Activision Blizzard | SEC Filing

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atvi-20230630

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, 2023

☐ 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/dfbc1f7410ef37f11d36025ace261a20-ablogoblacka19.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.)

2701 Olympic Boulevard Building B

Santa Monica,

90404

(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 24, 2023 was 786,798,320.

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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, 2023 and December 31, 2022	4

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and June 30, 2022	5

	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2023 and June 30, 2022	6

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and June 30, 2022	7

	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the three and six months ended June 30, 2023 and June 30, 2022	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	67

Item 4.	Controls and Procedures	68

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	69

Item 1A.	Risk Factors	69

Item 5.	Other Information	69

Item 6.	Exhibits	70



SIGNATURE		71

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CAUTIONARY STATEMENT

This Quarterly Report on Form 10-Q contains, or incorporates by reference, statements reflecting our views about our future performance that constitute 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, services, features, or other content; (3) statements of future financial or operating performance, including the impact of tax items thereon; (4) statements regarding the proposed transaction between Activision Blizzard, Inc. (“Activision Blizzard”) and Microsoft Corporation (“Microsoft”) pursuant to the Agreement and Plan of Merger, dated as of January 18, 2022, by and among Activision Blizzard, Microsoft, and Anchorage Merger Sub Inc., a wholly owned subsidiary of Microsoft (as may be amended, supplemented or otherwise modified from time to time, the “Merger Agreement,” and such transaction, “the proposed transaction with Microsoft”), including any statements regarding the expected timetable for completing the proposed transaction with Microsoft, the ability to complete the proposed transaction with Microsoft, and the expected benefits of the proposed transaction with Microsoft; (5) statements regarding our goal of becoming the model workplace in our industry and our related transformational goals; (6) statements regarding potential termination fees payable in connection with the Overwatch League; and (7) statements of assumptions underlying such statements. Activision Blizzard 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 risk that the proposed transaction with Microsoft may not be completed in a timely manner or at all, which may adversely affect our business and the price of our common stock; the failure to satisfy the conditions to the consummation of the proposed transaction with Microsoft, including the receipt of certain governmental and regulatory approvals (which may or may not be received on a timely basis or at all); the occurrence of any event, change, or other circumstance that could give rise to the termination of the Merger Agreement; the effect of the announcement or pendency of the proposed transaction with Microsoft on our business relationships, operating results, and business generally; risks that the proposed transaction with Microsoft disrupts our current plans and operations and potential difficulties in employee retention and recruitment as a result of the proposed transaction with Microsoft; risks related to diverting management’s attention from ongoing business operations; the outcome of any legal proceedings that have been or may be instituted against us related to the Merger Agreement or the transactions contemplated thereby; restrictions during the pendency of the proposed transaction with Microsoft that may impact our ability to pursue certain business opportunities or strategic transactions; uncertainty about current and future economic conditions and other adverse changes in general political conditions in any of the major countries in which we do business; decline in demand for our products and services if general economic conditions decline; fluctuations in currency exchange rates; our ability to deliver popular, high-quality content in a timely manner; negative impacts on our business resulting from concerns regarding our workplace, including associated legal proceedings; our ability to attract, retain, and motivate skilled personnel; future impacts from COVID-19; the level of demand for our games and products; our ability to meet customer expectations with respect to our brands, games, services, and/or business practices; competition; our reliance on a relatively small number of franchises for a significant portion of our revenues and profits; negative impacts from the results of collective bargaining, legal proceedings related to unionization, or campaigns by unions directed at our workforce; our ability to adapt to rapid technological change, such as developments in artificial intelligence, and allocate our resources accordingly; the increasing importance of digital sales and the risks of that business model; our ability to effectively manage the scope and complexity of our business, including risks related to our professional esports business model; our reliance on third-party platforms, which are also our competitors, for the distribution of products; our dependence on the success and availability of video game consoles manufactured by third parties and our ability to develop commercially successful products for these consoles; the increasing importance of free-to-play games and the risks of that business model; the risks and uncertainties of conducting business outside the United States (the “U.S.”), including the need for regulatory approval to operate, the relatively weaker protection for our intellectual property rights, and the impact of cultural differences on consumer preferences; insolvency or business failure of any of our business partners; the importance of retail sales to our business and the risks of that business model; any difficulties in integrating acquired businesses or realizing the anticipated benefits of strategic transactions; seasonality in the sale of our products; fluctuation in our recurring business; the risk of distributors, retailers, development, and licensing partners or other third parties being unable to honor their commitments or otherwise putting our brand at risk; our reliance on tools and technologies owned by third parties; our use of open source software; risks associated with undisclosed content or features in our games; the impact of objectionable consumer- or other third-party-created content on our operating results or reputation; outages, disruptions, or degradations in our services, products, and/or technological infrastructure; cybersecurity-related attacks, significant data breaches, fraudulent activity, or disruption of our information technology systems or networks; significant disruption during our live events; catastrophic events; climate change; provisions in our corporate documents and Delaware state law that could delay or prevent a change of control; other legal proceedings; increasing regulation in key territories over our business, products, and distribution; changes in government regulation relating to the Internet; our compliance with evolving data privacy laws and regulations; scrutiny regarding the appropriateness of the content in our games and our ability to receive target ratings for certain titles; changes in tax rates and/or tax laws and exposure to additional tax liabilities; changes in financial accounting standards or the application of existing or future standards as our business evolves; and the other factors included in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the U.S. Securities and Exchange Commission (the “SEC”).

The forward-looking statements contained herein are based on information available to Activision Blizzard 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.

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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 June 30, 2023		At December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	10,770	$	7,060
Held-to-maturity investments	2,314		4,932
Accounts receivable, net	1,035		1,204

Software development	762		640
Other current assets	615		633
Total current assets	15,496		14,469

Software development	684		641
Property and equipment, net	204		193
Deferred income taxes, net	1,289		1,201
Other assets	479		508
Intangible assets, net	437		442
Goodwill	9,929		9,929
Total assets	$	28,518	$	27,383

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	225	$	324
Deferred revenues	1,877		2,088
Accrued expenses and other liabilities	1,220		1,143

Total current liabilities	3,322		3,555
Long-term debt, net	3,612		3,611
Deferred income taxes, net	32		158
Other liabilities	759		816
Total liabilities	7,725		8,140
Commitments and contingencies (Note 14)
Shareholders’ equity:
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,215,320,701 and 1,212,894,055 shares issued at June 30, 2023 and December 31, 2022, respectively	—		—
Additional paid-in capital	12,489		12,260
Less: Treasury stock, at cost, 428,676,471 shares at June 30, 2023 and December 31, 2022	(5,563)		(5,563)
Retained earnings	14,498		13,171
Accumulated other comprehensive loss	(631)		(625)
Total shareholders’ equity	20,793		19,243
Total liabilities and shareholders’ equity	$	28,518	$	27,383

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,
	2023		2022		2023		2022
Net revenues
Product sales	$	520	$	304	$	1,215	$	690
In-game, subscription, and other revenues	1,687		1,340		3,375		2,722
Total net revenues	2,207		1,644		4,590		3,412

Costs and expenses
Cost of revenues—product sales:
Product costs	116		80		252		172
Software royalties and amortization	105		63		207		144
Cost of revenues—in-game, subscription, and other:
Game operations and distribution costs	373		317		736		605
Software royalties and amortization	62		25		126		43
Product development	405		311		807		658
Sales and marketing	333		263		611		514
General and administrative	230		247		468		459

Total costs and expenses	1,624		1,306		3,207		2,595

Operating income	583		338		1,383		817

Interest expense from debt	27		27		54		54
Other (income) expense, net (Note 10)	(168)		(10)		(290)		(23)

Income before income tax expense	724		321		1,619		786

Income tax expense	137		41		291		111

Net income	$	587	$	280	$	1,328	$	675

Earnings per common share
Basic	$	0.75	$	0.36	$	1.69	$	0.86
Diluted	$	0.74	$	0.36	$	1.67	$	0.86

Weighted-average number of shares outstanding
Basic	786		782		785		781
Diluted	794		788		793		787

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,
	2023		2022		2023		2022
Net income	$	587	$	280	$	1,328	$	675
Other comprehensive (loss) income:
Foreign currency translation adjustments, net of tax	6		(23)		14		(27)
Unrealized gains (losses) on forward contracts designated as hedges, net of tax	(8)		14		(20)		9
Unrealized gains (losses) on available-for-sale securities, net of tax	—		4		—		5
Total other comprehensive (loss) income	$	(2)	$	(5)	$	(6)	$	(13)
Comprehensive income	$	585	$	275	$	1,322	$	662

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,
	2023		2022
Cash flows from operating activities:
Net income	$	1,328	$	675
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	(208)		(137)

Non-cash operating lease cost	42		37
Depreciation and amortization	38		49
Amortization of capitalized software development costs (1)	212		133


Share-based compensation expense (2)	226		199


Other	(77)		(27)
Changes in operating assets and liabilities, net of effect of business acquisitions:
Accounts receivable, net	173		394

Software development	(382)		(290)
Other assets	21		61
Deferred revenues	(228)		(268)
Accounts payable	(104)		(87)
Accrued expenses and other liabilities	126		101
Net cash provided by operating activities	1,167		840
Cash flows from investing activities:
Proceeds from maturities of available-for-sale investments	—		22
Proceeds from sale of available-for-sale investments	—		20
Purchases of available-for-sale investments	—		(109)
Proceeds from maturities of held-to-maturity investments	5,000		—
Purchases of held-to-maturity investments	(2,311)		—
Acquisition of business, net of cash acquired	—		(135)

Capital expenditures	(60)		(52)
Other investing activities	—		1
Net cash provided by (used in) investing activities	2,629		(253)
Cash flows from financing activities:
Proceeds from issuance of common stock to employees	25		37
Tax payment related to net share settlements on restricted stock units	(122)		(137)
Dividends paid	—		(367)






Net cash used in financing activities	(97)		(467)
Effect of foreign exchange rate changes on cash and cash equivalents	12		(48)
Net increase in cash and cash equivalents and restricted cash	3,711		72
Cash and cash equivalents and restricted cash at beginning of period	7,086		10,438
Cash and cash equivalents and restricted cash at end of period	$	10,797	$	10,510

(1)Excludes deferral and amortization of share-based compensation expense, including liability awards accounted for under Accounting Standards Codification (“ASC”) 718.

(2)Includes the net effects of capitalization, deferral, and amortization of share-based compensation expense, including liability awards accounted for under ASC 718.

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, 2023

(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, 2022	1,213	$	—	(429)	$	(5,563)	$	12,260	$	13,171	$	(625)	$	19,243

Components of comprehensive income:
Net income	—	—		—	—		—		740		—		740
Other comprehensive income (loss)	—	—		—	—		—		—		(4)		(4)
Issuance of common stock pursuant to employee stock options	—	—		—	—		14		—		—		14
Issuance of common stock pursuant to restricted stock units	3	—		—	—		—		—		—		—
Restricted stock surrendered for employees’ tax liability	(1)	—		—	—		(92)		—		—		(92)
Settlement of liability-classified awards in restricted stock units (Note 9)	—	—		—	—		93		—		—		93
Share-based compensation expense related to employee stock options and restricted stock units	—	—		—	—		121		—		—		121

Balance at March 31, 2023	1,215	$	—	(429)	$	(5,563)	$	12,396	$	13,911	$	(629)	$	20,115
Components of comprehensive income:
Net income	—	—		—	—		—		587		—		587
Other comprehensive income (loss)	—	—		—	—		—		—		(2)		(2)
Issuance of common stock pursuant to employee stock options	—	—		—	—		11		—		—		11
Restricted stock surrendered for employees’ tax liability	—	—		—	—		(19)		—		—		(19)
Share-based compensation expense related to employee stock options and restricted stock units	—	—		—	—		101		—		—		101
Balance at June 30, 2023	1,215	$	—	(429)	$	(5,563)	$	12,489	$	14,498	$	(631)	$	20,793

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, 2022

(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, 2021	1,208	$	—	(429)	$	(5,563)	$	11,715	$	12,025	$	(578)	$	17,599

Components of comprehensive income:
Net income	—	—		—	—		—		395		—		395
Other comprehensive income (loss)	—	—		—	—		—		—		(8)		(8)
Issuance of common stock pursuant to employee stock options	—	—		—	—		15		—		—		15
Issuance of common stock pursuant to restricted stock units	4	—		—	—		—		—		—		—
Restricted stock surrendered for employees’ tax liability	(2)	—		—	—		(131)		—		—		(131)
Settlement of liability-classified awards in restricted stock units (Note 9)	—	—		—	—		204		—		—		204
Share-based compensation expense related to employee stock options and restricted stock units	—	—		—	—		124		—		—		124
Dividends ($0.47 per common share)	—	—		—	—		—		(367)		—		(367)
Balance at March 31, 2022	1,210	$	—	(429)	$	(5,563)	$	11,927	$	12,053	$	(586)	$	17,831
Components of comprehensive income:
Net income	—	—		—	—		—		280		—		280
Other comprehensive income (loss)	—	—		—	—		—		—		(5)		(5)
Issuance of common stock pursuant to employee stock options	1	—		—	—		22		—		—		22

Restricted stock surrendered for employees’ tax liability	—	—		—	—		(9)		—		—		(9)
Share-based compensation expense related to employee stock options and restricted stock units	—	—		—	—		129		—		—		129
Balance at June 30, 2022	1,211	$	—	(429)	$	(5,563)	$	12,069	$	12,333	$	(591)	$	18,248

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

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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 (“PCs”), and mobile devices. We also operate esports leagues and offer digital advertising within some of our content. The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries.

Merger Agreement

On January 18, 2022, we entered into an Agreement and Plan of Merger (as may be amended, supplemented, or otherwise modified from time to time, the “Merger Agreement”) with Microsoft Corporation (“Microsoft”) and Anchorage Merger Sub Inc. (“Merger Sub”), a wholly owned subsidiary of Microsoft. Subject to the terms and conditions of the Merger Agreement, Microsoft agreed to acquire the Company for $95.00 per issued and outstanding share of our common stock, par value $0.000001 per share, in an all-cash transaction. Pursuant to the terms of the Merger Agreement, our acquisition will be accomplished through the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Microsoft. As a result of the Merger, we will cease to be a publicly traded company. We have agreed to various customary covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs or capital expenditure requirements.

On July 18, 2023, the Company, Microsoft, and Merger Sub entered into a letter agreement to the Merger Agreement (the “Letter Agreement”), pursuant to which, among other things, each of Microsoft and the Company waived any right to terminate the Merger Agreement other than (i) pursuant to mutual agreement or (ii) if the Merger has not been consummated prior to 11:59 p.m. Pacific time on October 18, 2023.

Microsoft will be required to pay us a reverse termination fee (the “Parent Termination Fee”) under certain specified circumstances. Pursuant to the Letter Agreement, if payable under the Merger Agreement on or prior to August 29, 2023, the Parent Termination Fee will be $3.0 billion, increasing to $3.5 billion if payable after August 29, 2023, and increasing to $4.5 billion if payable after September 15, 2023.

Pursuant to the Letter Agreement, Microsoft and Merger Sub waived any right to not pay the first $3.0 billion of the Parent Termination Fee, if otherwise payable pursuant to the Merger Agreement (which amount shall be payable regardless of any breach of the Merger Agreement by the Company). Pursuant to the Letter Agreement, Microsoft and Merger Sub also waived any right to not pay any portion of the Parent Termination Fee in excess of $3.0 billion, to the extent otherwise payable pursuant to the Merger Agreement:

•as a result of a breach by the Company of any representation, warranty or covenant in the Merger Agreement, whether before or after the date of the Letter Agreement, other than the willful breach by the Company of a covenant required to be performed after the date of the Letter Agreement by it that is the proximate cause of the failure of the conditions to Closing (as defined in the Merger Agreement) with respect to the expiration or termination of the applicable waiting period pursuant to, or obtaining all requisite clearances, consents and approvals pursuant to, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the antitrust and foreign investment laws of certain specified countries, without the imposition of a Burdensome Condition (as defined in the Merger Agreement); or

•in the event that Microsoft or any of its subsidiaries materially breaches the Merger Agreement after the date of the Letter Agreement.

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In addition, pursuant to the Letter Agreement, among other things:

•the Company is permitted to declare and pay one regular cash dividend for fiscal year 2023 in an amount per share not in excess of $0.99, prior to and not contingent on the Closing; and

•in circumstances in which the Parent Termination Fee is payable pursuant to the Merger Agreement, effective from and after October 18, 2023, Microsoft and its Affiliates (as defined in the Merger Agreement) shall pay to the Company 100% of all proceeds or other payments for games of the Company, and the Company shall be entitled to offset any payments owed to the gaming business of Microsoft or its Affiliates pursuant to the existing agreements between the Company and Microsoft or their respective Affiliates, on a combined basis, in an amount up to $250 million for each of the 12-month periods ending December 31, 2023 and December 31, 2024.

For additional information related to the Merger Agreement, please refer to Part I Item 1 “Business” of our Annual Report on Form 10-K for the year ended December 31, 2022, our C urrent Report on Form 8-K filed on July 19, 2023 regarding the Letter Agreement, and other relevant materials in connection with the proposed transaction with Microsoft that we will file with the SEC and that will contain important information about the Company and the Merger.

On December 8, 2022, the United States Federal Trade Commission (the “FTC”) issued an administrative complaint against the Company and Microsoft alleging that the Company and Microsoft executed the Merger Agreement in violation of Section 5 of the FTC Act, as amended, 15 U.S.C. § 45, which, if consummated, would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the FTC Act, as amended, 15 U.S.C. § 45. The administrative trial was scheduled to take place before an FTC administrative law judge starting August 2, 2023, but the case was removed from adjudication by the FTC on July 20, 2023, and the hearing has been stayed until further notice. On June 12, 2023, the FTC filed an action captioned Federal Trade Commission v. Microsoft, et al., Case No. 3:23-cv-02880-JSC (N.D. Cal.), in the U.S. District Court for the Northern District of California seeking an emergency temporary restraining order and a preliminary injunction that would prohibit the Company and Microsoft from closing the Merger. On July 10, 2023, the district court denied the FTC’s motion for a preliminary injunction. On July 13, 2023, the FTC filed motions with the district court and the U.S. Court of Appeals for the Ninth Circuit seeking a temporary injunction pending appeal of the district court’s ruling. The district court denied the motion on July 13, 2023, and the U.S. Court of Appeals for the Ninth Circuit denied the motion on July 14, 2023. The emergency temporary restraining order that had been issued by the district court expired on July 14, 2023. The FTC’s appeal of the district court’s denial of the preliminary injunction is pending before the U.S. Court of Appeals for the Ninth Circuit. For more information regarding the FTC complaint regarding the pending Merger, see Note 14 to these condensed consolidated financial statements.

On April 26, 2023, the United Kingdom Competition and Markets Authority (the “CMA”) announced a decision to block the Merger, stating that competition concerns arose in relation to cloud gaming and that Microsoft’s remedies addressing any concerns in cloud gaming were not sufficient. Microsoft is appealing the CMA’s ruling, and the Company has intervened in support. On July 11, 2023, the CMA announced that it had agreed with Microsoft and the Company to jointly seek a stay of the appeal from the Competition Appeal Tribunal (the “CAT”) in order to pursue a potential resolution to the CMA’s previously stated competition concerns. On July 21, 2023, the CAT formally approved the adjournment request. For more information regarding the CMA ruling regarding the pending Merger, see Note 14 to these condensed consolidated financial statements.

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 offerings include titles and content for Call of Duty®, a first-person action franchise. Activision also includes the activities of the Call of Duty League™, a global professional esports league.

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(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 platform, 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 offerings include titles and content for: the Warcraft® franchise, which includes World of Warcraft®, a subscription-based massive multi-player online role-playing game, and Hearthstone®, an online collectible card game based in the Warcraft universe; Diablo® in the action role-playing genre; and Overwatch® in the team-based first-person action genre. Blizzard also includes the activities of the Overwatch League™, a global professional esports league.

(iii) King Digital Entertainment

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

Other

We also engage in other businesses that do not represent reportable segments, including our Activision Blizzard Distribution (“Distribution”) business, which consists of operations in Europe that provide warehousing, logistics, and sales distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.

Basis of Consolidation and Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC 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, 2022.

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. 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. Actual results could differ from these estimates and assumptions.

The accompanying condensed consolidated financial statements include the accounts and operations of the Company. All intercompany accounts and transactions have been eliminated. Certain amounts in the prior year condensed consolidated financial statements have been reclassified to conform to the current year presentation.

2. Held-to-Maturity Investments

The following tables summarize the Company's held-to-maturity investments (amount in millions):


	At June 30, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized losses		Estimated Fair Value (Level 1)
U.S. treasuries and government agency securities	$	2,956	$	1	$	—	$	2,957

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	At December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized losses		Estimated Fair Value (Level 1)
U.S. treasuries and government agency securities	$	4,932	$	1	$	(3)	$	4,930

At June 30, 2023 and December 31, 2022, all contractual maturities of held-to-maturity investments were less than 12 months. As of June 30, 2023, we have $642 million of held-to-maturity investments presented in cash and cash equivalents on our condensed consolidated balance sheet as these investments are highly liquid and have original maturities of three months or less at the time of purchase.

3. Software Development

Our total capitalized software development costs were $1.4 billion and $1.3 billion as of June 30, 2023 and December 31, 2022, respectively, and primarily relate to internal development costs.

Amortization of capitalized software development costs was as follows (amounts in millions):


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Amortization of capitalized software development costs	$	133	$	60	$	258	$	139

4. Fair Value Measurements

The Financial Accounting Standards Board 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.

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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 June 30, 2023 Using
	As of June 30, 2023		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance Sheet Classification
Financial Assets:
Recurring fair value measurements:
Money market funds	$	9,807	$	9,807	$	—	$	—	Cash and cash equivalents


Equity securities	62		62		—		—		Other current assets
Foreign currency forward contracts designated as hedges	4		—		4		—		Other current assets

Total	$	9,873	$	9,869	$	4	$	—

Financial Liabilities:

Foreign currency forward contracts designated as hedges	$	(10)	$	—	$	(10)	$	—	Accrued expenses and other liabilities


			Fair Value Measurements at December 31, 2022 Using
	As of December 31, 2022		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance Sheet Classification
Financial Assets:
Recurring fair value measurements:
Money market funds	$	6,639	$	6,639	$	—	$	—	Cash and cash equivalents


Equity securities	49		49		—		—		Other current assets
Foreign currency forward contracts designated as hedges	6		—		6		—		Other current assets

Total	$	6,694	$	6,688	$	6	$	—

Financial Liabilities:
Foreign currency forward contracts designated as hedges	$	(6)	$	—	$	(6)	$	—	Accrued expenses and other liabilities

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Foreign Currency Forward Contracts

Foreign Currency Forward Contracts Designated as Hedges (“Cash Flow Hedges”)

The total gross notional amounts and fair values of our Cash Flow Hedges, which generally had remaining maturities of twelve months or less as of June 30, 2023, are as follows (amounts in millions):


	As of June 30, 2023				As of December 31, 2022
	Notional amount		Fair value gain (loss)		Notional amount		Fair value gain (loss)
Foreign Currency:
Buy USD, Sell EUR	$	632	$	(5)	$	509	$	—
Buy USD, Sell GBP	107		(1)		—		—
Buy USD, Sell CAD	55		(1)		—		—
Buy USD, Sell AUD	31		1		—		—

For the three and six months ended June 30, 2023 and 2022, 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.

5. 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 June 30, 2023 and December 31, 2022, were $1.9 billion and $2.1 billion, respectively. For the six months ended June 30, 2023, 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, which were in the ordinary course of business. During the three and six months ended June 30, 2023, $1.9 billion and $0.6 billion, respectively, of revenues were recognized that were included in the deferred revenues balance at December 31, 2022. During the three and six months ended June 30, 2022, $0.3 billion and $1.0 billion, respectively, of revenues were recognized that were included in the deferred revenues balance at December 31, 2021.

As of June 30, 2023, the aggregate amount of contracted revenues allocated to our unsatisfied performance obligations was $2.1 billion, which included our deferred revenues balances and amounts to be invoiced and recognized as revenue in future periods. We expect to recognize approximately $2.0 billion over the next 12 months, 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 accounting standard.

6. Debt

Credit Facilities

As of June 30, 2023 and December 31, 2022, 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 not drawn on the Revolver and we were in compliance with the terms of the Credit Agreement as of June 30, 2023. The Revolver is scheduled to mature on August 24, 2023.

Refer to Note 13 contained in our Annual Report on Form 10-K for the year ended December 31, 2022 for further details regarding the Credit Agreement and its key terms.

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Unsecured Senior Notes

As of June 30, 2023 and December 31, 2022, 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 June 30, 2023				At December 31, 2022
Unsecured Senior Notes	Interest Rate	Semi-Annual Interest Payments Due On	Maturity	Principal		Fair Value (Level 2)		Principal		Fair Value (Level 2)




2026 Notes	3.40%	Mar. 15 & Sept. 15	Sept. 2026	$	850	$	811	$	850	$	810
2027 Notes	3.40%	Jun. 15 & Dec. 15	Jun. 2027	400		379		400		378
2030 Notes	1.35%	Mar. 15 & Sept. 15	Sept. 2030	500		401		500		391
2047 Notes	4.50%	Jun. 15 & Dec. 15	Jun. 2047	400		369		400		353
2050 Notes	2.50%	Mar. 15 & Sept. 15	Sept. 2050	1,500		965		1,500		936
Total gross long-term debt				$	3,650			$	3,650
Unamortized discount and deferred financing costs				(38)				(39)
Total net carrying amount				$	3,612			$	3,611

We were in compliance with the terms of the notes outstanding as of June 30, 2023. Refer to Note 13 contained in our Annual Report on Form 10-K for the year ended December 31, 2022 for further details regarding key terms under our indentures that govern our outstanding notes.

7. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) were as follows (amounts in millions):


	For the Six Months Ended June 30, 2023
	Foreign currency translation adjustments		Unrealized gain (loss) on forward contracts		Total
Balance at December 31, 2022	$	(636)	$	11	$	(625)
Other comprehensive income (loss) before reclassifications	14		(3)		11
Amounts reclassified from accumulated other comprehensive income (loss) into earnings	—		(17)		(17)
Balance at June 30, 2023	$	(622)	$	(9)	$	(631)


	For the Six Months Ended June 30, 2022
	Foreign currency translation adjustments		Unrealized gain (loss) on available-for- sale securities		Unrealized gain (loss) on forward contracts		Total
Balance at December 31, 2021	$	(606)	$	3	$	25	$	(578)
Other comprehensive income (loss) before reclassifications	(27)		7		27		7
Amounts reclassified from accumulated other comprehensive income (loss) into earnings	—		(2)		(18)		(20)
Balance at June 30, 2022	$	(633)	$	8	$	34	$	(591)

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8. Operating Segments and Geographic Regions

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 (including liability awards accounted for under ASC 718); 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; certain partnership wind down and related costs; and certain other non-cash charges. The CODM does not review any information regarding total assets on an operating segment basis, and accordingly, no disclosure is made with respect thereto.

Our operating segments are also consistent with our internal organizational structure, the way we assess operating performance and allocate resources, and the availability of separate financial information. We do not aggregate operating segments.

Information on reportable segment net revenues and operating income are presented below (amounts in millions):


	Three Months Ended June 30, 2023
	Activision		Blizzard		King		Total
Segment Revenues
Net revenues from external customers	$	574	$	1,049	$	747	$	2,370
Intersegment net revenues (1)	—		9		—		9
Segment net revenues	$	574	$	1,058	$	747	$	2,379

Segment operating income	$	167	$	409	$	266	$	842

	Three Months Ended June 30, 2022
	Activision		Blizzard		King		Total
Segment Revenues
Net revenues from external customers	$	490	$	390	$	684	$	1,564
Intersegment net revenues (1)	—		11		—		11
Segment net revenues	$	490	$	401	$	684	$	1,575

Segment operating income	$	92	$	94	$	271	$	457