AB(ATVI) - 2019 Q2 - Quarterly Report

Cautionary Statement This section outlines forward-looking statements subject to business and economic risks, emphasizing potential material differences in actual future results - Forward-looking statements are subject to business and economic risks, reflecting management's current expectations and projections, and are inherently uncertain and difficult to predict[3] - Key risk factors include the ability to consistently deliver popular titles, satisfy consumer expectations, concentration of revenue among a small number of titles, and the impact of restructuring plans[3] - Other significant risks involve increasing importance of digital distribution, substantial influence of third-party platform providers, risks associated with the free-to-play business model, and legal and tax liabilities[3] PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents unaudited condensed consolidated financial statements, including balance sheets, income, cash flows, and equity changes, with detailed notes Condensed Consolidated Balance Sheets | Metric | June 30, 2019 ($M) | December 31, 2018 ($M) | | :--------------------- | :----------------- | :--------------------- | | Total assets | 17,495 | 17,890 | | Total liabilities | 5,518 | 6,498 | | Total shareholders' equity | 11,977 | 11,392 | Condensed Consolidated Statements of Operations | Metric (Amounts in millions, except per share data) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net revenues | $1,396 | $1,641 | $3,220 | $3,607 | | Operating income | $336 | $434 | $906 | $1,029 | | Net income | $328 | $402 | $774 | $902 | | Basic EPS | $0.43 | $0.53 | $1.01 | $1.19 | | Diluted EPS | $0.43 | $0.52 | $1.01 | $1.17 | Condensed Consolidated Statements of Comprehensive Income | Metric (Amounts in millions) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $328 | $402 | $774 | $902 | | Total other comprehensive income (loss) | $(6) | $44 | $(7) | $30 | | Comprehensive income | $322 | $446 | $767 | $932 | Condensed Consolidated Statements of Cash Flows | Metric (Amounts in millions) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $604 | $538 | | Net cash provided by (used in) investing activities | $37 | $(124) | | 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 | Condensed Consolidated Statement of Changes in Shareholders' Equity | Metric (Amounts and shares in millions) | Dec 31, 2018 | Mar 31, 2019 | Jun 30, 2019 | | :-------------------------------------- | :----------- | :----------- | :----------- | | Common Shares | 1,192 | 1,195 | 1,196 | | Common Stock Amount | $— | $— | $— | | Treasury Shares | (429) | (429) | (429) | | Treasury Stock Amount | $(5,563) | $(5,563) | $(5,563) | | Additional Paid-In Capital | 10,963 | 11,004 | 11,063 | | Retained Earnings | 6,593 | 6,757 | 7,085 | | Accumulated Other Comprehensive Income (Loss) | $(601) | $(602) | $(608) | | Total Shareholders' Equity | 11,392 | 11,596 | 11,977 | | Metric (Amounts and shares in millions) | Dec 31, 2017 | Mar 31, 2018 | Jun 30, 2018 | | :-------------------------------------- | :----------- | :----------- | :----------- | | Common Shares | 1,186 | 1,190 | 1,191 | | Common Stock Amount | $— | $— | $— | | Treasury Shares | (429) | (429) | (429) | | Treasury Stock Amount | $(5,563) | $(5,563) | $(5,563) | | Additional Paid-In Capital | 10,747 | 10,786 | 10,867 | | Retained Earnings | 4,916 | 5,245 | 5,647 | | Accumulated Other Comprehensive Income (Loss) | $(638) | $(649) | $(605) | | Total Shareholders' Equity | 9,462 | 9,819 | 10,346 | Notes to Condensed Consolidated Financial Statements 1. Description of Business and Basis of Consolidation and Presentation Activision Blizzard is a global leader in interactive entertainment, operating through Activision, Blizzard, and King segments, with financial statements prepared under U.S. GAAP - Activision Blizzard is a leading global developer and publisher of interactive entertainment content and services for video game consoles, PCs, and mobile devices, also operating esports leagues and creating film/TV content[10] - The company's three reportable segments are Activision (Call of Duty, console/PC), Blizzard (World of Warcraft, StarCraft, Diablo, Hearthstone, Overwatch, PC/console/mobile, Battle.net, esports), and King (Candy Crush, Farm Heroes, Bubble Witch, mobile/PC, free-to-play with in-game purchases)[11][12][14] - Other businesses include Activision Blizzard Studios (film/TV content) and Activision Blizzard Distribution (warehousing, logistics, sales distribution services in Europe)[16] 2. Summary of Significant Accounting Policies This note details significant accounting policies, highlighting the adoption of ASC 842 Leases, which requires recognizing lease liabilities and ROU assets - The company adopted the new lease accounting standard (ASC 842) on January 1, 2019, requiring recognition of lease liabilities and ROU assets for leases[19] - Lease assets and liabilities are recognized based on the present value of future lease payments, generally using the incremental borrowing rate, and a portfolio approach is applied for similar leased assets[20] - The company elected practical expedients for transition, including not reassessing existing contracts for lease identification and carrying forward historical lease classifications[20] 3. Recently Issued Accounting Pronouncements This section discusses recently adopted and pending accounting pronouncements, including ASC 842 Leases, which impacted the balance sheet | Condensed Consolidated Balance Sheet (Amounts in millions) | Balance at Dec 31, 2018 | Adjustments due to adoption of new lease accounting standard | Balance at Jan 1, 2019 | | :------------------------------------------------------- | :---------------------- | :----------------------------------------------------------- | :--------------------- | | Other current assets | $539 | $(8) | $531 | | Other assets | $482 | $252 | $734 | | Accrued expenses and other liabilities | $896 | $54 | $950 | | Other liabilities | $1,167 | $190 | $1,357 | - The company is evaluating the impact of new FASB guidance on goodwill impairment (effective after Dec 15, 2019) and cloud computing arrangements (effective after Dec 15, 2019)[23][24] 4. Inventories, Net Inventories, net, primarily finished goods and purchased parts, totaled $46 million at June 30, 2019, with $18 million in reserves | Inventories, net (Amounts in millions) | June 30, 2019 | December 31, 2018 | | :------------------------------------- | :------------ | :---------------- | | Finished goods | $45 | $40 | | Purchased parts and components | $1 | $3 | | Inventories, net | $46 | $43 | - Inventory reserves decreased to $18 million at June 30, 2019, from $22 million at December 31, 2018[25] 5. Software Development and Intellectual Property Licenses Capitalized software development costs decreased to $274 million at June 30, 2019, with amortization expense of $54 million for Q2 2019 | Capitalized Software Development Costs (Amounts in millions) | June 30, 2019 | December 31, 2018 | | :--------------------------------------------------------- | :------------ | :---------------- | | Internally-developed software costs | $254 | $291 | | Payments made to third-party software developers | $20 | $38 | | Total software development costs | $274 | $329 | | Amortization Expense (Amounts in millions) | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :----------------------------------------- | :------------------------------- | :----------------------------- | | Amortization of capitalized software development costs and intellectual property licenses | $54 | $164 | 6. Intangible Assets, Net Total intangible assets, net, decreased to $633 million at June 30, 2019, with Q2 2019 amortization expense of $48 million | Intangible Assets, Net (Amounts in millions) | June 30, 2019 | December 31, 2018 | | :------------------------------------------- | :------------ | :---------------- | | Total definite-lived intangible assets | $200 | $302 | | Total indefinite-lived intangible assets | $433 | $433 | | Total intangible assets, net | $633 | $735 | | Amortization Expense (Amounts in millions) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Amortization expense of intangible assets | $48 | $77 | $103 | $196 | | Future Amortization of Definite-Lived Intangible Assets (Amounts in millions) | | :---------------------------------------------------------------------------- | | 2019 (remaining six months) | $102 | | 2020 | $74 | | 2021 | $12 | | 2022 | $7 | | 2023 | $2 | | Thereafter | $3 | | Total | $200 | 7. Goodwill Goodwill remained stable at $9,763 million at June 30, 2019, primarily allocated to Activision, Blizzard, and King segments | Segment (Amounts in millions) | December 31, 2018 | June 30, 2019 | | :---------------------------- | :---------------- | :------------ | | Activision | $6,897 | $6,898 | | Blizzard | $190 | $190 | | King | $2,675 | $2,675 | | Total | $9,762 | $9,763 | 8. Fair Value Measurements Financial assets and liabilities are categorized into a three-level fair value hierarchy, with recurring measurements totaling $3,999 million at June 30, 2019 - The company uses a three-level fair value hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[33][35] | Financial Assets (Amounts in millions) | June 30, 2019 | December 31, 2018 | | :------------------------------------- | :------------ | :---------------- | | Money market funds | $3,866 | $3,925 | | Foreign government treasury bills | $38 | $32 | | U.S. treasuries and government agency securities | $78 | $150 | | Foreign currency forward contracts designated as hedges | $11 | $13 | | Foreign currency forward contracts not designated as hedges | $6 | $1 | | Total recurring fair value measurements | $3,999 | $4,121 | - An upward adjustment of $38 million was recorded for an equity investment, historically at cost, based on an observable transaction, resulting in an unrealized gain in Q2 2019[42] 9. Deferred revenues Deferred revenues decreased from $1.6 billion to $0.8 billion by June 30, 2019, with $1.3 billion recognized in the first half - Deferred revenues decreased from $1.6 billion at January 1, 2019, to $0.8 billion at June 30, 2019[43] - For the six months ended June 30, 2019, $1.3 billion of revenues were recognized from the deferred revenues balance at December 31, 2018[43] - The aggregate amount of contracted revenues allocated to unsatisfied performance obligations is $1.9 billion, with approximately $0.9 billion expected to be recognized over the next 12 months[43] 10. Leases Lease arrangements for offices and equipment are mostly operating leases, with ROU assets of $254 million and total lease liabilities of $289 million at June 30, 2019 - Lease arrangements are primarily for offices, data centers, and event production equipment, with terms from one to ten years, mostly classified as operating leases[45] | Lease Costs (Amounts in millions) | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :----------------------------- | | Operating lease costs | $20 | $40 | | Variable lease costs | $4 | $9 | | Operating Lease ROU Assets and Liabilities (Amounts in millions) | June 30, 2019 | | :--------------------------------------------------------------- | :------------ | | ROU assets | $254 | | Current lease liabilities | $60 | | Non-current lease liabilities | $229 | | Total lease liabilities | $289 | 11. Debt The company holds an undrawn $1.5 billion revolving credit facility and $2.7 billion in unsecured senior notes, with Q2 2019 interest expense at $21 million - The company has a $1.5 billion revolving credit facility available, which has not been drawn upon as of June 30, 2019[49] | Unsecured Senior Notes (Amounts in millions) | June 30, 2019 Net Carrying Amount | December 31, 2018 Net Carrying Amount | | :------------------------------------------- | :-------------------------------- | :------------------------------------ | | 2021 Notes (2.3%) | $647 | $647 | | 2022 Notes (2.6%) | $397 | $397 | | 2026 Notes (3.4%) | $842 | $842 | | 2027 Notes (3.4%) | $396 | $395 | | 2047 Notes (4.5%) | $391 | $390 | | Total long-term debt | $2,673 | $2,671 | | Interest Expense (Amounts in millions) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest expense | $21 | $41 | $43 | $80 | | Amortization of debt discount and deferred financing costs | $1 | $2 | $2 | $4 | 12. Accumulated Other Comprehensive Income (Loss) AOCI was $(608) million at June 30, 2019, primarily comprising foreign currency translation adjustments and unrealized gains/losses | Components of AOCI (Amounts in millions) | December 31, 2018 | June 30, 2019 | | :-------------------------------------- | :---------------- | :------------ | | Foreign currency translation adjustments | $(629) | $(628) |\ | Unrealized gain (loss) on forward contracts | $23 | $17 |\ | Unrealized gain (loss) on available-for-sale securities | $5 | $3 |\ | Total | $(601) | $(608) | 13. Operating Segments and Geographic Region Activision Blizzard operates through Activision, Blizzard, and King segments, with Q2 2019 total segment net revenues decreasing to $1,151 million - The company's three reportable segments are Activision, Blizzard, and King, with performance reviewed by the CEO excluding certain non-GAAP items[59] | Segment Performance (Amounts in millions) | Q2 2019 Net Revenues | Q2 2018 Net Revenues | Q2 2019 Operating Income | Q2 2018 Operating Income | | :---------------------------------------- | :------------------- | :------------------- | :----------------------- | :----------------------- | | Activision | $268 | $338 | $55 | $84 | | Blizzard | $384 | $489 | $75 | $133 | | King | $499 | $502 | $171 | $169 | | Total Segment | $1,151 | $1,329 | $301 | $386 | | Consolidated Net Revenues by Distribution Channel (Amounts in millions) | Q2 2019 | Q2 2018 | YTD Q2 2019 | YTD Q2 2018 | | :-------------------------------------------------------------------- | :------ | :------ | :---------- | :---------- | | Digital online channels | $1,086 | $1,259 | $2,479 | $2,720 | | Retail channels | $193 | $278 | $505 | $690 | | Other | $117 | $104 | $236 | $197 | | Total Consolidated Net Revenues | $1,396| $1,641| $3,220 | $3,607 | | Consolidated Net Revenues by Geographic Region (Amounts in millions) | Q2 2019 | Q2 2018 | YTD Q2 2019 | YTD Q2 2018 | | :----------------------------------------------------------------- | :------ | :------ | :---------- | :---------- | | Americas | $764 | $900 | $1,751 | $1,966 | | EMEA | $459 | $552 | $1,073 | $1,239 | | Asia Pacific | $173 | $189 | $396 | $402 | | Total Consolidated Net Revenues | $1,396| $1,641| $3,220 | $3,607 | | Consolidated Net Revenues by Platform (Amounts in millions) | Q2 2019 | Q2 2018 | YTD Q2 2019 | YTD Q2 2018 | | :-------------------------------------------------------- | :------ | :------ | :---------- | :---------- | | Console | $407 | $565 | $1,083 | $1,382 | | PC | $361 | $451 | $855 | $971 | | Mobile and ancillary | $511 | $521 | $1,046 | $1,057 | | Other | $117 | $104 | $236 | $197 | | Total Consolidated Net Revenues | $1,396| $1,641| $3,220 | $3,607 | 14. Restructuring A Board-authorized restructuring plan initiated in February 2019 is expected to incur $150 million in pre-tax charges for 2019 - A Board-authorized restructuring plan was committed on February 12, 2019, to refocus resources on largest opportunities and reduce complexity[88] | Restructuring and Related Costs (Amounts in millions) | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :---------------------------------------------------- | :------------------------------- | :----------------------------- | | Total | $22 | $79 | - Expected aggregate pre-tax restructuring charges for 2019 are approximately $150 million, primarily for severance (55%), facilities costs (20%), and other asset write-downs (25%)[92] 15. Interest and Other Expense (Income), Net Interest and other expense (income), net, shifted to an income of $34 million in Q2 2019, driven by an unrealized gain and lower interest expense | Metric (Amounts in millions) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest income | $(19) | $(18) | $(41) | $(32) | | Interest expense from debt and amortization of debt discount and deferred financing costs | $23 | $43 | $46 | $84 | | Unrealized gain on equity investment | $(38) | $— | $(38) | $— | | Other expense (income), net | $— | $1 | $2 | $2 | | Interest and other expense (income), net | $(34) | $26 | $(31) | $54 | - The decrease in interest and other expense (income), net, was primarily due to a $38 million unrealized gain on an equity investment and a $20 million decrease in interest expense from lower debt outstanding (Q2 2019 vs Q2 2018)[171] 16. Income Taxes Income tax expense increased to $42 million in Q2 2019 (11% effective rate), primarily due to prior-year benefits and increased U.S. tax on foreign earnings | Income Tax Expense (Amounts in millions) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax expense | $42 | $6 | $163 | $73 | | % of pretax income | 11% | 1% | 17% | 7% | - The increase in tax expense is primarily due to a discrete tax benefit in the prior year from an IRS audit settlement, lower excess tax benefits from share-based payments in the current year, and an increase in U.S. tax on foreign earnings[97] - The company received a €571 million (approximately $650 million) tax assessment from the French Tax Authority for 2011-2013, which it intends to vigorously contest[97] 17. Computation of Basic/Diluted Earnings Per Common Share Basic EPS was $0.43 for Q2 2019 and $1.01 YTD, with diluted EPS showing a similar trend, reflecting a decrease from prior year | Metric (Amounts in millions, except per share data) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Consolidated net income | $328 | $402 | $774 | $902 | | Denominator for basic EPS (weighted-average common shares outstanding) | 766 | 761 | 765 | 760 | | Basic earnings per common share | $0.43 | $0.53 | $1.01 | $1.19 | | Diluted earnings per common share | $0.43 | $0.52 | $1.01 | $1.17 | | Weighted-Average Shares Excluded from Diluted EPS (Amounts in millions) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Restricted stock units and options with performance measures not yet met | 4 | 6 | 3 | 6 | | Anti-dilutive employee stock options | 6 | 2 | 6 | 2 | 18. Capital Transactions A $1.5 billion stock repurchase program was authorized, with no shares repurchased as of June 30, 2019, and a $283 million cash dividend was paid - A $1.5 billion stock repurchase program was authorized on January 31, 2019, but no shares were repurchased as of June 30, 2019[101] - A cash dividend of $0.37 per common share, totaling $283 million, was paid on May 9, 2019[103] 19. Commitments and Contingencies The company faces routine legal and tax matters, including a contested €571 million French tax assessment, but expects no material adverse effect - A reassessment from the Swedish Tax Agency for 2016 and 2017 tax years was paid in July 2019, with no significant impact on financial statements[104] - The company is vigorously contesting a €571 million (approximately $650 million) tax assessment from the French Tax Authority for 2011-2013[97] - Management believes routine claims and lawsuits are not significant and are not expected to have a material adverse effect on the company's business, financial condition, results of operations, or liquidity[104] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial performance, condition, and outlook, covering revenues, expenses, liquidity, and critical accounting policies Business Overview Activision Blizzard is a global interactive entertainment leader, operating through Activision, Blizzard, and King segments across various platforms and content types - Activision Blizzard is a leading global developer and publisher of interactive entertainment content and services across video game consoles, PCs, and mobile devices[106] - The company's reportable segments are Activision (Call of Duty, console/PC), Blizzard (World of Warcraft, StarCraft, Diablo, Hearthstone, Overwatch, PC/console/mobile, Battle.net, esports), and King (Candy Crush, Farm Heroes, Bubble Witch, mobile/PC, free-to-play)[107][108][109] - Other businesses include Activision Blizzard Studios (film/TV content) and Activision Blizzard Distribution (warehousing, logistics, sales distribution services)[111] Business Results and Highlights Q2 2019 consolidated net revenues decreased 15% to $1.40 billion, with operating income down 23% to $336 million, and diluted EPS at $0.43 | Metric (Amounts in millions, except per share data) | Q2 2019 | Q2 2018 | YTD Q2 2019 | YTD Q2 2018 | | :-------------------------------------------------- | :------ | :------ | :---------- | :---------- | | Consolidated net revenues | $1,400 | $1,640 | $3,220 | $3,610 | | Consolidated operating income | $336 | $434 | $906 | $1,030 | | Consolidated net income | $328 | $402 | $774 | $902 | | Diluted EPS | $0.43 | $0.52 | $1.01 | $1.17 | | Cash flows from operating activities | N/A | N/A | $604 | $538 | - Digital online channels accounted for 78% of consolidated net revenues in Q2 2019 and 77% YTD Q2 2019[112] - Q2 2019 operating margin was 24.1% (including $22 million restructuring costs), and YTD Q2 2019 operating margin was 28.1% (including $79 million restructuring costs)[112] Operating Metrics Net bookings decreased 13% in Q2 2019, primarily due to the Destiny divestiture, while MAUs declined 5% sequentially across all segments | Net Bookings (Amounts in millions) | June 30, 2019 | June 30, 2018 | Increase (Decrease) | | :--------------------------------- | :------------ | :------------ | :------------------ | | Three Months Ended | $1,207 | $1,385 | $(178) | | Six Months Ended | $2,465 | $2,769 | $(304) | - Q2 2019 net bookings decrease was primarily due to lower net bookings from the Destiny franchise (divested) and Overwatch[117] | Average Monthly Active Users (MAUs) (in millions) | June 30, 2019 | March 31, 2019 | December 31, 2018 | September 30, 2018 | June 30, 2018 | | :------------------------------------------------ | :------------ | :------------- | :---------------- | :----------------- | :------------ | | Activision | 37 | 41 | 53 | 46 | 45 | | Blizzard | 32 | 32 | 35 | 37 | 37 | | King | 258 | 272 | 268 | 262 | 270 | | Total | 327 | 345 | 356 | 345 | 352 | - Average MAUs decreased by 18 million (5%) sequentially, primarily driven by decreases in King (Candy Crush franchise) and Activision (Call of Duty franchise)[120] Management's Overview of Business Trends The interactive entertainment industry shows significant growth, driven by mobile gaming, with opportunities in esports and a shift towards recurring revenue models - The global interactive entertainment industry grew, on average, 18% annually from 2015 to 2018, with mobile gaming being a significant growth driver[122] - Opportunities exist to expand franchises outside of games, including esports (e.g., Overwatch League, Call of Duty city-based league)[123] - A significant portion of revenues and profits is concentrated among a few popular franchises (e.g., Call of Duty, Candy Crush, World of Warcraft accounted for 58% of 2018 consolidated net revenues)[124] - The business is shifting towards more consistently recurring, year-round revenue models through downloadable content, microtransactions, and free-to-play games[125] Consolidated Statements of Operations Data Q2 2019 consolidated net revenues decreased 15% to $1,396 million, with operating income declining 23% to $336 million | Metric (Amounts in millions) | Q2 2019 | Q2 2018 | YTD Q2 2019 | YTD Q2 2018 | | :--------------------------- | :------ | :------ | :---------- | :---------- | | Total net revenues | $1,396 | $1,641 | $3,220 | $3,607 | | Total costs and expenses | $1,060 | $1,207 | $2,314 | $2,578 | | Operating income | $336 | $434 | $906 | $1,029 | | Net income | $328 | $402 | $774 | $902 | - Restructuring and related costs were $22 million in Q2 2019 and $79 million YTD Q2 2019, compared to $0 in the prior-year periods[126] - Interest and other expense (income), net, shifted from an expense of $26 million in Q2 2018 to an income of $34 million in Q2 2019[126] Consolidated Net Revenues Consolidated net revenues decreased 15% in Q2 2019, primarily due to the Destiny franchise divestiture and lower Call of Duty and Overwatch revenues - Q2 2019 consolidated net revenues decreased by $245 million (15%) YoY, primarily due to lower revenues from Activision (Destiny franchise divestiture, Call of Duty: Black Ops 4 vs WWII) and Blizzard (Overwatch)[128] - YTD Q2 2019 consolidated net revenues decreased by $387 million (11%) YoY, mainly due to lower revenues from Activision (Destiny franchise, partially offset by Sekiro: Shadows Die Twice) and Blizzard (Overwatch)[129] - Foreign exchange rate changes had a negative impact of $39 million on Q2 2019 consolidated net revenues and $105 million YTD Q2 2019[132] Operating Segment Results Activision's net revenues decreased 21% in Q2 2019 due to Destiny divestiture, while Blizzard's revenues also declined 21% from key franchises | Segment Performance (Amounts in millions) | Q2 2019 Net Revenues | Q2 2018 Net Revenues | Q2 2019 Operating Income | Q2 2018 Operating Income | | :---------------------------------------- | :------------------- | :------------------- | :----------------------- | :----------------------- | | Activision | $268 | $338 | $55 | $84 | | Blizzard | $384 | $489 | $75 | $133 | | King | $499 | $502 | $171 | $169 | | Total Segment | $1,151 | $1,329 | $301 | $386 | - Activision's Q2 2019 revenue decrease was driven by lower Destiny franchise revenues (divested), Crash Bandicoot N. Sane Trilogy, and Call of Duty catalog titles, partially offset by Crash Team Racing Nitro-Fueled and Sekiro: Shadows Die Twice[137] - Blizzard's Q2 2019 revenue decrease was primarily due to lower revenues from Overwatch, Hearthstone (Rise of Shadows vs The Witchwood), and World of Warcraft (no comparable pre-purchase content)[139] - Foreign exchange rate changes had a negative impact of $30 million on reportable segment net revenues for Q2 2019 and $72 million YTD Q2 2019[147] Consolidated Results (Net Revenues by Distribution Channel, Geographic Region, Platform) Digital online channels remain the largest revenue source, though decreasing in Q2 2019, with console and PC revenues also declining | Net Revenues by Distribution Channel (Amounts in millions) | Q2 2019 | Q2 2018 | YTD Q2 2019 | YTD Q2 2018 | | :--------------------------------------------------------- | :------ | :------ | :---------- | :---------- | | Digital online channels | $1,086 | $1,259 | $2,479 | $2,720 | | Retail channels | $193 | $278 | $505 | $690 | | Other | $117 | $104 | $236 | $197 | | Total Consolidated Net Revenues | $1,396| $1,641| $3,220 | $3,607 | - Digital online channel net revenues decreased primarily due to lower revenues from the Destiny franchise (divested) and Overwatch[149] | Net Revenues by Geographic Region (Amounts in millions) | Q2 2019 | Q2 2018 | YTD Q2 2019 | YTD Q2 2018 | | :------------------------------------------------------ | :------ | :------ | :---------- | :---------- | | Americas | $764 | $900 | $1,751 | $1,966 | | EMEA | $459 | $552 | $1,073 | $1,239 | | Asia Pacific | $173 | $189 | $396 | $402 | | Consolidated net revenues | $1,396| $1,641| $3,220 | $3,607 | | Net Revenues by Platform (Amounts in millions) | Q2 2019 | Q2 2018 | YTD Q2 2019 | YTD Q2 2018 | | :--------------------------------------------- | :------ | :------ | :---------- | :---------- | | Console | $407 | $565 | $1,083 | $1,382 | | PC | $361 | $451 | $855 | $971 | | Mobile and ancillary | $511 | $521 | $1,046 | $1,057 | | Other | $117 | $104 | $236 | $197 | | Total Consolidated Net Revenues | $1,396| $1,641| $3,220 | $3,607 | Costs and Expenses Total cost of revenues decreased 15% in Q2 2019, driven by lower product costs and royalties, while restructuring costs significantly increased | Cost of Revenues (Amounts in millions) | Q2 2019 | Q2 2018 | YTD Q2 2019 | YTD Q2 2018 | | :------------------------------------- | :------ | :------ | :---------- | :---------- | | Product costs | $99 | $126 | $251 | $289 | | Software royalties, amortization, and intellectual property licenses (product sales) | $51 | $49 | $162 | $194 | | Game operations and distribution costs | $230 | $250 | $469 | $521 | | Software royalties, amortization, and intellectual property licenses (subscription, licensing, other) | $53 | $85 | $114 | $169 | | Total cost of revenues | $433| $510| $996 | $1,173 | | Operating Expenses (Amounts in millions) | Q2 2019 | Q2 2018 | YTD Q2 2019 | YTD Q2 2018 | | :--------------------------------------- | :------ | :------ | :---------- | :---------- | | 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 | $— | - The decrease in sales and marketing expenses YTD Q2 2019 was partly due to a $44 million decrease in amortization of the customer base intangible asset, which was fully amortized in Q1 2018[168] Liquidity and Capital Resources The company maintains a strong financial position with $4.7 billion in cash and investments, and operating cash flow increased to $604 million YTD Q2 2019 | Sources of Liquidity (Amounts in millions) | June 30, 2019 | December 31, 2018 | | :----------------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $4,592 | $4,225 | | Short-term investments | $84 | $155 | | Total | $4,676 | $4,380 | - The company has a $1.5 billion revolving credit facility available, which remains undrawn[173] | Cash Flow Summary (Amounts in millions) | YTD Q2 2019 | YTD Q2 2018 | Increase (Decrease) | | :-------------------------------------- | :---------- | :---------- | :------------------ | | Net cash provided by operating activities | $604 | $538 | $66 | | Net cash provided by (used in) investing activities | $37 | $(124) | $161 | | Net cash used in financing activities | $(274) | $(250) | $(24) | | Effect of foreign exchange rate changes | $3 | $(19) | $22 | | Net increase in cash and cash equivalents and restricted cash | $370 | $145 | $225 | - Capital expenditures for YTD Q2 2019 were $45 million, with an anticipated total of approximately $140 million for the full year 2019[183] Critical Accounting Policies and Estimates Critical accounting policies and estimates, including revenue recognition and income taxes, remained consistent with no significant changes in H1 2019 - No significant changes occurred to the critical accounting policies and estimates during the six months ended June 30, 2019[185] - Key critical accounting policies include Revenue Recognition, Income Taxes, Allowances for Returns and Price Protection, Software Development Costs, Fair Value Estimates, and Share-Based Payments[185] Recently Issued Accounting Pronouncements This section reiterates the adoption of ASC 842 Leases, which resulted in balance sheet adjustments but no impact on operations or cash flows - The new lease accounting standard (ASC 842) was adopted effective January 1, 2019, using an optional adoption method and practical expedients[186] - The adoption of ASC 842 resulted in adjustments to the condensed consolidated balance sheet but did not impact the condensed consolidated statement of operations or cash flows[22] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency and interest rate fluctuations, mitigated by derivative contracts and a fixed-rate debt structure Foreign Currency Exchange Rate Risk Foreign currency exchange rate risk, particularly from a strengthening U.S. dollar, is mitigated by short-term derivative contracts, with a 10% adverse shift impacting net income by $90 million - The company is exposed to foreign currency exchange rate risk from international operations, particularly from the strengthening of the U.S. dollar against currencies like the euro and British pound[188] - Foreign currency risk is mitigated by periodically entering into currency derivative contracts, principally forward contracts with maturities of less than one year, not for trading or speculative purposes[188] | Cash Flow Hedges (Amounts in millions) | Notional amount (June 30, 2019) | Fair value gain (loss) (June 30, 2019) | | :------------------------------------- | :------------------------------ | :------------------------------------- | | Buy USD, Sell Euro | $409 | $11 | - A hypothetical 10% adverse foreign currency exchange rate movement would result in a theoretical decline of approximately $90 million in net income for the six months ended June 30, 2019[191] Interest Rate Risk Interest rate risk is minimal due to fixed-rate debt and an investment portfolio of high-credit-quality, short-maturity money market and government securities - Interest rate risk primarily relates to the investment portfolio, as all outstanding debt is at fixed rates[191] - The investment portfolio consists primarily of money market funds and government securities with high credit quality and short average maturities, making it less sensitive to market fluctuations[191] - As of June 30, 2019, there was no material interest rate risk exposure to the company's consolidated financial condition, results of operations, or liquidity[191] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes in internal control over financial reporting Definition and Limitations of Disclosure Controls and Procedures Disclosure controls ensure timely and accurate SEC reporting, but inherently provide only reasonable assurance due to human error or circumvention - Disclosure controls and procedures are designed to ensure timely and accurate reporting of information required by the Exchange Act[192] - Inherent limitations of any control system include human error and the possibility of circumvention or overriding of controls[192] Evaluation of Disclosure Controls and Procedures Management, including principal officers, concluded that disclosure controls and procedures were effective as of June 30, 2019 - Management, including the principal executive officer and principal financial officer, concluded that disclosure controls and procedures were effective as of June 30, 2019[193] Changes in Internal Control Over Financial Reporting Management concluded no material changes in internal control over financial reporting occurred during Q2 2019 - No material changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2019[194] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in routine legal and tax matters, including a contested €571 million French tax assessment, but expects no material adverse effect - A reassessment from the Swedish Tax Agency for 2016 and 2017 tax years was paid in July 2019, with no significant impact on financial statements[195] - The company is vigorously contesting a €571 million (approximately $650 million) tax assessment from the French Tax Authority for 2011-2013[97] - Management believes routine claims and lawsuits are not significant and are not expected to have a material adverse effect on the company's business, financial condition, results of operations, or liquidity[195] Item 1A. Risk Factors This section refers to the comprehensive list of business risk factors detailed in the Annual Report on Form 10-K for 2018 - Various risks associated with the company's business are described in Part I, Item 1A, 'Risk Factors,' of the Annual Report on Form 10-K for the year ended December 31, 2018[197] Item 5. Other Information Stephen Wereb, Chief Accounting Officer, will retire effective August 15, 2019, with Dennis Durkin, CFO, temporarily assuming his duties - Stephen Wereb, Chief Accounting Officer, will retire effective August 15, 2019[198] - Dennis Durkin, Chief Financial Officer, will temporarily assume the responsibilities of principal accounting officer[198] Item 6. Exhibits This section confirms that the exhibits listed in the accompanying Exhibit Index are incorporated by reference into this Quarterly Report - The exhibits listed on the accompanying Exhibit Index are incorporated by reference into this Quarterly Report on Form 10-Q[199] EXHIBIT INDEX The Exhibit Index lists all documents filed as exhibits to the Form 10-Q, including corporate governance, employment agreements, and certifications - The Exhibit Index lists various documents, including the Third Amended and Restated Certificate of Incorporation, Fourth Amended and Restated Bylaws, an Employment Agreement, and certifications pursuant to the Sarbanes-Oxley Act[201] - It also includes XBRL Instance, Schema, Calculation, Labels, Presentation, and Definition Linkbase Documents for interactive data filing[201] SIGNATURE The report was signed by Dennis Durkin, CFO, and Stephen Wereb, Chief Accounting Officer, on behalf of Activision Blizzard, Inc. on August 8, 2019 - The report was signed by Dennis Durkin, Chief Financial Officer and Principal Financial Officer, and Stephen Wereb, Deputy Chief Financial Officer, Chief Accounting Officer, and Principal Accounting Officer[204] - The signing date of the report was August 8, 2019[203]