Activision Blizzard | SEC Filing

View:

atvi-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2021

☐ 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/f6b559bcf2e164bd646becc77bff00bf-atvi-20210930_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.)

N/A

(Address of principal executive offices)

(Zip Code)

(310) 255-2000

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.000001 per share

ATVI

The Nasdaq Global Select Market

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

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

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

Large Accelerated Filer

☒

Non-accelerated Filer

☐

Accelerated Filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

The number of shares of the registrant’s Common Stock outstanding at October 26, 2021 was 778,888,584.

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 September 30, 2021 and December 31, 2020	4

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and September 30, 2020	5

	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and September 30, 2020	6

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and September 30, 2020	7

	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2021 and September 30, 2020	8

	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61

Item 4.	Controls and Procedures	62

PART II.	OTHER INFORMATION	63

Item 1.	Legal Proceedings	63

Item 1A.	Risk Factors	64



Item 6.	Exhibits	67

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

We caution that a number of important factors, many of which are beyond our control, could cause our actual future results and other future circumstances to differ materially from those expressed in any forward-looking statements. Such factors include, but are not limited to: the ongoing global impact of a novel strain of coronavirus which emerged in December 2019 (“COVID-19”) (including, without limitation, the potential for significant short- and long-term global unemployment and economic weakness and a resulting impact on global discretionary spending; potential strain on the retailers, distributors, and manufacturers who sell our physical products to customers and the platform providers on whose networks and consoles certain of our games are available; effects on our ability to release our content in a timely manner; effects on the operations of our professional esports leagues; the impact of large-scale intervention by the Federal Reserve and other central banks around the world, including the impact on interest rates; increased demand for our games due to stay-at-home orders and curtailment of other forms of entertainment, which may not be sustained and is likely to fluctuate as stay-at-home orders are reduced, lifted and/or reinstated; macroeconomic impacts arising from the long duration of the COVID-19 pandemic, including labor shortages and supply chain disruptions; and volatility in foreign exchange rates); our ability to consistently deliver popular, high-quality titles in a timely manner, which has been made more difficult as a result of the COVID-19 pandemic; competition; concentration of revenue among a small number of franchises; our ability to satisfy the expectations of consumers with respect to our brands, games, services, and/or business practices; our ability to attract, retain, and motivate skilled personnel; rapid changes in technology and industry standards; 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; substantial influence of third-party platform providers over our products and costs; success and availability of video game consoles manufactured by third parties, including our ability to predict the consoles that will be most successful in the marketplace and develop commercially-successful products for those consoles; risks associated with the free-to-play business model, including our dependence on a relatively small number of consumers for a significant portion of revenues and profits from any given game; our ability to realize the expected benefits of, and effectively implement and manage, our restructuring actions; difficulties in integrating acquired businesses or otherwise realizing the anticipated benefits of strategic transactions; the seasonality in the sale of our products; risks relating to behavior of our distributors, retailers, development, and licensing partners, or other affiliated third parties that may harm our brands or business operations; risks associated with our use of open source software; risks and uncertainties of conducting business outside the United States (the “U.S.”), including the recently enacted Chinese regulation that further limits the number of hours per week children under the age of 18 can play video games; risks associated with undisclosed content or features that may result in consumers’ refusal to buy or retailers’ refusal to sell our products; risks associated with objectionable consumer- or other third-party-created content; reliance on servers and networks to distribute and operate our games and our proprietary online gaming service; data breaches and other cybersecurity risks; significant disruption during our live events; risks related to the impacts of catastrophic events, including the susceptibility of some of our primary operating locations to earthquakes; provisions in our corporate documents that may make it more difficult for any person to acquire control of our company; risks and costs associated with legal proceedings, including the impact of the complaint filed by the California Department of Fair Employment and Housing alleging violations of the California Fair Employment and Housing Act and the California Equal Pay Act and separate investigations and complaints by other parties and regulators related to certain employment practices and related disclosures; court approval of our settlement agreement with the Equal Employment Opportunity Commission (“EEOC”) and successful implementation of the requirements of the agreement with the EEOC; intellectual property claims; increasing regulation in key territories; regulation relating to the Internet, including potential harm from laws impacting “net neutrality”; regulation concerning data privacy, including China's recently passed Personal Information Protection Law; scrutiny regarding the appropriateness of our games’ content, including ratings assigned by third parties; changes in tax rates or exposure to additional tax liabilities, as well as the outcome of current or future tax disputes; fluctuations in currency exchange rates; impacts of changes in financial accounting standards; insolvency or business failure of any of our business partners, which has been magnified as a result of the COVID-19 pandemic; risks associated with our reliance on discretionary spending; and the other factors identified in “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 and Part II, Item 1A of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2021.

The forward-looking statements contained herein are based on information available to Activision Blizzard, Inc. as of the date of this filing, and we assume no obligation to update any such forward-looking statements. Actual events or results may differ from those expressed in forward-looking statements. As such, you should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, prospects, strategy, and financial needs. These statements are not guarantees of our future performance and are subject to risks, uncertainties, 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 (Unaudited)

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in millions, except share data)


	At September 30, 2021		At December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	9,718	$	8,647
Accounts receivable, net of allowances of $36 and $83, at September 30, 2021 and December 31, 2020, respectively	585		1,052

Software development	227		352
Other current assets	681		514
Total current assets	11,211		10,565

Software development	349		160
Property and equipment, net	171		209
Deferred income taxes, net	1,400		1,318
Other assets	632		641
Intangible assets, net	449		451
Goodwill	9,765		9,765
Total assets	$	23,977	$	23,109

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	248	$	295
Deferred revenues	844		1,689
Accrued expenses and other liabilities	924		1,116

Total current liabilities	2,016		3,100
Long-term debt, net	3,607		3,605
Deferred income taxes, net	433		418
Other liabilities	971		949
Total liabilities	7,027		8,072
Commitments and contingencies (Note 17)
Shareholders’ equity:
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,207,443,667 and 1,202,906,087 shares issued at September 30, 2021 and December 31, 2020, respectively	—		—
Additional paid-in capital	11,640		11,531
Less: Treasury stock, at cost, 428,676,471 shares at September 30, 2021 and December 31, 2020	(5,563)		(5,563)
Retained earnings	11,460		9,691
Accumulated other comprehensive loss	(587)		(622)
Total shareholders’ equity	16,950		15,037
Total liabilities and shareholders’ equity	$	23,977	$	23,109

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

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 September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Net revenues
Product sales	$	423	$	408	$	1,666	$	1,484
In-game, subscription, and other revenues	1,647		1,546		4,974		4,190
Total net revenues	2,070		1,954		6,640		5,674

Costs and expenses
Cost of revenues—product sales:
Product costs	120		101		375		357
Software royalties, amortization, and intellectual property licenses	72		37		272		152
Cost of revenues—in-game, subscription, and other:
Game operations and distribution costs	307		290		925		819
Software royalties, amortization, and intellectual property licenses	28		41		87		115
Product development	329		274		1,016		802
Sales and marketing	244		238		727		722
General and administrative	143		186		614		529
Restructuring and related costs	3		9		46		39
Total costs and expenses	1,246		1,176		4,062		3,535

Operating income	824		778		2,578		2,139
Interest and other expense (income), net (Note 13)	65		25		52		55
Loss on extinguishment of debt	—		31		—		31
Income before income tax expense	759		722		2,526		2,053
Income tax expense	120		118		391		365
Net income	$	639	$	604	$	2,135	$	1,688

Earnings per common share
Basic	$	0.82	$	0.78	$	2.75	$	2.19
Diluted	$	0.82	$	0.78	$	2.72	$	2.17

Weighted-average number of shares outstanding
Basic	778		772		777		771
Diluted	783		779		784		777

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 September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Net income	$	639	$	604	$	2,135	$	1,688
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax	(14)		21		(8)		11
Unrealized gains (losses) on forward contracts designated as hedges, net of tax	14		(18)		40		(26)
Unrealized gains (losses) on available-for-sale securities, net of tax	6		(2)		3		1
Total other comprehensive income (loss)	$	6	$	1	$	35	$	(14)
Comprehensive income	$	645	$	605	$	2,170	$	1,674

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

Table of Contents

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in millions)


	For the Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net income	$	2,135	$	1,688
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	(82)		(13)

Non-cash operating lease cost	46		48
Depreciation and amortization	88		152
Amortization of capitalized software development costs and intellectual property licenses (1)	256		141


Share-based compensation expense (2)	259		138
Realized and unrealized gain on equity investment (Note 6)	(36)		(3)
Other	(3)		15
Changes in operating assets and liabilities:
Accounts receivable, net	462		225

Software development and intellectual property licenses	(303)		(300)
Other assets	(88)		(179)
Deferred revenues	(818)		(322)
Accounts payable	(46)		(71)
Accrued expenses and other liabilities	(117)		(407)
Net cash provided by operating activities	1,753		1,112
Cash flows from investing activities:
Proceeds from maturities of available-for-sale investments	120		36
Proceeds from sale of available-for-sale investments	66		—
Purchases of available-for-sale investments	(248)		(158)



Capital expenditures	(59)		(56)
Other investing activities	20		—
Net cash used in investing activities	(101)		(178)
Cash flows from financing activities:
Proceeds from issuance of common stock to employees	78		114
Tax payment related to net share settlements on restricted stock units	(246)		(41)
Dividends paid	(365)		(316)
Proceeds from debt issuances, net of discounts	—		1,994
Repayment of long-term debt	—		(1,050)
Payment of financing costs	—		(20)
Premium payment for early redemption of note	—		(28)


Net cash (used in) provided by financing activities	(533)		653
Effect of foreign exchange rate changes on cash and cash equivalents	(35)		32
Net increase (decrease) in cash and cash equivalents and restricted cash	1,084		1,619
Cash and cash equivalents and restricted cash at beginning of period	8,652		5,798
Cash and cash equivalents and restricted cash at end of period	$	9,736	$	7,417

(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 Nine Months Ended September 30, 2021

(Unaudited)

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


	Common Stock			Treasury Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2020	1,203	$	—	(429)	$	(5,563)	$	11,531	$	9,691	$	(622)	$	15,037

Components of comprehensive income:
Net income	—	—		—	—		—		619		—		619
Other comprehensive income (loss)	—	—		—	—		—		—		22		22
Issuance of common stock pursuant to employee stock options	1	—		—	—		33		—		—		33
Issuance of common stock pursuant to restricted stock units	4	—		—	—		—		—		—		—
Restricted stock surrendered for employees’ tax liability	(2)	—		—	—		(165)		—		—		(165)
Share-based compensation expense related to employee stock options and restricted stock units	—	—		—	—		150		—		—		150
Dividends ($0.47 per common share)	—	—		—	—		—		(365)		—		(365)
Balance at March 31, 2021	1,206	$	—	(429)	$	(5,563)	$	11,549	$	9,945	$	(600)	$	15,331
Components of comprehensive income:
Net income	—	—		—	—		—		876		—		876
Other comprehensive income (loss)	—	—		—	—		—		—		7		7
Issuance of common stock pursuant to employee stock options	—	—		—	—		33		—		—		33
Restricted stock surrendered for employees’ tax liability	—	—		—	—		(7)		—		—		(7)
Share-based compensation expense related to employee stock options and restricted stock units	—	—		—	—		46		—		—		46
Balance at June 30, 2021	1,206	$	—	(429)	$	(5,563)	$	11,621	$	10,821	$	(593)	$	16,286
Components of comprehensive income:
Net income	—	—		—	—		—		639		—		639
Other comprehensive income (loss)	—	—		—	—		—		—		6		6
Issuance of common stock pursuant to employee stock options	—	—		—	—		12		—		—		12
Issuance of common stock pursuant to restricted stock units	2	—		—	—		—		—		—		—
Restricted stock surrendered for employees’ tax liability	(1)	—		—	—		(73)		—		—		(73)
Share-based compensation expense related to employee stock options and restricted stock units	—	—		—	—		80		—		—		80

Balance at September 30, 2021	1,207	$	—	(429)	$	(5,563)	$	11,640	$	11,460	$	(587)	$	16,950

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

Table of Contents

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three and Nine Months Ended September 30, 2020

(Unaudited)

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


	Common 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 income (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 income (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	$	(634)	$	13,682
Components of comprehensive income:
Net income	—	—		—