity from certain parts of our business. On October 27, 2020, the Company’s Board of Directors approved an expansion to the scope of this restructuring plan that are aimed at integrating our global and regional functions to allow continued focus on investing in our franchises and to provide us with the ability to better leverage our scale.
As a result of the restructuring expansion approved on October 27, 2020, we now expect to incur total aggregate pre-tax restructuring charges of approximately $310 million associated with the restructuring plan, of which the remaining charges that have not yet been incurred are expected to largely be incurred within the next 12 months. The charges associated with the restructuring plan are expected to relate to severance and employee-related costs (approximately 60% of the aggregate charge), facilities and related costs (approximately 20% of the aggregate charge), and other costs (approximately 20% of the aggregate charge), including charges for restructuring-related fees and the write-down of assets. A substantial majority (approximately 70%) of the total pre-tax charge associated with the restructuring is expected to be paid in cash using amounts on hand, and such cash outlays are largely expected to be completed by the end of 2021.
Item 6. Exhibits
The exhibits listed on the accompanying Exhibit Index are hereby incorporated by reference into this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
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Exhibit Number | | Exhibit |
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3.1 | | |
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3.2 | | |
| | |
10.1* | | |
| | |
10.2* | | |
| | |
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
32.2 | | |
| | |
101.INS | | XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. |
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document. |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document. |
| | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* Indicates a management contract or compensatory plan, contract or arrangement in which a director or executive officer of the Company participates.
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: October 29, 2020November 2, 2021
ACTIVISION BLIZZARD, INC.
| | | | | | | | |
/s/ DENNIS DURKINARMIN ZERZA | | /s/ JESSE YANG |
Dennis DurkinArmin Zerza | | Jesse Yang |
Chief Financial Officer and Principal Financial Officer | | Chief Accounting Officer and Principal Accounting Officer |
of Activision Blizzard, Inc. | | of Activision Blizzard, Inc. |