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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 June 30, 2019

☐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

https://cdn.kscope.io/336dcd1452677663ae3bc011654d32d1-ablogoblacka12.jpg

ACTIVISION BLIZZARD, INC.

(Exact name of registrant as specified in its charter)



Delaware			95-4803544
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

3100 Ocean Park Boulevard	Santa Monica,	CA	90405
(Address of principal executive offices)			(Zip Code)

(310) 255-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.000001 per share	ATVI	The Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer	☒	Non-accelerated Filer	☐	Accelerated Filer	☐

				Smaller reporting company	☐
				Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s Common Stock outstanding at August 1, 2019 was 767,025,940.

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

Table of Contents



	Cautionary Statement	3

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018	4

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and June 30, 2018	5

	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and June 30, 2018	6

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and June 30, 2018	7

	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the three and six months ended June 30, 2019 and June 30, 2018	8

	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65

Item 4.	Controls and Procedures	67

PART II.	OTHER INFORMATION	67

Item 1.	Legal Proceedings	67

Item 1A.	Risk Factors	68

Item 5.	Other Information	69

Item 6.	Exhibits	69

EXHIBIT INDEX		70

SIGNATURE		71

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CAUTIONARY STATEMENT

This Quarterly Report on Form 10-Q contains, or incorporates by reference, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements consist of any statement other than a recitation of historical facts and include, but are not limited to: (1) projections of revenues, expenses, income or loss, earnings or loss per share, cash flow, or other financial items; (2) statements of our plans and objectives, including those related to releases of products or services 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,” “plans,” “believes,” “may,” “might,” “expects,” “intends,” “intends as,” “anticipates,” “estimate,” “future,” “positioned,” “potential,” “project,” “remain,” “scheduled,” “set to,” “subject to,” “upcoming” and other similar expressions to help identify forward-looking statements. Forward-looking statements are subject to business and economic risks, reflect management’s current expectations, estimates, and projections about our business, and are inherently uncertain and difficult to predict.

We caution that a number of important factors 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: our ability to consistently deliver popular, high-quality titles in a timely manner; our ability to satisfy the expectations of consumers with respect to our brands, games, services, and/or business practices; concentration of revenue among a small number of titles; 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; our ability to realize the expected financial and operational benefits of, and effectively manage, our recently announced restructuring plans; increasing importance of revenues derived from digital distribution channels; risks associated with the retail sales business model; substantial influence of third-party platform providers over our products and costs; success and availability of video game consoles manufactured by third parties; risks associated with the free-to-play business model, including dependence on a relatively small number of consumers for a significant portion of revenues and profits from any given game; risks and costs associated with legal proceedings; changes in tax rates or exposure to additional tax liabilities, as well as the outcome of current or future tax disputes; rapid changes in technology and industry standards; competition, including from other forms of entertainment; our ability to sell products at assumed pricing levels; our ability to attract, retain, and motivate skilled personnel; reliance on external developers for development of some of our software products; the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt; counterparty risks relating to customers, licensees, licensors, and manufacturers; intellectual property claims; piracy and unauthorized copying of our products; risks and uncertainties of conducting business outside the United States (“U.S.”); fluctuations in currency exchange rates; increasing regulation of our business, products, and distribution in key territories; compliance with continually evolving laws and regulations concerning data privacy; 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, 2018.

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.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in millions, except share data)



	At June 30, 2019			At December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	4,592		$	4,225
Accounts receivable, net of allowances of $108 and $190, at June 30, 2019 and December 31, 2018, respectively	455			1,035
Inventories, net	46			43
Software development	184			264
Other current assets	386			539
Total current assets	5,663			6,106
Software development	90			65
Property and equipment, net	259			282
Deferred income taxes, net	366			458
Other assets	721			482
Intangible assets, net	633			735
Goodwill	9,763			9,762
Total assets	$	17,495		$	17,890

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	180		$	253
Deferred revenues	728			1,493
Accrued expenses and other liabilities	731			896
Total current liabilities	1,639			2,642
Long-term debt, net	2,673			2,671
Deferred income taxes, net	20			18
Other liabilities	1,186			1,167
Total liabilities	5,518			6,498
Commitments and contingencies (Note 19)
Shareholders’ equity:
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,195,517,884 and 1,192,093,991 shares issued at June 30, 2019 and December 31, 2018, respectively	—			—
Additional paid-in capital	11,063			10,963
Less: Treasury stock, at cost, 428,676,471 shares at June 30, 2019 and December 31, 2018	(5,563		)	(5,563		)
Retained earnings	7,085			6,593
Accumulated other comprehensive loss	(608		)	(601		)
Total shareholders’ equity	11,977			11,392
Total liabilities and shareholders’ equity	$	17,495		$	17,890

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

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in millions, except per share data)



	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2019			2018		2019			2018
Net revenues
Product sales	$	359		$	464	$	1,015		$	1,184
Subscription, licensing, and other revenues	1,037			1,177		2,205			2,423
Total net revenues	1,396			1,641		3,220			3,607

Costs and expenses
Cost of revenues—product sales:
Product costs	99			126		251			289
Software royalties, amortization, and intellectual property licenses	51			49		162			194
Cost of revenues—subscription, licensing, and other revenues:
Game operations and distribution costs	230			250		469			521
Software royalties, amortization, and intellectual property licenses	53			85		114			169
Product development	244			255		492			513
Sales and marketing	191			226		397			477
General and administrative	170			216		350			415
Restructuring and related costs	22			—		79			—
Total costs and expenses	1,060			1,207		2,314			2,578

Operating income	336			434		906			1,029
Interest and other expense (income), net (Note 15)	(34		)	26		(31		)	54
Income before income tax expense	370			408		937			975
Income tax expense	42			6		163			73
Net income	$	328		$	402	$	774		$	902

Earnings per common share
Basic	$	0.43		$	0.53	$	1.01		$	1.19
Diluted	$	0.43		$	0.52	$	1.01		$	1.17

Weighted-average number of shares outstanding
Basic	766			761		765			760
Diluted	770			770		770			770

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

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Amounts in millions)



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018
Net income	$	328		$	402		$	774		$	902

Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax	(2		)	(11		)	1			(10		)
Unrealized gains (losses) on forward contracts designated as hedges, net of tax	(8		)	48			(6		)	36
Unrealized gains (losses) on investments, net of tax	4			7			(2		)	4
Total other comprehensive income (loss)	$	(6	)	$	44		$	(7	)	$	30
Comprehensive income	$	322		$	446		$	767		$	932

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

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in millions)



	For the Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net income	$	774		$	902
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	91			95
Depreciation and amortization	166			267
Non-cash operating lease cost	34			—
Amortization of capitalized software development costs and intellectual property licenses(1)	153			206
Share-based compensation expense (2)	100			110
Unrealized gain on equity investment (Note 8)	(38		)	—
Other	28			9
Changes in operating assets and liabilities:
Accounts receivable, net	570			511
Inventories	(4		)	8
Software development and intellectual property licenses	(105		)	(209		)
Other assets	78			39
Deferred revenues	(803		)	(891		)
Accounts payable	(75		)	(157		)
Accrued expenses and other liabilities	(365		)	(352		)
Net cash provided by operating activities	604			538

Cash flows from investing activities:
Proceeds from maturities of available-for-sale investments	75			—
Purchases of available-for-sale investments	—			(59		)
Capital expenditures	(45		)	(61		)
Other investing activities	7			(4		)
Net cash provided by (used in) investing activities	37			(124		)

Cash flows from financing activities:
Proceeds from issuance of common stock to employees	57			77
Tax payment related to net share settlements on restricted stock units	(48		)	(68		)
Dividends paid	(283		)	(259		)
Net cash used in financing activities	(274		)	(250		)
Effect of foreign exchange rate changes on cash and cash equivalents	3			(19		)
Net increase in cash and cash equivalents and restricted cash	370			145
Cash and cash equivalents and restricted cash at beginning of period	4,229			4,720
Cash and cash equivalents and restricted cash at end of period	$	4,599		$	4,865


(1)	Excludes deferral and amortization of share-based compensation expense.


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

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

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2019

(Unaudited)

(Amounts and shares in millions, except per share data)



	Common Stock				Treasury Stock					Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Shares		Amount		Shares		Amount			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at December 31, 2018	1,192		$	—	(429	)	$	(5,563	)	$	10,963		$	6,593		$	(601	)	$	11,392
Components of comprehensive income:
Net income	—		—		—		—			—			447			—			447
Other comprehensive loss	—		—		—		—			—			—			(1		)	(1		)
Issuance of common stock pursuant to employee stock options	2		—		—		—			30			—			—			30
Issuance of common stock pursuant to restricted stock units	2		—		—		—			—			—			—			—
Restricted stock surrendered for employees’ tax liability	(1	)	—		—		—			(45		)	—			—			(45		)
Share-based compensation expense related to employee stock options and restricted stock units	—		—		—		—			56			—			—			56
Dividends ($0.37 per common share)	—		—		—		—			—			(283		)	—			(283		)
Balance at March 31, 2019	1,195		$	—	(429	)	$	(5,563	)	$	11,004		$	6,757		$	(602	)	$	11,596
Components of comprehensive income:
Net income	—		—		—		—			—			328			—			328
Other comprehensive loss	—		—		—		—			—			—			(6		)	(6		)
Issuance of common stock pursuant to employee stock options	1		—		—		—			28			—			—			28
Restricted stock surrendered for employees’ tax liability	—		—		—		—			(4		)	—			—			(4		)
Share-based compensation expense related to employee stock options and restricted stock units	—		—		—		—			35			—			—			35
Balance at June 30, 2019	1,196		$	—	(429	)	$	(5,563	)	$	11,063		$	7,085		$	(608	)	$	11,977

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

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2018

(Unaudited)

(Amounts and shares in millions, except per share data)



	Common Stock				Treasury Stock					Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Shares		Amount		Shares		Amount			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at December 31, 2017	1,186		$	—	(429	)	$	(5,563	)	$	10,747		$	4,916		$	(638	)	$	9,462
Cumulative impact from adoption of new revenue accounting standard	—		—		—		—			—			88			3			91
Components of comprehensive income:
Net income	—		—		—		—			—			500			—			500
Other comprehensive loss	—		—		—		—			—			—			(14		)	(14		)
Issuance of common stock pursuant to employee stock options	3		—		—		—			47			—			—			47
Issuance of common stock pursuant to restricted stock units	2		—		—		—			—			—			—			—
Restricted stock surrendered for employees’ tax liability	(1	)	—		—		—			(64		)	—			—			(64		)
Share-based compensation expense related to employee stock options and restricted stock units	—		—		—		—			56			—			—			56
Dividends ($0.34 per common share)	—		—		—		—			—			(259		)	—			(259		)
Balance at March 31, 2018	1,190		$	—	(429	)	$	(5,563	)	$	10,786		$	5,245		$	(649	)	$	9,819
Components of comprehensive income:
Net income	—		—		—		—			—			402			—			402
Other comprehensive loss	—		—		—