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ATVI Activision Blizzard

Filed: 4 May 21, 4:34pm
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 March 31, 2021
 
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
atvi-20210331_g1.jpg
ACTIVISION BLIZZARD, INC.
(Exact name of registrant as specified in its charter)
Delaware95-4803544
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
N/AN/A
(Address of principal executive offices)(Zip Code)
 
(310) 255-2000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.000001 per shareATVIThe Nasdaq Global Select Market
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   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 FilerNon-accelerated FilerAccelerated 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 April 27, 2021 was 777,016,759.


ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
 
Table of Contents


2

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 and restructuring activities; (3) statements of future financial or operating performance, including the impact of tax items thereon; and (4) statements of assumptions underlying such statements. Activision Blizzard, Inc. generally uses words such as “outlook,” “forecast,” “will,” “could,” “should,” “would,” “to be,” “plan,” “aims,” “believes,” “may,” “might,” “expects,” “intends,” “seeks,” “anticipates,” “estimate,” “future,” “positioned,” “potential,” “project,” “remain,” “scheduled,” “set to,” “subject to,” “upcoming,” and other similar words and expressions to help identify forward-looking statements. Forward-looking statements are subject to business and economic risks, reflect management’s current expectations, estimates, and projections about our business, and are inherently uncertain and difficult to predict.

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 and distributors who sell our physical product to customers; effects on our ability to release our content in a timely manner; the impact of large-scale intervention by the Federal Reserve and other central banks around the world, including the impact on interest rates; and volatility in foreign exchange rates); our ability to consistently deliver popular, high-quality titles in a timely manner, which has been made more difficult as a result of the COVID-19 pandemic; concentration of revenue among a small number of 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; substantial influence of third-party platform providers over our products and costs; risks associated with transitions to next-generation consoles; success and availability of video game consoles manufactured by third parties; risks associated with the free-to-play business model, including dependence on a relatively small number of consumers for a significant portion of revenues and profits from any given game; our ability to realize the expected financial and operational benefits of, and effectively implement and manage, our restructuring actions; our ability to quickly adjust our cost structure in response to sudden changes in demand; risks and costs associated with legal proceedings; intellectual property claims; changes in tax rates or exposure to additional tax liabilities, as well as the outcome of current or future tax disputes; our ability to sell products at assumed pricing levels; reliance on external developers for development of some of our software products; the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt; the seasonality in the sale of our products; counterparty risks relating to customers, licensees, licensors, and manufacturers, which have 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; 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, 2020.

The forward-looking statements contained herein are based on information available to Activision Blizzard, Inc. as of the date of this filing and we assume no obligation to update any such forward-looking statements. Although these forward-looking statements are believed to be true when made, they may ultimately prove to be incorrect. These statements are not guarantees of our future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and may cause actual results to differ materially from current expectations.
 
Activision Blizzard, Inc.’s names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or trade names of Activision Blizzard, Inc. All other product or service names are the property of their respective owners. All dollar amounts referred to in, or contemplated by, this Quarterly Report on Form 10-Q refer to U.S. dollars, unless otherwise explicitly stated to the contrary.

3

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 March 31, 2021At December 31, 2020
Assets  
Current assets:  
Cash and cash equivalents$9,281 $8,647 
Accounts receivable, net of allowances of $59 and $83, at March 31, 2021 and December 31, 2020, respectively773 1,052 
Software development283 352 
Other current assets585 514 
Total current assets10,922 10,565 
Software development207 160 
Property and equipment, net192 209 
Deferred income taxes, net1,250 1,318 
Other assets643 641 
Intangible assets, net446 451 
Goodwill9,765 9,765 
Total assets$23,425 $23,109 
Liabilities and Shareholders’ Equity  
Current liabilities:  
Accounts payable$225 $295 
Deferred revenues1,459 1,689 
Accrued expenses and other liabilities1,497 1,116 
Total current liabilities3,181 3,100 
Long-term debt, net3,606 3,605 
Deferred income taxes, net365 418 
Other liabilities942 949 
Total liabilities8,094 8,072 
Commitments and contingencies (Note 16)
00
Shareholders’ equity:
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,205,570,562 and 1,202,906,087 shares issued at March 31, 2021 and December 31, 2020, respectively
Additional paid-in capital11,549 11,531 
Less: Treasury stock, at cost, 428,676,471 shares at March 31, 2021 and December 31, 2020(5,563)(5,563)
Retained earnings9,945 9,691 
Accumulated other comprehensive loss(600)(622)
Total shareholders’ equity15,331 15,037 
Total liabilities and shareholders’ equity$23,425 $23,109 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in millions, except per share data)
 
 For the Three Months Ended March 31,
 20212020
Net revenues
Product sales$675 $543 
In-game, subscription, and other revenues1,600 1,245 
Total net revenues2,275 1,788 
Costs and expenses 
Cost of revenues—product sales:
Product costs140 119 
Software royalties, amortization, and intellectual property licenses112 82 
Cost of revenues—in-game, subscription, and other:
Game operations and distribution costs296 258 
Software royalties, amortization, and intellectual property licenses30 46 
Product development353 238 
Sales and marketing237 243 
General and administrative282 167 
Restructuring and related costs30 23 
Total costs and expenses1,480 1,176 
Operating income795 612 
Interest and other expense (income), net (Note 12)
30 
Income before income tax expense765 604 
Income tax expense146 99 
Net income$619 $505 
Earnings per common share 
Basic$0.80 $0.66 
Diluted$0.79 $0.65 
Weighted-average number of shares outstanding 
Basic775 769 
Diluted783 774 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

5

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in millions)
 
 For the Three Months Ended March 31,
 20212020
Net income$619 $505 
Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax(5)(14)
Unrealized gains (losses) on forward contracts designated as hedges, net of tax29 
Unrealized gains (losses) on investments, net of tax(2)
Total other comprehensive income (loss)$22 $(9)
Comprehensive income$641 $496 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

6

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in millions)

 For the Three Months Ended March 31,
 20212020
Cash flows from operating activities:  
Net income$619 $505 
Adjustments to reconcile net income to net cash provided by operating activities: 
Deferred income taxes11 
Depreciation and amortization33 62 
Non-cash operating lease cost16 16 
Amortization of capitalized software development costs and intellectual property licenses (1)106 77 
Share-based compensation expense (2)151 43 
Other(11)(10)
Changes in operating assets and liabilities: 
Accounts receivable, net276 249 
Software development and intellectual property licenses(84)(85)
Other assets(2)(1)
Deferred revenues(204)(334)
Accounts payable(70)(132)
Accrued expenses and other liabilities11 (253)
Net cash provided by operating activities844 148 
Cash flows from investing activities: 
Proceeds from maturities of available-for-sale investments16 
Purchases of available-for-sale investments(80)(9)
Capital expenditures(22)(19)
Net cash used in investing activities(86)(28)
Cash flows from financing activities: 
Proceeds from issuance of common stock to employees29 26 
Tax payment related to net share settlements on restricted stock units(124)(19)
Net cash provided by (used in) financing activities(95)
Effect of foreign exchange rate changes on cash and cash equivalents(28)(15)
Net increase in cash and cash equivalents and restricted cash635 112 
Cash and cash equivalents and restricted cash at beginning of period8,652 5,798 
Cash and cash equivalents and restricted cash at end of period$9,287 $5,910 
Supplemental cash flow information - Non-cash financing activities:
Dividends payable$365 $316 

(1)    Excludes deferral and amortization of share-based compensation expense.
(2)    Includes the net effects of capitalization, deferral, and amortization of share-based compensation expense.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
7

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2021 and March 31, 2020
(Unaudited)
(Amounts and shares in millions, except per share data) 

 Common StockTreasury StockAdditional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
 SharesAmountSharesAmount
Balance at December 31, 20201,203 $0 (429)$(5,563)$11,531 $9,691 $(622)$15,037 
Components of comprehensive income:
Net income— — — — — 619 — 619 
Other comprehensive loss— — — — — — 22 22 
Issuance of common stock pursuant to employee stock options— — — 33 — — 33 
Issuance of common stock pursuant to restricted stock units— — — — — — 
Restricted stock surrendered for employees’ tax liability(2)— — — (165)— — (165)
Share-based compensation expense related to employee stock options and restricted stock units— — — — 150 — — 150 
Dividends ($0.47 per common share)— — — — — (365)— (365)
Balance at March 31, 20211,206 $0 (429)$(5,563)$11,549 $9,945 $(600)$15,331 


 Common StockTreasury StockAdditional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
 SharesAmountSharesAmount
Balance at December 31, 20191,197 $0 (429)$(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— — — 27 — — 27 
Issuance of common stock pursuant to restricted stock units— — — — — — 
Restricted stock surrendered for employees’ tax liability— — — (31)— — (31)
Share-based compensation expense related to employee stock options and restricted stock units— — — — 43 — — 43 
Dividends ($0.41 per common share)— — — — — (316)— (316)
Balance at March 31, 20201,199 $0 (429)$(5,563)$11,213 $7,999 $(628)$13,021 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
8

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), 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.
 
Our Segments

Based upon our organizational structure, we conduct our business through 3 reportable segments, each of which is a leading global developer and publisher of interactive entertainment content and services based primarily on our internally developed intellectual properties.
 
(i) Activision Publishing, Inc.
 
Activision Publishing, Inc. (“Activision”) delivers content through both premium and free-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’s key product franchise is Call of Duty®, a first-person action franchise. Activision also includes the activities of the Call of Duty League™, a global professional esports league with city-based teams.

(ii) Blizzard Entertainment, Inc.
 
Blizzard Entertainment, Inc. (“Blizzard”) delivers content through both premium and free-to-play offerings and primarily generates revenue from full-game and in-game sales, subscriptions, 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’s key product franchises include: World of Warcraft®, a subscription-based massive multi-player online role-playing franchise; Hearthstone®, an online collectible card franchise based in the Warcraft universe; Diablo®, an action role-playing franchise; and Overwatch®, a team-based first-person action franchise. Blizzard also includes the activities of the Overwatch League™, a global professional esports league with city-based teams.

(iii) King Digital Entertainment
 
King Digital Entertainment (“King”) delivers content primarily through free-to-play offerings and primarily generates revenue from in-game sales and in-game advertising on the mobile platform. King’s key product franchise is Candy Crush™, a “match three” 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.
9

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, 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, involves additional uncertainty. While there was no material impact to our estimates in the current period, in future periods, facts and circumstances could change and impact our estimates. Additionally, actual results could differ from these estimates and assumptions. In the opinion of management, all adjustments 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

Simplifying the Accounting for Income Taxes

In December 2019, the Financial Accounting Standards Board (“FASB”) issued new guidance which is intended to simplify various aspects to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 for recognizing deferred taxes for investments, performing an intraperiod allocation, and calculating income taxes in interim periods. The amendment also clarifies and amends certain areas of existing guidance to reduce complexity and improve consistency in the application of Topic 740. Generally the guidance 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. On January 1, 2021, we adopted this new accounting standard 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
 
Our total capitalized software development costs of $490 million and $512 million, as of March 31, 2021 and December 31, 2021, respectively, primarily relates to internal development costs. As of both March 31, 2021 and December 31, 2020, capitalized intellectual property licenses were not material.

Amortization of capitalized software development costs and intellectual property licenses was as follows (amounts in millions):
For the Three Months Ended March 31,
 20212020
Amortization of capitalized software development costs and intellectual property licenses$112 $83 
 
10

4.    Intangible Assets, Net
 
Intangible assets, net, consist of the following (amounts in millions):
 
 At March 31, 2021
Estimated useful livesGross carrying amountAccumulated amortizationNet carrying amount
Acquired definite-lived intangible assets:    
Internally-developed franchises3-11 years$1,154 $(1,154)$
Trade names and other1-10 years73 (60)13 
Total definite-lived intangible assets (1) $1,227 $(1,214)$13 
Acquired indefinite-lived intangible assets:    
Activision trademarkIndefinite  386 
Acquired trade namesIndefinite  47 
Total indefinite-lived intangible assets   $433 
Total intangible assets, net$446 

(1) At March 31, 2021, the balances of the developed software intangible assets have been removed as such amounts were fully amortized in the prior year.


 At December 31, 2020
Estimated useful livesGross carrying amountAccumulated amortizationNet carrying amount
Acquired definite-lived intangible assets:    
Internally-developed franchises3-11 years$1,154 $(1,151)$
Developed software2-5 years601 (601)
Trade names and other1-10 years73 (58)15 
Total definite-lived intangible assets $1,828 $(1,810)$18 
Acquired indefinite-lived intangible assets:    
Activision trademarkIndefinite  386 
Acquired trade namesIndefinite  47 
Total indefinite-lived intangible assets   $433 
Total intangible assets, net$451 

Amortization expense of our intangible assets was $5 million and $33 million for the three months ended March 31, 2021 and March 31, 2020, respectively.

 
5.    Goodwill
 
The carrying amount of goodwill by reportable segment at both March 31, 2021 and December 31, 2020 was as follows (amounts in millions):

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

11

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 March 31, 2021 Using
 As of March 31, 2021Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Balance Sheet Classification
Financial Assets:     
Recurring fair value measurements:     
Money market funds$8,968 $8,968 $$Cash and cash equivalents
Foreign government treasury bills25 25 Cash and cash equivalents
U.S. treasuries and government agency securities227 227 Other current assets
Foreign currency forward contracts designated as hedges12 12 Other current assets and Other assets
Total$9,232 $9,220 $12 $ 
Financial Liabilities:
Foreign currency forward contracts not designated as hedges$(1)$$(1)$Accrued expenses and other liabilities
Foreign currency forward contracts designated as hedges(7)(7)Accrued expenses and other liabilities
Total$(8)$$(8)$
12

Fair Value Measurements at December 31, 2020 Using
 As of December 31, 2020Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Balance Sheet Classification
Financial Assets:
Recurring fair value measurements:     
Money market funds$8,345 $8,345 $$Cash and cash equivalents
Foreign government treasury bills34 34 Cash and cash equivalents
U.S. treasuries and government agency securities164 164 Other current assets
Total$8,543 $8,543 $$ 
Financial Liabilities:
Foreign currency forward contracts not designated as hedges$(2)$$(2)$Accrued expenses and other liabilities
Foreign currency forward contracts designated as hedges(24)(24)Accrued expenses and other liabilities
Total$(26)$$(26)$

Foreign Currency Forward Contracts

Foreign Currency Forward Contracts 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 19 months or less as of March 31, 2021, are as follows (amounts in millions):

As of March 31, 2021As of December 31, 2020
Notional amountFair value gain (loss)Notional amountFair value gain (loss)
Foreign Currency:
Buy USD, Sell Euro$850 $$542 $(24)

For the three months ended March 31, 2021 and 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 were not material.
Foreign Currency Forward Contracts Not Designated as Hedges

The gross notional amounts and fair values of our foreign currency forward contracts not designated as hedges are as follows (amounts in millions):

As of March 31, 2021As of December 31, 2020
Notional amountFair value gain (loss)Notional amountFair value gain (loss)
Foreign Currency:
Buy USD, Sell GBP$148 $(1)$116 $(2)

For the three months ended March 31, 2021 and 2020, pre-tax net gains (losses) associated with these forward contracts were recorded in “General and administrative expenses” and were not material.
 
13

7.    Deferred revenues

We record deferred revenues when cash payments are received or due in advance of the fulfillment of our associated performance obligations. The aggregate of the current and non-current balances of deferred revenues as of March 31, 2021 and December 31, 2020, were $1.5 billion and $1.7 billion, respectively. For the three months ended March 31, 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 months ended March 31, 2021, $1.1 billion of revenues were recognized that were included in the deferred revenues balance at December 31, 2020. During the three months ended March 31, 2020, $0.8 billion of revenues were recognized that were included in the deferred revenues balance at December 31, 2019.

As of March 31, 2021, the aggregate amount of contracted revenues allocated to our unsatisfied performance obligations was $2.2 billion, which included our deferred revenues balances and amounts to be invoiced and recognized as revenue in future periods. We expect to recognize approximately $1.7 billion over the next 12 months, $0.4 billion in the subsequent 12-month period, and the remainder thereafter. This balance did not include an estimate for variable consideration arising from sales-based royalty license revenue in excess of the contractual minimum guarantee or any estimated amounts of variable consideration that are subject to constraint in accordance with the revenue standard.

8.    Debt
 
Credit Facilities
As of March 31, 2021 and December 31, 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 0t drawn on the Revolver and we were in compliance with the terms of the Credit Agreement as of March 31, 2021.

Refer to Note 13 contained in our Annual Report on Form 10-K for the year ended December 31, 2020 for further details regarding the Credit Agreement and its key terms.
 
Unsecured Senior Notes

As of March 31, 2021 and December 31, 2020, we had $3.7 billion of gross unsecured senior notes outstanding. A summary of our outstanding unsecured senior notes is as follows (amounts in millions):

 At March 31, 2021At December 31, 2020
Unsecured Senior NotesInterest RateSemi-Annual Interest Payments Due OnMaturityPrincipalFair Value
(Level 2)
PrincipalFair Value
(Level 2)
2026 Notes3.40%Mar. 15 & Sept. 15Sept. 2026850 930 850 970 
2027 Notes3.40%Jun. 15 & Dec. 15Jun. 2027400 438 400 454 
2030 Notes1.35%Mar. 15 & Sept. 15Sept. 2030500 450 500 490 
2047 Notes4.50%Jun. 15 & Dec. 15Jun. 2047400 469 400 525 
2050 Notes2.50%Mar. 15 & Sept. 15Sept. 20501,500 1,258 1,500 1,462 
Total gross long-term debt$3,650 $3,650 
Unamortized discount and deferred financing costs(44)(45)
Total net carrying amount$3,606 $3,605 

We were in compliance with the terms of the notes outstanding as of March 31, 2021. As of March 31, 2021, we have no contractual principal repayments of our long-term debt due within the next five years.

Refer to Note 13 contained in our Annual Report on Form 10-K for the year ended December 31, 2020 for further details regarding key terms under our indentures that govern our outstanding notes.

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9.    Accumulated Other Comprehensive Income (Loss)
 
The components of accumulated other comprehensive income (loss) were as follows (amounts in millions):

 For the Three Months Ended March 31, 2021
Foreign currency translation adjustmentsUnrealized gain (loss) on forward contractsUnrealized gain (loss) on available-for-sale securitiesTotal
Balance at December 31, 2020$(589)$(28)$(5)$(622)
Other comprehensive income (loss) before reclassifications(5)20 (3)12 
Amounts reclassified from accumulated other comprehensive income (loss) into earnings10 
Balance at March 31, 2021$(594)$$(7)$(600)

 For the Three Months Ended March 31, 2020
Foreign currency translation adjustmentsUnrealized gain (loss) on forward contractsUnrealized gain (loss) on available-for-sale securitiesTotal
Balance at December 31, 2019$(624)$$(3)$(619)
Other comprehensive income (loss) before reclassifications(12)10 
Amounts reclassified from accumulated other comprehensive income (loss) into earnings(2)(9)(11)
Balance at March 31, 2020$(638)$$$(628)

10.    Operating Segments and Geographic Region
 
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.
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Information on reportable segment net revenues and operating income for the three months ended March 31, 2021 and 2020, are presented below (amounts in millions):

Three Months Ended March 31, 2021
ActivisionBlizzardKingTotal
Segment Net Revenues
Net revenues from external customers$891 $458 $609 $1,958 
Intersegment net revenues (1)25 25 
Segment net revenues$891 $483 $609 $1,983 
Segment operating income$442 $208 $203 $853 
Three Months Ended March 31, 2020
ActivisionBlizzardKingTotal
Segment Net Revenues
Net revenues from external customers$519 $437 $498 $1,454 
Intersegment net revenues (1)15 15 
Segment net revenues$519 $452 $498 $1,469 
Segment operating income$184 $197 $156 $537 

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

Reconciliations of total segment net revenues and total segment operating income to consolidated net revenues and consolidated income before income tax expense are presented in the table below (amounts in millions):

Three Months Ended March 31,
20212020
Reconciliation to consolidated net revenues:
Segment net revenues$1,983 $1,469 
Revenues from non-reportable segments (1)108 68 
Net effect from recognition (deferral) of deferred net revenues (2)209 266 
Elimination of intersegment revenues (3)(25)(15)
Consolidated net revenues$2,275 $1,788 
Reconciliation to consolidated income before income tax expense:
Segment operating income$853 $537 
Operating income (loss) from non-reportable segments (1)(4)
Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (2)132 171 
Share-based compensation expense(151)(43)
Amortization of intangible assets(5)(33)
Restructuring and related costs (Note 11)
(30)(23)
Consolidated operating income795 612 
Interest and other expense (income), net30 
Consolidated income before income tax expense$765 $604 

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

(2)Reflects the net effect from recognition (deferral) of deferred net revenues, along with related cost of revenues, on certain of our online-enabled products.

(3)Intersegment revenues reflect licensing and service fees charged between segments.
Net revenues by distribution channel, including a reconciliation to each of our reportable segment’s revenues, for the three months ended March 31, 2021 and 2020, were as follows (amounts in millions):

Three Months Ended March 31, 2021
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (3)Total
Net revenues by distribution channel:
Digital online channels (1)$965 $461 $605 $$(25)$2,006 
Retail channels143 149 
Other (2)15 102 120 
Total consolidated net revenues$1,123 $470 $605 $102 $(25)$2,275 
Change in deferred revenues:
Digital online channels (1)$(162)$17 $$$$(141)
Retail channels(70)(4)(74)
Other (2)
Total change in deferred revenues$(232)$13 $$$$(209)
Segment net revenues:
Digital online channels (1)$803 $478 $609 $$(25)$1,865 
Retail channels73 75 
Other (2)15 108 126 
Total segment net revenues$891 $483 $609 $108 $(25)$2,066 

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Three Months Ended March 31, 2020
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (3)Total
Net revenues by distribution channel:
Digital online channels (1)$548 $409 $499 $$(15)$1,441 
Retail channels212 221 
Other (2)20 31 75 126 
Total consolidated net revenues$780 $449 $499 $75 $(15)$1,788 
Change in deferred revenues:
Digital online channels (1)$(93)$$(1)$$$(86)
Retail channels(168)(4)(172)
Other (2)(1)(7)(8)
Total change in deferred revenues$(261)$$(1)$(7)$$(266)
Segment net revenues:
Digital online channels (1)$455 $417 $498 $$(15)$1,355 
Retail channels44 49 
Other (2)20 30 68 118 
Total segment net revenues$519 $452 $498 $68 $(15)$1,522 

(1)    Net revenues from “Digital online channels” include revenues from digitally-distributed 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.

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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 March 31, 2021 and 2020, were as follows (amounts in millions):

Three Months Ended March 31, 2021
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (2)Total
Net revenues by geographic region:
Americas$725 $210 $386 $$(14)$1,307 
EMEA (1)311 167 160 102 (9)731 
Asia Pacific87 93 59 (2)237 
Total consolidated net revenues$1,123 $470 $605 $102 $(25)$2,275 
Change in deferred revenues:
Americas$(131)$$$$$(121)
EMEA (1)(77)(1)(65)
Asia Pacific(24)(23)
Total change in deferred revenues$(232)$13 $$$$(209)
Segment net revenues:
Americas$594 $215 $391 $$(14)$1,186 
EMEA (1)234 174 159 108 (9)666 
Asia Pacific63 94 59 (2)214 
Total segment net revenues$891 $483 $609 $108 $(25)$2,066 

Three Months Ended March 31, 2020
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (2)Total
Net revenues by geographic region:
Americas$472 $172 $311 $$(7)$948 
EMEA (1)239 121 136 75 (5)566 
Asia Pacific69 156 52 (3)274 
Total consolidated net revenues$780 $449 $499 $75 $(15)$1,788 
Change in deferred revenues:
Americas$(146)$$$$$(143)
EMEA (1)(96)(1)(7)(101)
Asia Pacific(19)(2)(1)(22)
Total change in deferred revenues$(261)$$(1)$(7)$$(266)
Segment net revenues:
Americas$326 $174 $312 $$(7)$805 
EMEA (1)143 124 135 68 (5)465 
Asia Pacific50 154 51 (3)252 
Total segment net revenues$519 $452 $498 $68 $(15)$1,522 

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

(2)    Intersegment revenues reflect licensing and service fees charged between segments.
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The Company’s net revenues in the U.S. were 50% and 47% of consolidated net revenues for the three months ended March 31, 2021 and 2020, respectively. The Company’s net revenues in the United Kingdom (“U.K.”) were 11% and 9% of consolidated net revenues for the three months ended March 31, 2021 and 2020, respectively. No other country’s net revenues exceeded 10% of consolidated net revenues for either the three months ended March 31, 2021 or 2020.
Net revenues by platform, including a reconciliation to each of our reportable segment’s net revenues, for the three months ended March 31, 2021 and 2020, were as follows (amounts in millions):

Three Months Ended March 31, 2021
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (3)Total
Net revenues by platform:
Console$774 $25 $$$$799 
PC201 422 24 (25)622 
Mobile and ancillary (1)133 20 581 734 
Other (2)15 102 120 
Total consolidated net revenues$1,123 $470 $605 $102 $(25)$2,275 
Change in deferred revenues:
Console$(167)$(6)$$$$(173)
PC(61)17 (1)(45)
Mobile and ancillary (1)(4)
Other (2)
Total change in deferred revenues$(232)$13 $$$$(209)
Segment net revenues:
Console$607 $19 $$$$626 
PC140 439 23 (25)577 
Mobile and ancillary (1)129 22 586 737 
Other (2)15 108 126 
Total segment net revenues$891 $483 $609 $108 $(25)$2,066 

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Three Months Ended March 31, 2020
ActivisionBlizzardKingNon-reportable segmentsElimination of intersegment revenues (3)Total
Net revenues by platform:
Console$567 $27 $$$$594 
PC126 362 25 (15)498 
Mobile and ancillary (1)67 29 474 570 
Other (2)20 31 75 126 
Total consolidated net revenues$780 $449 $499 $75 $(15)$1,788 
Change in deferred revenues:
Console$(223)$(8)$$$$(231)
PC(37)19 (1)(19)
Mobile and ancillary (1)(1)(7)(8)
Other (2)(1)(7)(8)
Total change in deferred revenues$(261)$$(1)$(7)$$(266)
Segment net revenues:
Console$344 $19 $$$$363 
PC89 381 24 (15)479 
Mobile and ancillary (1)66 22 474 562 
Other (2)20 30 68 118 
Total segment net revenues$519 $452 $498 $68 $(15)$1,522 

(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” primarily 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 March 31, 2021At December 31, 2020
Long-lived assets (1) by geographic region:  
Americas$259 $270 
EMEA156 166 
Asia Pacific14 17 
Total long-lived assets by geographic region$429 $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 lease right-of-use assets. All other long-term assets are not allocated by location.

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11.    Restructuring

During 2019, we began implementing a plan aimed at refocusing our resources on our largest opportunities and removing unnecessary levels of complexity from certain parts of our business. We have been:

increasing our investment in development for our largest, internally-owned franchises—across upfront releases, in-game content, mobile, and geographic expansion;

reducing certain non-development and administrative-related costs across our business; and

integrating our global and regional sales and “go-to-market,” partnerships, and sponsorships capabilities across the business, which we believe will enable us to provide better opportunities for talent, and greater expertise and scale on behalf of our business units.

The restructuring actions remain in progress as we continue to focus on these goals.

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

Severance and employee-related costsFacilities and related costsOther costsTotal
Balance at December 31, 2020$88 $$$91 
Costs charged to expense24 27 
Cash payments(9)(1)(10)
Non-cash charge adjustment(2)(1)(1)(4)
Balance at March 31, 2021$101 $$$104 
Cumulative charges incurred through March 31, 2021$176 $36 $34 $246 

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

Three Months Ended March 31,
20212020
Activision$$
Blizzard23 21 
King(1)
Other segments (1)
Total$27 $23 

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


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During the three months ended March 31, 2021, we incurred additional restructuring charges that are not included in the plan discussed above. Such amounts were not material.

We expect to incur total aggregate pre-tax restructuring charges of approximately $310 million associated with the plan, of which we expect the remaining charges that have not yet been recognized to largely be incurred by the end of 2021. The charges associated with the 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. 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 is expected to be offset by increased investment in product development.

The total charges incurred through March 31, 2021 and total expected pre-tax restructuring charges related to the plan, by segment, inclusive of amounts already incurred and inclusive of certain inventory write-downs in prior years, are presented below (amounts in millions):

Total Charges Incurred Through March 31, 2021Total Charges Expected as of March 31, 2021
Activision$33 $44 
Blizzard167 205 
King20 22 
Other segments (1)31 39 
Total$251 $310 

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

12.     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 March 31,
20212020
Interest income$(1)$(16)
Interest expense from debt and amortization of debt discount and deferred financing costs28 23 
Other expense (income), net
Interest and other expense (income), net$30 $

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.
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The income tax expense of $146 million for the three months ended March 31, 2021, reflects, an effective tax rate of 19%, which is higher than the effective tax rate of 16% for the three months ended March 31, 2020. The increase is primarily due to a benefit recognized in the prior year in connection with the remeasurement of a U.S. deferred tax asset, partially offset by higher excess tax benefits from share-based payments in the current year.

The effective tax rate of 19% for the three months ended March 31, 2021, is lower than the U.S. statutory rate of 21%, primarily due to excess tax benefits from share-based payments in the current year.
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 2016 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 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.

14.    Computation of Basic/Diluted Earnings Per Common Share
 
The following table sets forth the computation of basic and diluted earnings per common share (amounts in millions, except per share data):

For the Three Months Ended March 31,
20212020
Numerator:
  Consolidated net income$619 $505 
Denominator:  
Denominator for basic earnings per common share—weighted-average common shares outstanding775 769 
Effect of dilutive stock options and awards under the treasury stock method
Denominator for basic earnings per common share—weighted-average dilutive common shares outstanding783 774 
Basic earnings per common share$0.80 $0.66 
Diluted earnings per common share$0.79 $0.65 
 
The vesting of certain of our employee-related restricted stock units is contingent upon the satisfaction of predefined 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.
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Weighted-average shares excluded from the computation of diluted earnings per share were as follows (amounts in millions):

For the Three Months Ended March 31,
20212020
Restricted stock units with performance measures not yet met
Anti-dilutive employee stock options

15.    Capital Transactions
 
Repurchase Program
 
On January 27, 2021, our Board of Directors authorized a stock repurchase program under which we are authorized to repurchase up to $4.0 billion of our common stock during the two-year period from February 14, 2021 until the earlier of February 13, 2023 and a determination by the Board of Directors to discontinue the repurchase program. As of March 31, 2021, we have 0t 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. Such dividend is payable on May 6, 2021, to shareholders of record at the close of business on April 15, 2021. We have recorded $365 million of dividends payable in “Accrued expenses and other liabilities” on our condensed consolidated balance sheet as of March 31, 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.

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.

25

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), 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. For a discussion of the history of the formation of our Company, including our year and form of incorporation, refer to Part I, Item 1 “Business” of our Annual Report on Form 10-K for the year ended December 31, 2019.
Our Segments
Based upon our organizational structure, we conduct our business through three reportable segments, each of which is a leading global developer and publisher of interactive entertainment content and services based primarily on our internally developed intellectual properties.
 
(i) Activision Publishing, Inc.
 
Activision Publishing, Inc. (“Activision”) delivers content through both premium and free-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’s key product franchise is Call of Duty®, a first-person action franchise. Activision also includes the activities of the Call of Duty League™, a global professional esports league with city-based teams.

(ii) Blizzard Entertainment, Inc.
 
Blizzard Entertainment, Inc. (“Blizzard”) delivers content through both premium and free-to-play offerings and primarily generates revenue from full-game and in-game sales, subscriptions, 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’s key product franchises include: World of Warcraft®, a subscription-based massive multi-player online role-playing franchise; Hearthstone®, an online collectible card franchise based in the Warcraft universe; Diablo®, an action role-playing franchise; and Overwatch®, a team-based first-person action franchise. Blizzard also includes the activities of the Overwatch League™, a global professional esports league with city-based teams.

(iii) King Digital Entertainment
 
King Digital Entertainment (“King”) delivers content primarily through free-to-play offerings and primarily generates revenue from in-game sales and in-game advertising on the mobile platform. King’s key product franchise is Candy Crush™, a “match three” 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 March 11, 2020, the World Health Organization (“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. We anticipate that these actions and the ongoing global health crisis caused by COVID-19 will continue to negatively impact many business activities and financial markets across the globe.

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

In an effort to protect the health and safety of our employees, the majority of our workforce continues to work from home and we have placed restrictions on non-essential business travel. Additionally, thus far, our business has been able to operate with minimal disruption to our game titles’ published release dates.

The full extent of the impact of the COVID-19 pandemic on our business, reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, or stock price will depend on numerous evolving factors that we are not able to fully predict at this time. We will continue to actively monitor the developments of the COVID-19 pandemic and may take further actions that could alter our business operations as may be required by federal, state, local, or foreign authorities, or that we determine are in the best interests of our employees, customers, partners, and shareholders.

Refer to Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020 for additional details on risks and uncertainties regarding the impacts of the global COVID-19 pandemic on our business, reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, and stock price.

Business Results and Highlights
 
Financial Results

For the three months ended March 31, 2021:

consolidated net revenues increased 27% to $2.28 billion, while consolidated operating income increased 30% to $795 million, as compared to consolidated net revenues of $1.79 billion and consolidated operating income of $612 million for the three months ended March 31, 2020;

diluted earnings per common share increased 22% to $0.79, as compared to $0.65 for the three months ended March 31, 2020; and

cash flows from operating activities were $844 million, an increase of 470%, as compared to $148 million for the three months ended March 31, 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 March 31, 2021, include a net effect of $209 million and $132 million, respectively, from the recognition of deferred net revenues and related cost of revenues.

Additionally, for the both three months ended March 31, 2021 and 2020, 11% 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 89% of total net revenues. 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 and other revenue” is primarily comprised of revenue associated with the online functionality of our games, in-game purchases, and subscriptions.

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Operating Metrics

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

Net bookings and In-game net bookings

We monitor net bookings and in-game net bookings as key operating metrics in evaluating the performance of our business because they enable an analysis of performance based on the timing of actual transactions with our customers and provide a more timely indication of trends in our operating results. Net bookings is the net amount of products and services sold digitally or sold-in physically in the period, and includes license fees, merchandise, and publisher incentives, among others. Net bookings is equal to net revenues excluding the impact from deferrals. In-game net bookings primarily includes the net amount of microtransactions and downloadable content 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 March 31,
20212020Increase (Decrease)
Net bookings$2,066 $1,522 $544 
In-game net bookings$1,343 $956 $387 

Net bookings

The increase in net bookings for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to:

a $372 million increase in Activision net bookings, driven by higher 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 on October 2019, and when referred to herein, is inclusive of Call of Duty: Warzone from its release in March 2020 through December 16, 2020), (2) Call of Duty: Modern Warfare, as compared to Call of Duty: Black Ops 4, which was released in October 2018, and (3) Call of Duty: Mobile, which was released in October 2019;

an $111 million increase in King net bookings driven by higher net bookings from in-game player purchases and advertising, primarily in the Candy Crush franchise; and

a $31 million increase in Blizzard net bookings, driven by higher net bookings from World of Warcraft, which includes the November 2020 release of World of Warcraft: Shadowlands, partially offset by lower net bookings from Warcraft III: Reforged™, which was released in January 2020.

In-game net bookings

The increase in in-game net bookings for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to a $243 million increase in Activision in-game net bookings, an $81 million increase in King in-game net bookings, and a $63 million increase in Blizzard in-game net bookings, primarily driven by the same factors as noted for net bookings above.

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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 trending in the number of MAUs can be a meaningful performance metric, period-to-period fluctuations may not be indicative of longer-term trends. The following table details our average MAUs on a sequential quarterly basis for each of our reportable segments (amounts in millions):

March 31, 2021December 31, 2020September 30, 2020June 30, 2020March 31, 2020
Activision150 128 111 125 102 
Blizzard27 29 30 32 32 
King258 240 249 271 273 
Total435 397 390 428 407 

Average MAUs increased by 38 million, or 10%, for the three months ended March 31, 2021, as compared to the three months ended December 31, 2020, primarily due to:

an increase in average MAUs for Activision, driven by (1) the December 2020 release of Call of Duty: Mobile in China and (2) Call of Duty: Black Ops Cold War, which was released in November 2020; and

an increase in average MAUs for King, driven by (1) the Candy Crush franchise and (2) the release of Crash Bandicoot: On the Run! in March 2021.

Average MAUs increased by 28 million, or 7%, for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, primarily due to an increase in Activision’s average MAUs, driven by (1) the December 2020 release of Call of Duty: Mobile in China and (2) Call of Duty: Modern Warfare and Call of Duty: Black Ops Cold War, both of which benefited from the March 2020 release of Call of Duty: Warzone. The increase was partially offset by a decrease in King’s average MAUs, driven by the Candy Crush franchise.

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Consolidated Statements of Operations Data

The following table sets forth condensed consolidated statements of operations data for the periods indicated (amounts in 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 March 31,
 20212020
Net revenues    
Product sales$675 30 %$543 30 %
In-game, subscription, and other revenues1,600 70 1,245 70 
Total net revenues2,275 100 1,788 100 
Costs and expenses   
Cost of revenues—product sales:
Product costs140 21 119 22 
Software royalties, amortization, and intellectual property licenses112 17 82 15 
Cost of revenues—in-game, subscription, and other:
Game operations and distribution costs296 19 258 21 
Software royalties, amortization, and intellectual property licenses30 46 
Product development353 16 238 13 
Sales and marketing237 10 243 14 
General and administrative282 12 167 
Restructuring and related costs30 23 
Total costs and expenses1,480 65 1,176 66 
Operating income795 35 612 34 
Interest and other expense (income), net30 — 
Income before income tax expense765 34 604 34 
Income tax expense146 99 
Net income$619 27 %$505 28 %


Consolidated Net Revenues

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

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

 For the Three Months Ended March 31,
 20212020Increase (Decrease)% Change
Consolidated net revenues$2,275 $1,788 $487 27 %
In-game net revenues (1)1,323 935 388 41 

(1)    In-game net revenues primarily includes the net amount of revenue recognized for microtransactions and downloadable content during the period.

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Consolidated Net Revenues

The increase in consolidated net revenues for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily driven by an increase in revenues of $524 million due to higher revenues from:

Call of Duty: Modern Warfare, which was released in October 2019, as compared to Call of Duty: Black Ops 4, which was released in October 2018;

World of Warcraft, which includes the November 2020 release of World of Warcraft: Shadowlands;

the Candy Crush franchise;

Call of Duty: Mobile, which was released in October 2019; and

Call of Duty: Black Ops Cold War, which was released in November 2020, as compared to Call of Duty: Modern Warfare.

This increase was partially offset by a net decrease in revenues of $37 million, driven by various other franchises and titles.

In-game Net Revenues

The increase in in-game net revenues for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily driven by an increase in in-game net revenues of $380 million due to higher in-game revenues from:

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

the Candy Crush franchise;

Call of Duty: Mobile; and

World of Warcraft.

The remaining net increase of $8 million was driven by various other franchises and titles.

Foreign Exchange Impact

Changes in foreign exchange rates had a positive impact of approximately $78 million on our consolidated net revenues for the three months ended March 31, 2021, 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.

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Information on the reportable segment net revenues and segment operating income are presented below (amounts in millions):
Three Months Ended March 31, 2021Increase / (Decrease)
ActivisionBlizzardKingTotalActivisionBlizzardKingTotal
Segment Net Revenues
Net revenues from external customers$891 $458 $609 $1,958 $372 $21 $111 $504 
Intersegment net revenues (1)— 25 — 25 — 10 — 10 
Segment net revenues$891 $483 $609 $1,983 $372 $31 $111 $514 
Segment operating income$442 $208 $203 $853 $258 $11 $47 $316 
Three Months Ended March 31, 2020
ActivisionBlizzardKingTotal
Segment Net Revenues
Net revenues from external customers$519 $437 $498 $1,454 
Intersegment net revenues (1)— 15 — 15 
Segment net revenues$519 $452 $498 $1,469 
Segment operating income$184 $197 $156 $537 

(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 March 31,
20212020
Reconciliation to consolidated net revenues:
Segment net revenues$1,983 $1,469 
Revenues from non-reportable segments (1)108 68 
Net effect from recognition (deferral) of deferred net revenues (2)209 266 
Elimination of intersegment revenues (3)(25)(15)
Consolidated net revenues$2,275 $1,788 
Reconciliation to consolidated income before income tax expense:
Segment operating income$853 $537 
Operating income (loss) from non-reportable segments (1)(4)
Net effect from recognition (deferral) of deferred net revenues and related cost of revenues132 171 
Share-based compensation expense(151)(43)
Amortization of intangible assets(5)(33)
Restructuring and related costs (Note 11)
(30)(23)
Consolidated operating income795 612 
Interest and other expense (income), net30 
Consolidated income before income tax expense$765 $604 
(1)Includes other income and expenses outside of our reportable segments, including our Distribution business and unallocated corporate income and expenses.
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(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.

Segment Net Revenues
 
Activision

The increase in Activision’s segment net revenues for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to higher 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;

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

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

Blizzard

The increase in Blizzard’s segment net revenues for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to higher revenues from World of Warcraft, which includes the November 2020 release of World of Warcraft: Shadowlands.

The increase was partially offset by lower revenues from:

Warcraft III: Reforged, which was released in January 2020; and

The Overwatch League, whose current season commenced in April 2021 while the 2020 season commenced in February 2020.

King

The increase in King’s segment net revenues for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to higher revenues from in-game player purchases and advertising, primarily in the Candy Crush franchise.

Segment Income from Operations
 
Activision

The increase in Activision’s segment operating income for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to:

higher segment net revenues; and

lower marketing cost for the Call of Duty franchise, as the prior year included additional spending to support the release of Call of Duty: Warzone in March 2020, as well as Call of Duty: Mobile, which was released in October 2019.

This increase was partially offset by:

higher cost of revenues driven by the higher segment net revenues; and

higher product development costs driven by increased personnel costs to support the Call of Duty franchise, including higher bonuses as a result of strong business performance.
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Blizzard

The increase in Blizzard’s segment operating income for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to higher segment net revenues, partially offset by an increase in product development costs to support game development efforts.

King

The increase in King’s segment operating income for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to higher segment net revenues.

This increase was partially offset by:

higher marketing costs;

higher service provider fees, primarily digital storefront fees (e.g. fees retained by Google Inc. (“Google”) and Apple Inc. (“Apple”) for our sales on their platforms), driven by the higher in-game player purchases; and

higher product development costs.

Foreign Exchange Impact
 
Changes in foreign exchange rates had a positive impact of approximately $57 million on reportable segment net revenues for the three months ended March 31, 2021, as compared to the same period 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 March 31,
 20212020Increase (Decrease)
Net revenues by distribution channel:   
Digital online channels (1)$2,006 $1,441 $565 
Retail channels149 221 (72)
Other (2)120 126 (6)
Total consolidated net revenues$2,275 $1,788 $487 

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

(2)     Net revenues from “Other” primarily includes revenues from our Distribution business, the Overwatch League, and the Call of Duty League.

Digital Online Channel Net Revenues

The increase in net revenues from digital online channels for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to higher revenues from:

Call of Duty: Modern Warfare, which was released in October 2019, as compared to Call of Duty: Black Ops 4, which was released in October 2018;

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Call of Duty: Black Ops Cold War, which was released in November 2020, as compared to Call of Duty: Modern Warfare;

World of Warcraft, which includes the November 2020 release of World of Warcraft: Shadowlands;

the Candy Crush franchise; and

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

Retail Channel Net Revenues

The decrease in net revenues from retail channels for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to lower revenues from Call of Duty: Black Ops Cold War as compared to Call of Duty: Modern Warfare.

Net Revenues by Platform
 
The following table details our consolidated net revenues by platform (amounts in millions):
 
For the Three Months Ended March 31,
20212020Increase (Decrease)
Net revenues by platform:
Console$799 $594 $205 
PC622 498 124 
Mobile and ancillary (1)734 570 164 
Other (2)120 126 (6)
Total consolidated net revenues$2,275 $1,788 $487 

(1)    Net revenues from “Mobile and ancillary” include revenues from mobile devices, as well as non-platform-specific game-related revenues, such as standalone sales of toys and accessories.

(2)    Net revenues from “Other” primarily includes revenues from our Distribution business, the Overwatch League, and the Call of Duty League.

Console

The increase in net revenues from the console platform for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to higher revenues from:

Call of Duty: Modern Warfare, which was released in October 2019, as compared to Call of Duty: Black Ops 4, which was released in October 2018; and

Call of Duty: Black Ops Cold War, which was released in November 2020, as compared to Call of Duty: Modern Warfare.

PC

The increase in net revenues from the PC platform for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to higher revenues from:

World of Warcraft, which includes the November 2020 release of World of Warcraft: Shadowlands; and

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

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The increase was partially offset by lower revenues from Hearthstone.

Mobile and Ancillary

The increase in net revenues from mobile and ancillary for the three months ended March 31, 2021, as compared to net revenues for the three months ended March 31, 2020, was primarily due to higher revenues from:

the Candy Crush franchise; and

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

Costs and Expenses
 
Cost of Revenues
 
The following table details the components of cost of revenues in dollars (amounts in millions) and as a percentage of associated net revenues:

Three Months Ended March 31, 2021% of associated net revenuesThree Months Ended March 31, 2020% of associated net revenuesIncrease (Decrease)
Cost of revenues—product sales:
     Product costs$140 21 %$119 22 %$21 
Software royalties, amortization, and intellectual property licenses112 17 82 15 30 
Cost of revenues—in-game, subscription, and other:
  Game operations and distribution costs296 19 258 21 38 
Software royalties, amortization, and intellectual property licenses30 46 (16)
Total cost of revenues$578 25 %$505 28 %$73 

Cost of Revenues—Product Sales:

The increase in product costs for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to a $43 million increase in product costs for our Distribution business as a result of higher revenues, partially offset by an $11 million decrease in product costs 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.

The increase in software royalties, amortization, and intellectual property licenses related to product sales for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to a $28 million increase in software amortization and royalties from Blizzard, driven by higher software amortization and royalties from World of Warcraft given the November 2020 release of World of Warcraft: Shadowlands with no comparable amortization in the prior year.

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

The increase in game operations and distribution costs for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to a $36 million increase 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, as a result of higher revenues.

The decrease in software royalties, amortization, and intellectual property licenses related to in-game, subscription, and other revenues for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to a decrease of $27 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 $12 million, driven by Call of Duty: Mobile, which was released in October 2019.
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Product Development (amounts in millions)

March 31, 2021% of consolidated net revenuesMarch 31, 2020% of consolidated net revenuesIncrease (Decrease)
Three Months Ended$353 16 %$238 13 %$115 

The increase in product development costs for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to higher development costs of $115 million, driven by increased personnel costs to support our franchises, as well as higher bonuses as a result of strong business performance.

Sales and Marketing (amounts in millions)
 
March 31, 2021% of consolidated net revenuesMarch 31, 2020% of consolidated net revenuesIncrease (Decrease)
Three Months Ended$237 10 %$243 14 %$(6)

Sales and marketing expenses for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, were comparable, as lower sales and marketing costs for the Call of Duty franchise were largely offset by higher sales and marketing costs for the Candy Crush franchise.

General and Administrative (amounts in millions)
 
March 31, 2021% of consolidated net revenuesMarch 31, 2020% of consolidated net revenuesIncrease (Decrease)
Three Months Ended$282 12 %$167 %$115 

The increase in general and administrative expenses for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, was primarily due to a $106 million increase in personnel costs as a result of higher share-based compensation.

Restructuring and related costs (amounts in millions)

March 31, 2021% of consolidated net revenuesMarch 31, 2020% of consolidated net revenuesIncrease (Decrease)
Three Months Ended$30 %$23 %$

During 2019, we began implementing a plan aimed at refocusing our resources on our largest opportunities and to remove unnecessary levels of complexity and duplication from certain parts of our business. Since then, we have been, and will continue focusing on these goals as we execute against our plan. The restructuring and related costs incurred during 2021 relate primarily to severance costs. We do not expect to realize significant net savings in our total operating expenses as a result of our plan, as cost reductions in our selling, general and administrative activities is expected to be offset by increased investment in product development. Refer to Note 11 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for further discussion.

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Interest and Other Expense (Income), Net (amounts in millions)
 
March 31, 2021% of consolidated net revenuesMarch 31, 2020% of consolidated net revenuesIncrease (Decrease)
Three Months Ended$30 %$— %$22 
 
The increase in interest and other expense (income), net, for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020 was primarily due to a $15 million decrease in interest income driven by lower returns on our investment portfolio as a result of lower interest rates.

As of March 31, 2021, based on the composition of our investment portfolio, 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.

Income Tax Expense (amounts in millions)

March 31, 2021% of pretax incomeMarch 31, 2020% of pretax incomeIncrease (Decrease)
Three Months Ended$146 19 %$99 16 %$47 

The income tax expense of $146 million for the three months ended March 31, 2021, reflects an effective tax rate of 19%, which is higher than the effective tax rate of 16% for the three months ended March 31, 2020. The increase is primarily due to a benefit recognized in the prior year in connection with the remeasurement of a U.S. deferred tax asset, partially offset by higher excess tax benefits from share-based payments in the current year.

The effective tax rate of 19% for the three months ended March 31, 2021, is lower than the U.S. statutory rate of 21%, primarily due to excess tax benefits from share-based payments in the current year.

Further information about our income taxes is provided in Note 13 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

Liquidity and Capital Resources
 
We believe our ability to generate cash flows from operating activities is one of our fundamental financial strengths. 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 $9.5 billion, our access to capital, and the availability of our $1.5 billion revolving credit facility, will be sufficient to finance our operational and financing requirements for the next 12 months. Our primary sources of liquidity, which are available to us to fund our operations and other cash outflows such as potential dividend payments or share repurchases and scheduled debt maturities (the next of which is in 2026), include our cash and cash equivalents, short-term investments, and cash flows provided by operating activities.

As of March 31, 2021, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $2.6 billion, as compared to $2.5 billion as of December 31, 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 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.

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Sources of Liquidity (amounts in millions)

March 31, 2021December 31, 2020Increase (Decrease)
Cash and cash equivalents$9,281 $8,647 $634 
Short-term investments234 170 64 
 $9,515 $8,817 $698 
Percentage of total assets41 %38 % 
 
 For the Three Months Ended March 31,
 20212020Increase (Decrease)
Net cash provided by operating activities$844 $148 $696 
Net cash used in investing activities(86)(28)(58)
Net cash provided by (used in) financing activities(95)(102)
Effect of foreign exchange rate changes(28)(15)(13)
Net increase in cash and cash equivalents and restricted cash$635 $112 $523 

Net Cash Provided by Operating Activities
 
The primary driver of net cash flows associated with our operating activities is the income generated from the sale of our products and services. This is typically partially offset by: working capital requirements used in the development, sale, and support of our products; payments for interest on our debt; payments for tax liabilities; and payments to our workforce.

Net cash provided by operating activities for the three months ended March 31, 2021, was $844 million, as compared to $148 million for the three months ended March 31, 2020. The increase was primarily due to higher net income and lower tax payments, 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 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 three months ended March 31, 2021, was $86 million, as compared to $28 million for the three months ended March 31, 2020. The increase in cash used in investing activities was primarily due to the net purchases of $64 million of available-for-sale investments in the three months ended March 31, 2021, as compared to purchases of available-for-sale investments of $9 million in the prior-year period.

Net Cash provided by Financing Activities

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

Net cash used in financing activities for the three months ended March 31, 2021, was $95 million, as compared to net cash provided by financing activities of $7 million for the three months ended March 31, 2020. The change was primarily attributed to higher tax payments made for net share settlements on restricted stock units, driven by higher volume share releases and at higher market values, resulting in $124 million of payments during the three months ended March 31, 2021, as compared to $19 million in the prior-year period.

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Effect of Foreign Exchange Rate Changes

Changes in foreign exchange rates had a negative impact of $28 million on our cash and cash equivalents and restricted cash for the three months ended March 31, 2021, as compared to a negative impact of $15 million for the three months ended March 31, 2020. The change was primarily due to changes in the value of the U.S. dollar relative to the euro and the British pound.

Debt
 
At March 31, 2021 and December 31, 2020, our total outstanding debt was $3.7 billion, bearing interest at a weighted average rate of 2.87%.

A summary of our outstanding debt is as follows (amounts in millions):

 At March 31, 2021At December 31, 2020
2026 Notes850 850 
2027 Notes400 400 
2030 Notes500 500 
2047 Notes400 400 
2050 Notes1,500 1,500 
Total gross long-term debt$3,650 $3,650 
Unamortized discount and deferred financing costs(44)(45)
Total net carrying amount$3,606 $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 4, 2021, our Board of Directors declared a cash dividend of $0.47 per common share. Such dividend is payable on May 6, 2021, to shareholders of record at the close of business on April 15, 2021. We have recorded $365 million of dividends payable in “Accrued expenses and other liabilities” on our condensed consolidated balance sheet as of March 31, 2021.

Capital Expenditures
 
For the year ending December 31, 2021, we anticipate total capital expenditures of approximately $100 million, primarily for computer and network hardware and leasehold improvements. During the three months ended March 31, 2021, capital expenditures were $22 million.

Off-Balance Sheet Arrangements
 
At each of March 31, 2021 and December 31, 2020, Activision Blizzard had no significant relationships with unconsolidated entities or financial parties, often referred to as “structured finance” or “special purpose” entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

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Critical Accounting Policies and Estimates
 
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. 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.

During the three months ended March 31, 2021, there were no significant changes to the above critical accounting policies and estimates. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020, for a more complete discussion of our critical accounting policies and estimates.

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.

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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”) and Foreign Currency Forward Contracts Not Designated as Hedges

Refer to Note 6 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for disclosures regarding our Cash Flow Hedges and foreign currency forward contracts not designated as hedges.

In the absence of hedging activities for the three months ended March 31, 2021, a hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in a theoretical decline of our net income of approximately $24 million. This sensitivity analysis assumes a parallel adverse shift of all foreign currency exchange rates against the U.S. dollar; however, all foreign currency exchange rates do not always move in this manner and actual results may differ materially.

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio, 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 March 31, 2021, our cash and cash equivalents were comprised primarily of money market funds.

As of March 31, 2021, based on the composition of our investment portfolio, 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.

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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 March 31, 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 March 31, 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 March 31, 2021. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at March 31, 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.

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.

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, 2020 (the “2020 Form 10-K”).

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

Item 6.    Exhibits

The exhibits listed on the accompanying Exhibit Index are hereby incorporated by reference into this Quarterly Report on Form 10-Q.
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EXHIBIT INDEX
Exhibit Number Exhibit
   
3.1 
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.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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


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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:  May 4, 2021

ACTIVISION BLIZZARD, INC.
 
/s/ ARMIN ZERZA/s/ JESSE YANG
Armin ZerzaJesse Yang
Chief Financial Officer and Principal Financial OfficerChief Accounting Officer and Principal Accounting Officer
of Activision Blizzard, Inc.of Activision Blizzard, Inc.
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