Activision Blizzard | SEC Filing

View:

atvi-20200630

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, 2020

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

For the transition period from to

Commission File Number 1-15839

https://cdn.kscope.io/f211308ff80348536b18082b23e871b9-atvi-20200630_g1.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,

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 July 28, 2020 was 771,872,058.

Table of Contents

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, 2020 and December 31, 2019	4

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and June 30, 2019	5

	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 3 0 , 2020 and June 3 0 , 2019	6

	Condensed Consolidated Statements of Cash Flows for the six months ended June 3 0 , 2020 and June 3 0 , 2019	7

	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the three a nd six months ended June 3 0 , 2020 and June 3 0 , 2019	8

	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62

Item 4.	Controls and Procedures	63

PART II.	OTHER INFORMATION	65

Item 1.	Legal Proceedings	65

Item 1A.	Risk Factors	65

Item 6.	Exhibits	66

EXHIBIT INDEX			67

SIGNATURE			68

Table of Contents

CAUTIONARY STATEMENT

This Quarterly Report on Form 10-Q contains, or incorporates by reference, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements consist of any statement other than a recitation of historical facts and include, but are not limited to: (1) projections of revenues, expenses, income or loss, earnings or loss per share, cash flow, or other financial items; (2) statements of our plans and objectives, including those related to releases of products or services 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 previously announced restructuring actions; our ability to quickly adjust our cost structure in response to sudden changes in demand; risks and costs associated with legal proceedings; intellectual property claims; changes in tax rates or exposure to additional tax liabilities, as well as the outcome of current or future tax disputes; our ability to sell products at assumed pricing levels; reliance on external developers for development of some of our software products; the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt; the 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 (“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, 2019, our Quarterly Report on Form 10-Q for the period ended March 31, 2020, and this Quarterly Report on Form 10-Q.

The forward-looking statements contained herein are based on information available to Activision Blizzard, Inc. as of the date of this filing and we assume no obligation to update any such forward-looking statements. Although these forward-looking statements are believed to be true when made, they may ultimately prove to be incorrect. These statements are not guarantees of our future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and may cause actual results to differ materially from current expectations.

Activision Blizzard, Inc.’s names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or trade names of Activision Blizzard, Inc. All other product or service names are the property of their respective owners. All dollar amounts referred to in, or contemplated by, this Quarterly Report on Form 10-Q refer to 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, 2020		At December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	6,338	$	5,794

Accounts receivable, net of allowances of $76 and $132, at June 30, 2020 and December 31, 2019, respectively	614		848

Software development	331		322

Other current assets	436		328
Total current assets	7,719		7,292


Software development	134		54

Property and equipment, net	222		253
Deferred income taxes, net	1,221		1,293
Other assets	677		658
Intangible assets, net	484		531

Goodwill	9,763		9,764
Total assets	$	20,220	$	19,845

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	177	$	292
Deferred revenues	1,222		1,375
Accrued expenses and other liabilities	1,158		1,248

Total current liabilities	2,557		2,915
Long-term debt, net	2,676		2,675
Deferred income taxes, net	436		505
Other liabilities	869		945
Total liabilities	6,538		7,040
Commitments and contingencies (Note 16)
Shareholders’ equity:
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,200,382,579 and 1,197,436,644 shares issued at June 30, 2020 and December 31, 2019, respectively	—		—
Additional paid-in capital	11,300		11,174
Less: Treasury stock, at cost, 428,676,471 shares at June 30, 2020 and December 31, 2019	(5,563)		(5,563)
Retained earnings	8,579		7,813
Accumulated other comprehensive loss	(634)		(619)
Total shareholders’ equity	13,682		12,805
Total liabilities and shareholders’ equity	$	20,220	$	19,845

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

Table of Contents

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,
	2020		2019		2020		2019
Net revenues
Product sales	$	533	$	359	$	1,076	$	1,015
Subscription, licensing, and other revenues	1,399		1,037		2,643		2,205
Total net revenues	1,932		1,396		3,719		3,220

Costs and expenses
Cost of revenues—product sales:
Product costs	137		99		255		251
Software royalties, amortization, and intellectual property licenses	33		51		115		162
Cost of revenues—subscription, licensing, and other revenues:
Game operations and distribution costs	271		230		529		469
Software royalties, amortization, and intellectual property licenses	28		53		74		114
Product development	291		244		528		492
Sales and marketing	242		191		485		397
General and administrative	175		170		343		350
Restructuring and related costs	6		22		29		79
Total costs and expenses	1,183		1,060		2,358		2,314

Operating income	749		336		1,361		906

Interest and other expense (income), net (Note 12)	22		(34)		30		(31)

Income before income tax expense	727		370		1,331		937

Income tax expense	147		42		247		163

Net income	$	580	$	328	$	1,084	$	774

Earnings per common share
Basic	$	0.75	$	0.43	$	1.41	$	1.01
Diluted	$	0.75	$	0.43	$	1.40	$	1.01

Weighted-average number of shares outstanding
Basic	771		766		770		765
Diluted	776		770		775		770

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

Table of Contents

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,
	2020		2019		2020		2019
Net income	$	580	$	328	$	1,084	$	774

Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax	4		(2)		(11)		1
Unrealized gains (losses) on forward contracts designated as hedges, net of tax	(10)		(8)		(9)		(6)
Unrealized gains (losses) on investments, net of tax	—		4		5		(2)

Total other comprehensive loss	$	(6)	$	(6)	$	(15)	$	(7)
Comprehensive income	$	574	$	322	$	1,069	$	767

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

Table of Contents

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in millions)


	For the Six Months Ended June 30,
	2020		2019
Cash flows from operating activities:
Net income	$	1,084	$	774
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	3		91

Depreciation and amortization	106		166
Non-cash operating lease cost	32		34
Amortization of capitalized software development costs and intellectual property licenses (1)	105		153



Share-based compensation expense (2)	85		100
Unrealized gain on equity investment (Note 6)	—		(38)
Other	3		28
Changes in operating assets and liabilities:
Accounts receivable, net	230		570

Software development and intellectual property licenses	(190)		(105)
Other assets	(103)		74
Deferred revenues	(192)		(803)
Accounts payable	(113)		(75)
Accrued expenses and other liabilities	(134)		(365)
Net cash provided by operating activities	916		604

Cash flows from investing activities:
Proceeds from maturities of available-for-sale investments	—		75
Purchases of available-for-sale investments	(56)		—


Capital expenditures	(32)		(45)
Other investing activities	—		7
Net cash provided by (used in) investing activities	(88)		37

Cash flows from financing activities:
Proceeds from issuance of common stock to employees	69		57
Tax payment related to net share settlements on restricted stock units	(34)		(48)

Dividends paid	(316)		(283)





Net cash used in financing activities	(281)		(274)
Effect of foreign exchange rate changes on cash and cash equivalents	(5)		3
Net increase in cash and cash equivalents and restricted cash	542		370
Cash and cash equivalents and restricted cash at beginning of period	5,798		4,229
Cash and cash equivalents and restricted cash at end of period	$	6,340	$	4,599

(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.

Table of Contents

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2020

(Unaudited)

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


	Common Stock				Treasury Stock						Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)	Total Shareholders’ Equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2019	1,197	$	—	(429)	$	(5,563)	$	11,174	$	7,813	$	(619)	$	12,805
Cumulative impact from adoption of new credit loss standard	—	—		—	—		—		(3)		—		(3)
Components of comprehensive income:
Net income	—	—		—	—		—		505		—		505
Other comprehensive loss	—	—		—	—		—		—		(9)		(9)
Issuance of common stock pursuant to employee stock options	1	—		—	—		27		—		—		27
Issuance of common stock pursuant to restricted stock units	1	—		—	—		—		—		—		—
Restricted stock surrendered for employees’ tax liability	—	—		—	—		(31)		—		—		(31)
Share-based compensation expense related to employee stock options and restricted stock units	—	—		—	—		43		—		—		43
Dividends ($0.41 per common share)	—	—		—	—		—		(316)		—		(316)
Balance at March 31, 2020	1,199	$	—	(429)	$	(5,563)	$	11,213	$	7,999	$	(628)	$	13,021
Components of comprehensive income:
Net income	—	—		—	—		—		580		—		580
Other comprehensive loss	—	—		—	—		—		—		(6)		(6)
Issuance of common stock pursuant to employee stock options	1	—		—	—		44		—		—		44

Restricted stock surrendered for employees’ tax liability	—	—		—	—		(3)		—		—		(3)
Share-based compensation expense related to employee stock options and restricted stock units	—	—		—	—		46		—		—		46

Balance at June 30, 2020	1,200	$	—	(429)	$	(5,563)	$	11,300	$	8,579	$	(<