AB(ATVI) - 2019 Q4 - Annual Report

PART I Business Activision Blizzard is a global interactive entertainment company focused on expanding audience reach, engagement, and player investment through key franchises like Call of Duty, Candy Crush, and World of Warcraft - The company's business strategy is built on three strategic pillars: expanding audience reach, driving deep consumer engagement, and providing more opportunities for player investment[13] - The business is structured into three reportable segments: Activision Publishing, Inc. (primarily console), Blizzard Entertainment, Inc. (primarily PC), and King Digital Entertainment (primarily mobile)[17][20][22] 2019 Top Franchise Revenue Contribution | Franchise | Percentage of 2019 Net Revenues | | :--- | :--- | | Call of Duty, Candy Crush, World of Warcraft (collectively) | 67% | 2019 Significant Customer Revenue Contribution | Customer | Percentage of 2019 Net Revenues | | :--- | :--- | | Apple | 17% | | Google | 13% | | Sony | 11% | Risk Factors The company faces significant risks from franchise dependence, platform reliance, intense competition, data privacy, cybersecurity, and global events - A significant portion of revenues and profits are derived from a small number of popular franchises, with Call of Duty, Candy Crush, and World of Warcraft collectively accounting for approximately 67% of net revenues in 2019[65] - The business is highly dependent on third-party platforms like Sony, Microsoft, Nintendo, Apple, and Google, which have substantial influence over product costs, release schedules, and distribution terms[80][81][82] - The company is subject to evolving data privacy laws such as the EU's GDPR and the California Consumer Privacy Act (CCPA), with non-compliance potentially leading to significant fines and reputational damage[155][156] - Cybersecurity attacks, data breaches, or system disruptions pose a significant risk, potentially leading to software piracy, disclosure of sensitive customer or employee information, and reputational harm[162] - Large-scale medical emergencies, such as the 2019 coronavirus outbreak, could negatively impact employee productivity, consumer health, and live esports events, potentially harming the business[169] Properties The company primarily leases its corporate and segment headquarters globally, owning only two European warehouses for distribution - The company's principal corporate and Activision headquarters are in a 150,000 sq. ft. leased space in Santa Monica, CA[173] - Blizzard's headquarters are in a 740,000 sq. ft. leased space in Irvine, CA, and King's headquarters are in a 68,000 sq. ft. leased space in London, UK[174] - The only facilities owned by the company are two European warehouses in Germany and the Netherlands, utilized by the Distribution segment[176] Legal Proceedings In 2019, the company settled a transfer pricing dispute with the French Tax Authority, incurring a $54 million tax expense - The company settled a transfer pricing dispute with the French Tax Authority (FTA) covering tax years 2011 through 2018[177] - The settlement resulted in a $54 million tax expense recognized in the period ended December 31, 2019, and a payment of €161 million (approx. $179 million) in January 2020[177] PART II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, pays annual dividends, and authorized a $1.5 billion stock repurchase program Annual Cash Dividends Paid Per Share | Year | Per Share Amount | | :--- | :--- | | 2020 (Declared) | $0.41 | | 2019 | $0.37 | | 2018 | $0.34 | | 2017 | $0.30 | - In January 2019, the Board of Directors authorized a stock repurchase program for up to $1.5 billion of common stock, valid until February 13, 2021, with no shares repurchased under this program to date[189] Selected Financial Data This section summarizes five years of consolidated financial data, showing a decline in 2019 net revenues and net income from 2018 Selected Financial Data (2015-2019) | Metric (in millions, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net revenues | $6,489 | $7,500 | $7,017 | $6,608 | $4,664 | | Net income | $1,503 | $1,848 | $273 | $966 | $892 | | Diluted net income per share | $1.95 | $2.40 | $0.36 | $1.28 | $1.19 | | Operating cash flows | $1,831 | $1,790 | $2,213 | $2,155 | $1,259 | | Total assets | $19,845 | $17,890 | $18,668 | $17,452 | $15,246 | | Long-term debt, net | $2,675 | $2,671 | $4,390 | $4,887 | $4,074 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In 2019, net revenues and operating income declined due to franchise performance and restructuring costs, while MAUs increased significantly 2019 vs. 2018 Financial Highlights | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Consolidated Net Revenues | $6.5B | $7.5B | -13% | | Consolidated Operating Income | $1.6B | $2.0B | -19% | | Diluted EPS | $1.95 | $2.40 | -18.8% | | Operating Cash Flows | $1.83B | $1.79B | +2% | Net Bookings Performance (2018 vs. 2019) | Metric (in millions) | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Net bookings | $6,388 | $7,262 | $(874) | | In-game net bookings | $3,366 | $4,203 | $(837) | - The decrease in 2019 net bookings was primarily due to lower performance from Blizzard's Hearthstone and World of Warcraft, and Activision's Destiny franchise (due to the sale of publishing rights)[214] - Average Monthly Active Users (MAUs) increased to 409 million in Q4 2019, up from 316 million in Q3 2019, primarily driven by the successful launch of Call of Duty: Mobile[220] - In 2019, the company implemented a restructuring plan to refocus resources on its largest opportunities, resulting in approximately $132 million in restructuring and related costs[235][284] Quantitative and Qualitative Disclosures about Market Risk The company manages foreign currency and interest rate risks through derivatives and fixed-rate debt, with currency fluctuations posing the primary exposure - The company is exposed to foreign currency risk as a substantial portion of international revenues and expenses are denominated in local currencies like the euro and British pound[366] - To mitigate currency risk, the company periodically uses derivative contracts, primarily forward contracts with maturities of less than one year[367] - A hypothetical adverse 10% movement in foreign currency exchange rates would have resulted in a theoretical decline of approximately $133 million in net income for the year ended December 31, 2019[372] - Interest rate risk is primarily related to the investment portfolio, as all outstanding debt is at fixed rates, and this risk was not considered material as of December 31, 2019[373][374] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the fiscal year ended December 31, 2019, and related notes Controls and Procedures Management and independent auditors concluded that the company's disclosure controls and internal control over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[379] - Based on an evaluation using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2019[382] PART III Directors, Executive Officers, and Corporate Governance Information for this item is incorporated by reference from the company's 2020 Proxy Statement - Required information for this item is incorporated by reference from the company's definitive Proxy Statement for the 2020 Annual Meeting of Shareholders[388] Executive Compensation Information for this item is incorporated by reference from the company's 2020 Proxy Statement - Required information for this item is incorporated by reference from the company's definitive Proxy Statement for the 2020 Annual Meeting of Shareholders[389] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's 2020 Proxy Statement - Required information for this item is incorporated by reference from the company's definitive Proxy Statement for the 2020 Annual Meeting of Shareholders[390] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's 2020 Proxy Statement - Required information for this item is incorporated by reference from the company's definitive Proxy Statement for the 2020 Annual Meeting of Shareholders[391] Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's 2020 Proxy Statement - Required information for this item is incorporated by reference from the company's definitive Proxy Statement for the 2020 Annual Meeting of Shareholders[392] PART IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed with the Form 10-K - This item lists the financial statements, financial statement schedules, and exhibits filed with the Form 10-K[394][395][396]