AB(ATVI) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, cash flows, and changes in shareholders' equity, along with detailed notes explaining accounting policies, segment information, debt, and other financial disclosures for Activision Blizzard, Inc. and its subsidiaries Condensed Consolidated Balance Sheets | Assets/Liabilities & Equity | June 30, 2020 (Millions) | December 31, 2019 (Millions) | | :-------------------------- | :----------------------- | :--------------------------- | | Assets | | | | Cash and cash equivalents | $6,338 | $5,794 | | Accounts receivable, net | $614 | $848 | | Software development | $331 | $322 | | Other current assets | $436 | $328 | | Total current assets | $7,719 | $7,292 | | Property and equipment, net | $222 | $253 | | Deferred income taxes, net | $1,221 | $1,293 | | Other assets | $677 | $658 | | Intangible assets, net | $484 | $531 | | Goodwill | $9,763 | $9,764 | | Total assets | $20,220 | $19,845 | | Liabilities | | | | Accounts payable | $177 | $292 | | Deferred revenues | $1,222 | $1,375 | | Accrued expenses & other | $1,158 | $1,248 | | Total current liabilities | $2,557 | $2,915 | | Long-term debt, net | $2,676 | $2,675 | | Deferred income taxes, net | $436 | $505 | | Other liabilities | $869 | $945 | | Total liabilities | $6,538 | $7,040 | | Shareholders' Equity | | | | Additional paid-in capital | $11,300 | $11,174 | | Treasury stock | $(5,563) | $(5,563) | | Retained earnings | $8,579 | $7,813 | | AOCI | $(634) | $(619) | | Total shareholders' equity| $13,682 | $12,805 | | Total liabilities & equity| $20,220 | $19,845 | Condensed Consolidated Statements of Operations | Metric (Millions) | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net revenues | $1,932 | $1,396 | $3,719 | $3,220 | | Product sales | $533 | $359 | $1,076 | $1,015 | | Subscription, licensing, & other revenues | $1,399 | $1,037 | $2,643 | $2,205 | | Total costs & expenses | $1,183 | $1,060 | $2,358 | $2,314 | | Operating income | $749 | $336 | $1,361 | $906 | | Interest & other expense (income), net | $22 | $(34) | $30 | $(31) | | Income before income tax expense | $727 | $370 | $1,331 | $937 | | Income tax expense | $147 | $42 | $247 | $163 | | Net income | $580 | $328 | $1,084 | $774 | | Basic EPS | $0.75 | $0.43 | $1.41 | $1.01 | | Diluted EPS | $0.75 | $0.43 | $1.40 | $1.01 | Condensed Consolidated Statements of Comprehensive Income | Metric (Millions) | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income | $580 | $328 | $1,084 | $774 | | Foreign currency translation adjustment, net of tax | $4 | $(2) | $(11) | $1 | | Unrealized gains (losses) on forward contracts designated as hedges, net of tax | $(10) | $(8) | $(9) | $(6) | | Unrealized gains (losses) on investments, net of tax | $0 | $4 | $5 | $(2) | | Total other comprehensive loss | $(6) | $(6) | $(15) | $(7) | | Comprehensive income | $574 | $322 | $1,069 | $767 | Condensed Consolidated Statements of Cash Flows | Cash Flow Activity (Millions) | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :---------------------------- | :--------------------------- | :--------------------------- | | Net income | $1,084 | $774 | | Net cash provided by operating activities | $916 | $604 | | Net cash provided by (used in) investing activities | $(88) | $37 | | Net cash used in financing activities | $(281) | $(274) | | Effect of foreign exchange rate changes on cash and cash equivalents | $(5) | $3 | | Net increase in cash and cash equivalents and restricted cash | $542 | $370 | | Cash and cash equivalents and restricted cash at beginning of period | $5,798 | $4,229 | | Cash and cash equivalents and restricted cash at end of period | $6,340 | $4,599 | Condensed Consolidated Statement of Changes in Shareholders' Equity | Shareholder's Equity Component (Millions) | Balance at Dec 31, 2019 | Balance at June 30, 2020 | | :---------------------------------------- | :---------------------- | :----------------------- | | Common Shares | 1,197 | 1,200 | | Common Stock Amount | $0 | $0 | | Treasury Shares | (429) | (429) | | Treasury Stock Amount | $(5,563) | $(5,563) | | Additional Paid-In Capital | $11,174 | $11,300 | | Retained Earnings | $7,813 | $8,579 | | Other Comprehensive Income (Loss) | $(619) | $(634) | | Total Shareholders' Equity | $12,805 | $13,682 | - Total shareholders' equity increased from $12,805 million at December 31, 2019, to $13,682 million at June 30, 2020, primarily driven by net income of $1,084 million for the six months ended June 30, 2020, partially offset by dividends paid of $316 million[17][11] Notes to Condensed Consolidated Financial Statements Note 1. Description of Business and Basis of Consolidation and Presentation Activision Blizzard, Inc. is a global developer and publisher of interactive entertainment content and services across consoles, PCs, and mobile devices, operating through three reportable segments: Activision, Blizzard, and King. The financial statements are unaudited and prepared in accordance with U.S. GAAP for interim reporting, with estimates and assumptions that consider the COVID-19 pandemic's uncertainty - Activision Blizzard is a leading global developer and publisher of interactive entertainment content and services, distributing content on video game consoles, personal computers, and mobile devices, and operating esports leagues[21] - Activision Publishing, Inc.: Focuses on console platforms, key franchise is Call of Duty® (including Call of Duty: Mobile launched Oct 2019), and operates the Call of Duty League™[23][24] - Blizzard Entertainment, Inc.: Focuses on PC platforms, key franchises include World of Warcraft®, Diablo®, Hearthstone®, and Overwatch®, and operates the Overwatch League™[25][26][27] - King Digital Entertainment: Focuses on mobile platforms with free-to-play games, key franchise is Candy Crush™, and is growing in-game advertising revenue[28][29] - The preparation of financial statements involves estimates and assumptions, with additional uncertainty due to the COVID-19 pandemic, though no material impact on estimates was noted in the current period[32] Note 2. Recently Issued Accounting Pronouncements The company adopted new accounting guidance for cloud computing arrangements, goodwill impairment, and credit losses in Q1 2020, none of which had a material impact on the financial statements. It is currently evaluating new guidance on income taxes effective after December 15, 2020 - Cloud Computing Arrangements: Adopted prospectively in Q1 2020; no material impact[33] - Goodwill: Adopted prospectively in Q1 2020, simplifying impairment test; no material impact[34] - Financial Instruments - Credit Losses: Adopted under modified retrospective basis in Q1 2020; no material impact[35] - New guidance on 'Simplifying the Accounting for Income Taxes' is effective for fiscal years beginning after December 15, 2020, and the company is currently evaluating its potential impact[36] Note 3. Software Development and Intellectual Property Licenses Capitalized software development costs increased to $465 million at June 30, 2020, from $376 million at December 31, 2019. Amortization expense for these costs and intellectual property licenses decreased significantly year-over-year | Component (Millions) | June 30, 2020 | December 31, 2019 | | :------------------- | :------------ | :---------------- | | Internally-developed software costs | $436 | $345 | | Payments to third-party software developers | $29 | $31 | | Total software development costs | $465 | $376 | | Amortization Expense (Millions) | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Software development costs & IP licenses | $30 | $54 | $112 | $164 | Note 4. Intangible Assets, Net Net intangible assets decreased to $484 million at June 30, 2020, from $531 million at December 31, 2019, primarily due to amortization of definite-lived assets. Amortization expense for intangible assets significantly decreased in Q2 and YTD Q2 2020 compared to the prior year | Intangible Asset Type (Millions) | June 30, 2020 Net Carrying Amount | December 31, 2019 Net Carrying Amount | | :------------------------------- | :-------------------------------- | :------------------------------------ | | Internally-developed franchises | $26 | $49 | | Developed software | $2 | $22 | | Trade names | $21 | $24 | | Other definite-lived | $2 | $3 | | Activision trademark (indefinite) | $386 | $386 | | Acquired trade names (indefinite) | $47 | $47 | | Total intangible assets, net | $484 | $531 | | Amortization Expense (Millions) | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Intangible assets | $14 | $48 | $47 | $103 | Note 5. Goodwill Goodwill remained largely stable at $9,763 million as of June 30, 2020, with a minor decrease of $1 million in the Activision segment compared to December 31, 2019 | Segment (Millions) | December 31, 2019 | June 30, 2020 | | :----------------- | :---------------- | :------------ | | Activision | $6,898 | $6,897 | | Blizzard | $190 | $190 | | King | $2,676 | $2,676 | | Total | $9,764 | $9,763 | Note 6. Fair Value Measurements The company categorizes financial assets and liabilities into a three-level fair value hierarchy. Recurring fair value measurements primarily consist of Level 1 assets like money market funds and government securities. Foreign currency forward contracts are used for hedging, with a total notional amount of $623 million for cash flow hedges at June 30, 2020 | Financial Asset (Millions) | June 30, 2020 Fair Value | Level 1 | Level 2 | Level 3 | | :------------------------- | :----------------------- | :------ | :------ | :------ | | Money market funds | $5,982 | $5,982 | $0 | $0 | | Foreign government treasury bills | $32 | $32 | $0 | $0 | | U.S. treasuries & government agency securities | $121 | $121 | $0 | $0 | | Foreign currency forward contracts designated as hedges | $3 | $0 | $3 | $0 | | Total recurring fair value measurements | $6,138 | $6,135| $3 | $0 | | Foreign Currency Forward Contracts (Millions) | Notional Amount (June 30, 2020) | Fair Value Gain (Loss) (June 30, 2020) | | :-------------------------------------------- | :------------------------------ | :------------------------------------- | | Buy USD, Sell Euro (Cash Flow Hedges) | $623 | $(1) | | Buy USD, Sell GBP (Not Designated as Hedges) | $25 | $0 | - Pre-tax net realized gains from Cash Flow Hedges reclassified into earnings were $3 million for Q2 2020 and $12 million for YTD Q2 2020, primarily impacting net revenues[47][48] Note 7. Deferred Revenues Deferred revenues decreased to $1.2 billion at June 30, 2020, from $1.4 billion at December 31, 2019. The company expects to recognize $1.4 billion of contracted revenues from unsatisfied performance obligations over the next 12 months - Aggregate deferred revenues: $1.2 billion at June 30, 2020 (vs. $1.4 billion at Dec 31, 2019)[54] - Revenues recognized from prior deferred balances: $0.4 billion for Q2 2020 and $1.2 billion for YTD Q2 2020[55] - Contracted revenues allocated to unsatisfied performance obligations: $2.5 billion as of June 30, 2020[55] - Expected recognition: Approximately $1.4 billion over the next 12 months, $0.5 billion in the subsequent 12-month period, and the remainder thereafter[55] Note 8. Debt The company maintains a $1.5 billion revolving credit facility, which remains undrawn. Total outstanding unsecured senior notes were $2.7 billion at June 30, 2020, with maturities ranging from 2021 to 2047. The company was in compliance with all debt terms - Revolving credit facility: $1.5 billion available, undrawn as of June 30, 2020[56] - Compliance: In compliance with terms of the Credit Agreement and Notes as of June 30, 2020[60] | Unsecured Senior Notes (Millions) | Gross Carrying Amount (June 30, 2020) | Net Carrying Amount (June 30, 2020) | | :-------------------------------- | :------------------------------------ | :---------------------------------- | | 2021 Notes (2.3%) | $650 | $648 | | 2022 Notes (2.6%) | $400 | $398 | | 2026 Notes (3.4%) | $850 | $843 | | 2027 Notes (3.4%) | $400 | $396 | | 2047 Notes (4.5%) | $400 | $391 | | Total long-term debt | $2,700 | $2,676 | | Scheduled Maturities (Millions) | Amount | | :------------------------------ | :----- | | 2020 (remaining six months) | $0 | | 2021 | $650 | | 2022 | $400 | | 2023 | $0 | | 2024 | $0 | | Thereafter | $1,650 | | Total | $2,700 | Note 9. Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive loss increased slightly to $(634) million at June 30, 2020, from $(619) million at December 31, 2019, primarily due to foreign currency translation adjustments and reclassifications from forward contracts | Component (Millions) | Balance at Dec 31, 2019 | Balance at June 30, 2020 | | :------------------- | :---------------------- | :----------------------- | | Foreign currency translation adjustments | $(624) | $(635) | | Unrealized gain (loss) on forward contracts | $8 | $(1) | | Unrealized gain (loss) on available-for-sale securities | $(3) | $2 | | Total | $(619) | $(634) | Note 10. Operating Segments and Geographic Region Activision Blizzard operates through three reportable segments: Activision, Blizzard, and King. This section details their net revenues and operating income, along with reconciliations to consolidated figures, and breakdowns of net revenues by distribution channel, geographic region, and platform for the three and six months ended June 30, 2020 and 2019 Segment Net Revenues and Operating Income | Segment (Millions) | Q2 2020 Net Revenues | Q2 2019 Net Revenues | Q2 2020 Operating Income | Q2 2019 Operating Income | | :----------------- | :------------------- | :------------------- | :----------------------- | :----------------------- | | Activision | $993 | $268 | $559 | $55 | | Blizzard | $461 | $384 | $203 | $75 | | King | $553 | $499 | $212 | $171 | | Total Segment | $2,007 | $1,151 | $974 | $301 | | Segment (Millions) | YTD Q2 2020 Net Revenues | YTD Q2 2019 Net Revenues | YTD Q2 2020 Operating Income | YTD Q2 2019 Operating Income | | :----------------- | :----------------------- | :----------------------- | :--------------------------- | :--------------------------- | | Activision | $1,512 | $585 | $743 | $128 | | Blizzard | $914 | $728 | $400 | $130 | | King | $1,051 | $1,028 | $367 | $349 | | Total Segment | $3,477 | $2,341 | $1,510 | $607 | Reconciliation to Consolidated Figures | Reconciliation Item (Millions) | Q2 2020 | Q2 2019 | YTD Q2 2020 | YTD Q2 2019 | | :----------------------------- | :------ | :------ | :---------- | :---------- | | Segment net revenues | $2,007 | $1,151 | $3,477 | $2,341 | | Revenues from non-reportable segments | $99 | $59 | $167 | $132 | | Net effect from recognition (deferral) of deferred net revenues | $(146) | $189 | $119 | $755 | | Elimination of intersegment revenues | $(28) | $(3) | $(44) | $(8) | | Consolidated net revenues | $1,932| $1,396| $3,719 | $3,220 | | Segment operating income | $974 | $301 | $1,510 | $607 | | Operating income (loss) from non-reportable segments | $(11) | $7 | $(7) | $4 | | Net effect from recognition (deferral) of deferred net revenues and related cost of revenues | $(152) | $135 | $19 | $576 | | Share-based compensation expense | $(42) | $(38) | $(85) | $(100) | | Amortization of intangible assets | $(14) | $(47) | $(47) | $(102) | | Restructuring and related costs | $(6) | $(22) | $(29) | $(79) | | Consolidated operating income| $749 | $336| $1,361 | $906 | | Interest and other expense (income), net | $22 | $(34) | $30 | $(31) | | Consolidated income before income tax expense | $727 | $370| $1,331 | $937 | Net Revenues by Distribution Channel | Distribution Channel (Millions) | Q2 2020 Consolidated Net Revenues | Q2 2019 Consolidated Net Revenues | | :------------------------------ | :-------------------------------- | :-------------------------------- | | Digital online channels | $1,591 | $1,086 | | Retail channels | $168 | $193 | | Other | $173 | $117 | | Total | $1,932 | $1,396 | | Distribution Channel (Millions) | YTD Q2 2020 Consolidated Net Revenues | YTD Q2 2019 Consolidated Net Revenues | | :------------------------------ | :------------------------------------ | :------------------------------------ | | Digital online channels | $3,030 | $2,479 | | Retail channels | $390 | $505 | | Other | $299 | $236 | | Total | $3,719 | $3,220 | - Digital online channels accounted for 82% of consolidated net revenues in Q2 2020, up from 78% in Q2 2019, reflecting a continued shift towards digital distribution[137] Net Revenues by Geographic Region | Geographic Region (Millions) | Q2 2020 Consolidated Net Revenues | Q2 2019 Consolidated Net Revenues | | :--------------------------- | :-------------------------------- | :-------------------------------- | | Americas | $1,112 | $764 | | EMEA | $615 | $459 | | Asia Pacific | $205 | $173 | | Total | $1,932 | $1,396 | | Geographic Region (Millions) | YTD Q2 2020 Consolidated Net Revenues | YTD Q2 2019 Consolidated Net Revenues | | :--------------------------- | :------------------------------------ | :------------------------------------ | | Americas | $2,060 | $1,751 | | EMEA | $1,181 | $1,073 | | Asia Pacific | $478 | $396 | | Total | $3,719 | $3,220 | - The U.S. accounted for 51% of consolidated net revenues in Q2 2020 (up from 49% in Q2 2019) and 50% in YTD Q2 2020 (up from 49% in YTD Q2 2019)[89][90] Net Revenues by Platform | Platform (Millions) | Q2 2020 Consolidated Net Revenues | Q2 2019 Consolidated Net Revenues | | :------------------ | :-------------------------------- | :-------------------------------- | | Console | $655 | $407 | | PC | $482 | $361 | | Mobile and ancillary| $622 | $511 | | Other | $173 | $117 | | Total | $1,932 | $1,396 | | Platform (Millions) | YTD Q2 2020 Consolidated Net Revenues | YTD Q2 2019 Consolidated Net Revenues | | :------------------ | :------------------------------------ | :------------------------------------ | | Console | $1,249 | $1,083 | | PC | $981 | $855 | | Mobile and ancillary| $1,190 | $1,046 | | Other | $299 | $236 | | Total | $3,719 | $3,220 | Note 11. Restructuring The company's restructuring plan, initiated in 2019, aims to refocus resources on key franchises and reduce non-development costs. As of June 30, 2020, $164 million in charges have been incurred, with an expected total of $190 million, primarily for severance and employee-related costs - Restructuring plan goals: Increase investment in largest internally-owned franchises, reduce non-development/administrative costs, integrate global sales and go-to-market capabilities[99] - Accrued restructuring and related costs: $49 million at June 30, 2020 (primarily severance)[100] | Segment (Millions) | Total Charges Incurred Through June 30, 2020 | Total Expected Charges | | :----------------- | :------------------------------------------- | :--------------------- | | Activision | $23 | $25 | | Blizzard | $96 | $105 | | King | $18 | $20 | | Other segments | $27 | $40 | | Total | $164 | $190 | - Approximately 60% of the aggregate restructuring charge relates to severance and employee-related costs, with most cash outlays expected by the end of 2020[103] Note 12. Interest and Other Expense (Income), Net Interest and other expense, net, shifted from an income of $(34) million in Q2 2019 to an expense of $22 million in Q2 2020, and from an income of $(31) million in YTD Q2 2019 to an expense of $30 million in YTD Q2 2020. This change was primarily due to a prior-year gain on an equity investment and decreased interest income from lower rates | Component (Millions) | Q2 2020 | Q2 2019 | YTD Q2 2020 | YTD Q2 2019 | | :------------------- | :------ | :------ | :---------- | :---------- | | Interest income | $(2) | $(19) | $(18) | $(41) | | Interest expense | $23 | $23 | $45 | $46 | | Unrealized gain on equity investment | $0 | $(38) | $0 | $(38) | | Other expense (income), net | $1 | $0 | $3 | $2 | | Total | $22 | $(34) | $30 | $(31) | Note 13. Income Taxes Income tax expense increased significantly in Q2 and YTD Q2 2020 compared to the prior year, with effective tax rates of 20% and 19% respectively, primarily due to a prior-year discrete tax benefit from audit settlements and a current-year change in valuation allowance. The rates remain lower than the U.S. statutory rate due to foreign earnings and R&D credits | Metric (Millions) | Q2 2020 | Q2 2019 | YTD Q2 2020 | YTD Q2 2019 | | :---------------- | :------ | :------ | :---------- | :---------- | | Income tax expense| $147 | $42 | $247 | $163 | | Effective tax rate| 20% | 11% | 19% | 17% | - Q2 2020 effective tax rate (20%) is higher than Q2 2019 (11%) due to a prior-year discrete tax benefit from audit settlements and a current-quarter discrete tax expense for a change in valuation allowance[235][236] - YTD Q2 2020 effective tax rate (19%) is higher than YTD Q2 2019 (17%) primarily due to a prior-year discrete tax benefit from audit settlements[235][236] - Both Q2 and YTD Q2 2020 effective tax rates are lower than the U.S. statutory rate of 21% due to lower U.S. taxes on foreign earnings and federal research and development credits[237] - The company is assessing the financial statement impact of new U.S. Treasury Department regulations related to foreign-derived intangible income and global intangible low-taxed income (GILTI)[111] Note 14. Computation of Basic/Diluted Earnings Per Common Share Basic and diluted earnings per common share increased significantly in Q2 and YTD Q2 2020, reflecting higher net income. The computation includes the effect of potential dilutive common shares from employee stock options and awards | Metric (Millions, except per share) | Q2 2020 | Q2 2019 | YTD Q2 2020 | YTD Q2 2019 | | :---------------------------------- | :------ | :------ | :---------- | :---------- | | Consolidated net income | $580 | $328 | $1,084 | $774 | | Weighted-average common shares outstanding (Basic) | 771 | 766 | 770 | 765 | | Effect of potential dilutive common shares | 5 | 4 | 5 | 5 | | Weighted-average dilutive common shares outstanding (Diluted) | 776 | 770 | 775 | 770 | | Basic earnings per common share | $0.75 | $0.43 | $1.41 | $1.01 | | Diluted earnings per common share | $0.75 | $0.43 | $1.40 | $1.01 | - Weighted-average shares excluded from diluted EPS: 4 million restricted stock units and options with unmet performance measures, and 1 million anti-dilutive employee stock options for Q2 2020[118] - For YTD Q2 2020, 3 million restricted stock units and options with unmet performance measures, and 3 million anti-dilutive employee stock options were excluded[118] Note 15. Capital Transactions The company has a $1.5 billion stock repurchase program authorized until February 2021, under which no shares have been repurchased as of June 30, 2020. Cash dividends of $0.41 per common share were paid in May 2020, totaling $316 million - Stock Repurchase Program: Authorized for up to $1.5 billion from Feb 2019 to Feb 2021; no shares repurchased as of June 30, 2020[119] - Dividends: $0.41 per common share declared in Feb 2020, with an aggregate cash payment of $316 million made in May 2020[120] Note 16. Commitments and Contingencies The company is involved in routine legal claims and proceedings arising from its ordinary course of business. Management, after consulting with legal counsel, does not expect these matters to have a material adverse effect on its financial condition or results of operations - The company is party to routine claims, suits, investigations, and other proceedings, including intellectual property rights, contractual claims, labor, regulatory, and tax matters[121] - Management believes these 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[121] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Activision Blizzard's financial condition and results of operations, highlighting business overview, the impact of COVID-19, key financial and operating metrics, and detailed analysis of revenues and expenses by segment, distribution channel, geographic region, and platform Business Overview - Activision Blizzard is a leading global developer and publisher of interactive entertainment content and services across video game consoles, PCs, and mobile devices, also operating esports leagues and offering digital advertising[123] - Activision: Console-focused, key franchise Call of Duty® (including Call of Duty: Mobile), operates Call of Duty League™[125][126] - Blizzard: PC-focused, key franchises World of Warcraft®, Diablo®, Hearthstone®, Overwatch®, operates Overwatch League™[127][128][129] - King: Mobile-focused, free-to-play games, key franchise Candy Crush™, growing in-game advertising[130][131] Impacts of the Global COVID-19 Pandemic - The COVID-19 pandemic has extensively impacted global health and the economic environment, leading to government measures like stay-at-home orders[133] - Increased demand for products and services due to stay-at-home orders, particularly for Call of Duty: Modern Warfare (including Warzone) and World of Warcraft[134] - Strong balance sheet with $6.5 billion in cash and cash equivalents and short-term investments provides flexibility[135] - Most of the workforce is working from home with minimal disruption to business operations[135] - Monthly active users (MAUs) for certain franchises increased in March but moderated in late Q2 2020, with Blizzard's and King's MAUs broadly flat with Q1 2020[135] - The full extent of COVID-19's impact remains uncertain and depends on evolving factors, including duration, global economic impact, and governmental actions[134] Business Results and Highlights Financial Highlights for the Three Months Ended June 30, 2020 vs 2019 | Metric (Millions, except EPS) | Q2 2020 | Q2 2019 | Change (%) | | :---------------------------- | :------ | :------ | :--------- | | Consolidated net revenues | $1,932 | $1,396 | 38% | | Consolidated operating income | $749 | $336 | 123% | | Revenues from digital online channels | $1,591 | $1,086 | 46% | | Operating margin | 38.8% | 24.1% | 14.7 pp | | Consolidated net income | $580 | $328 | 77% | | Diluted EPS | $0.75 | $0.43 | 74% | Financial Highlights for the Six Months Ended June 30, 2020 vs 2019 | Metric (Millions, except EPS) | YTD Q2 2020 | YTD Q2 2019 | Change (%) | | :---------------------------- | :---------- | :---------- | :--------- | | Consolidated net revenues | $3,719 | $3,220 | 15% | | Consolidated operating income | $1,361 | $906 | 50% | | Revenues from digital online channels | $3,030 | $2,479 | 22% | | Operating margin | 36.6% | 28.1% | 8.5 pp | | Consolidated net income | $1,084 | $774 | 40% | | Diluted EPS | $1.40 | $1.01 | 39% | | Cash flows from operating activities | $916 | $604 | 52% | - Net revenues and operating income for Q2 2020 included a net effect of $(146) million and $(152) million, respectively, from the deferral of net revenues and related cost of revenues[139] Operating Metrics This section details key operating metrics including net bookings, in-game net bookings, and monthly active users (MAUs), along with management's insights into business trends such as interactive entertainment growth, mobile gaming expansion, and sales concentration among popular franchises Net bookings and In-game net bookings - Net bookings is a key operating metric, representing the net amount of products and services sold digitally or physically, excluding deferrals[141] | Metric (Millions) | Q2 2020 | Q2 2019 | Increase (Decrease) | YTD Q2 2020 | YTD Q2 2019 | Increase (Decrease) | | :---------------- | :------ | :------ | :------------------ | :---------- | :---------- | :------------------ | | Net bookings | $2,078 | $1,207 | $871 | $3,600 | $2,465 | $1,135 | | In-game net bookings | $1,374 | $778 | $596 | $2,329 | $1,573 | $756 | - Q2 2020 net bookings increase driven by Activision ($725 million, Call of Duty: Modern Warfare, Warzone, Mobile), Blizzard ($77 million, World of Warcraft Classic, in-game content), and King ($55 million, Candy Crush)[143][144] - YTD Q2 2020 net bookings increase driven by Activision ($927 million, Call of Duty: Modern Warfare, Mobile), and Blizzard ($186 million, World of Warcraft Classic, in-game content)[143][144] - Q2 2020 in-game net bookings increase driven by Activision ($536 million, Call of Duty: Modern Warfare, Mobile), King ($41 million, Candy Crush), and Blizzard ($19 million, World of Warcraft)[145][146] - YTD Q2 2020 in-game net bookings increase primarily driven by Activision ($717 million)[145][146] Monthly Active Users (MAUs) - MAUs are a key measure of user base size, calculated as individuals accessing a game in a given month. Fluctuations can be influenced by new content releases[147][148] | Segment (Millions) | June 30, 2020 | March 31, 2020 | June 30, 2019 | | :----------------- | :------------ | :------------- | :------------ | | Activision | 125 | 102 | 37 | | Blizzard | 32 | 32 | 32 | | King | 271 | 273 | 258 | | Total | 428 | 407 | 327 | - Average MAUs increased by 21 million (5%) QoQ, primarily due to Activision's Call of Duty franchise, benefiting from Call of Duty: Warzone launch[149][150] - Average MAUs increased by 101 million (31%) YoY, driven by Activision's Call of Duty: Mobile and Modern Warfare (Warzone), and King's Candy Crush franchise[149][151] Management's Overview of Business Trends - Interactive entertainment industry grew 13% annually from 2016-2019, benefiting from new players and developing regions[152][153] - Mobile gaming is larger than console and PC gaming and continues to grow significantly, expanding the total addressable audience[154][155] - Emerging opportunities exist to drive engagement and investment in franchises outside of games, such as esports leagues (Overwatch League, Call of Duty League)[156][157] - A significant portion of revenues and profits are concentrated among a few popular franchises (Call of Duty, Candy Crush, World of Warcraft accounted for 67% of consolidated net revenues in 2019)[158] Consolidated Statements of Operations Data | Metric (Millions) | Q2 2020 | % of Total Net Revenues | Q2 2019 | % of Total Net Revenues | YTD Q2 2020 | % of Total Net Revenues | YTD Q2 2019 | % of Total Net Revenues | | :-------------------------- | :------ | :---------------------- | :------ | :---------------------- | :---------- | :---------------------- | :---------- | :---------------------- | | Net revenues | $1,932 | 100% | $1,396 | 100% | $3,719 | 100% | $3,220 | 100% | | Product sales | $533 | 28% | $359 | 26% | $1,076 | 29% | $1,015 | 32% | | Subscription, licensing, & other revenues | $1,399 | 72% | $1,037 | 74% | $2,643 | 71% | $2,205 | 68% | | Total costs & expenses | $1,183 | 61% | $1,060 | 76% | $2,358 | 63% | $2,314 | 72% | | Operating income | $749 | 39% | $336 | 24% | $1,361 | 37% | $906 | 28% | | Net income | $580 | 30% | $328 | 23% | $1,084 | 29% | $774 | 24% | Consolidated Net Revenues Consolidated net revenues increased by 38% to $1.93 billion in Q2 2020 and 15% to $3.72 billion in YTD Q2 2020, primarily driven by strong performance from Call of Duty: Modern Warfare, Call of Duty: Mobile, and the Candy Crush franchise. Foreign exchange rate changes had a negative impact on revenues | Metric (Millions) | Q2 2020 | Q2 2019 | Increase (Decrease) | YTD Q2 2020 | YTD Q2 2019 | Increase (Decrease) | | :---------------- | :------ | :------ | :------------------ | :---------- | :---------- | :------------------ | | Consolidated net revenues | $1,932 | $1,396 | $536 | $3,719 | $3,220 | $499 | | Net effect from recognition (deferral) of deferred net revenues | $(146) | $189 | $(335) | $119 | $755 | $(636) | | In-game net revenues | $1,113 | $802 | $311 | $2,048 | $1,745 | $303 | - Q2 2020 revenue increase driven by Call of Duty: Modern Warfare, Call of Duty: Mobile, Distribution business, and Candy Crush franchise[163] - YTD Q2 2020 revenue increase driven by Call of Duty: Modern Warfare, Call of Duty: Mobile, and Call of Duty League, partially offset by lower revenues from Sekiro: Shadows Die Twice[166] - Foreign exchange rate changes had a negative impact of $18 million on consolidated net revenues for Q2 2020 and $28 million for YTD Q2 2020[172] Operating Segment Results This section analyzes the net revenues and operating income for Activision, Blizzard, and King segments, detailing the key drivers of changes for both the three and six months ended June 30, 2020, compared to the prior year, and also notes the impact of foreign exchange rates Segment Net Revenues | Segment (Millions) | Q2 2020 Net Revenues | Q2 2019 Net Revenues | YTD Q2 2020 Net Revenues | YTD Q2 2019 Net Revenues | | :----------------- | :------------------- | :------------------- | :----------------------- | :----------------------- | | Activision | $993 | $268 | $1,512 | $585 | | Blizzard | $461 | $384 | $914 | $728 | | King | $553 | $499 | $1,051 | $1,028 | - Activision Q2 2020: Increase driven by Call of Duty: Modern Warfare, Call of Duty: Mobile, Call of Duty franchise catalog titles, Modern Warfare 2 Campaign Remastered, and Call of Duty League[180] - Blizzard Q2 2020: Increase driven by World of Warcraft (subscriptions, in-game content) and intersegment license fees from Call of Duty: Modern Warfare on Battle.net[183] - King Q2 2020: Increase driven by higher player purchases in the Candy Crush franchise[184] Segment Income from Operations | Segment (Millions) | Q2 2020 Operating Income | Q2 2019 Operating Income | YTD Q2 2020 Operating Income | YTD Q2 2019 Operating Income | | :----------------- | :----------------------- | :----------------------- | :--------------------------- | :--------------------------- | | Activision | $559 | $55 | $743 | $128 | | Blizzard | $203 | $75 | $400 | $130 | | King | $212 | $171 | $367 | $349 | - Activision Q2 2020: Increase due to higher net revenues and lower costs for Crash Team Racing Nitro-Fueled, partially offset by Call of Duty: Mobile costs, higher product development costs (bonuses), and Call of Duty: Modern Warfare costs[185][186] - Blizzard Q2 2020: Increase due to higher net revenues and lower product development costs (higher capitalization of software development costs)[188][189] - King Q2 2020: Increase due to higher net revenues and lower general and administrative costs, partially offset by higher sales and marketing costs and service provider fees[190] Foreign Exchange Impact - Changes in foreign exchange rates had a negative impact of $22 million on reportable segment net revenues for Q2 2020 and $41 million for YTD Q2 2020, primarily due to the U.S. dollar strengthening against the euro and British pound[192] Consolidated Results This section provides a detailed breakdown of consolidated net revenues by distribution channel, geographic region, and platform, along with an analysis of changes in various cost and expense categories, income tax expense, and the company's liquidity and capital resources Net Revenues by Distribution Channel | Distribution Channel (Millions) | Q2 2020 | Q2 2019 | Increase (Decrease) | YTD Q2 2020 | YTD Q2 2019 | Increase (Decrease) | | :------------------------------ | :------ | :------ | :------------------ | :---------- | :---------- | :------------------ | | Digital online channels | $1,591 | $1,086 | $505 | $3,030 | $2,479 | $551 | | Retail channels | $168 | $193 | $(25) | $390 | $505 | $(115) | | Other | $173 | $117 | $56 | $299 | $236 | $63 | | Total | $1,932| $1,396| $536 | $3,719 | $3,220 | $499 | - Digital online channel revenue increase in Q2 2020 driven by Call of Duty: Modern Warfare and Call of Duty: Mobile[198] - Retail channel revenue decrease in Q2 2020 due to lower revenues from Crash Team Racing Nitro-Fueled and Call of Duty franchise catalog titles[198] Net Revenues by Geographic Region | Geographic Region (Millions) | Q2 2020 | Q2 2019 | Increase (Decrease) | YTD Q2 2020 | YTD Q2 2019 | Increase (Decrease) | | :--------------------------- | :------ | :------ | :------------------ | :---------- | :---------- | :------------------ | | Americas | $1,112 | $764 | $348 | $2,060 | $1,751 | $309 | | EMEA | $615 | $459 | $156 | $1,181 | $1,073 | $108 | | Asia Pacific | $205 | $173 | $32 | $478 | $396 | $82 | | Total | $1,932| $1,396| $536 | $3,719 | $3,220 | $499 | - Americas Q2 2020 revenue increase driven by Call of Duty: Modern Warfare, Candy Crush franchise, and Call of Duty: Mobile[200] - EMEA Q2 2020 revenue increase driven by Call of Duty: Modern Warfare and the Distribution business[202] - Asia Pacific Q2 2020 revenue increase driven by Call of Duty: Modern Warfare and Call of Duty: Mobile[204] Net Revenues by Platform | Platform (Millions) | Q2 2020 | Q2 2019 | Increase (Decrease) | YTD Q2 2020 | YTD Q2 2019 | Increase (Decrease) | | :------------------ | :------ | :------ | :------------------ | :---------- | :---------- | :------------------ | | Console | $655 | $407 | $248 | $1,249 | $1,083 | $166 | | PC | $482 | $361 | $121 | $981 | $855 | $126 | | Mobile and ancillary| $622 | $511 | $111 | $1,190 | $1,046 | $144 | | Other | $173 | $117 | $56 | $299 | $236 | $63 | | Total | $1,932| $1,396| $536 | $3,719 | $3,220 | $499 | - Console Q2 2020 revenue increase driven by Call of Duty: Modern Warfare[208] - PC Q2 2020 revenue increase driven by Call of Duty: Modern Warfare and World of Warcraft (subscription revenue)[209] - Mobile and Ancillary Q2 2020 revenue increase driven by Call of Duty: Mobile and Candy Crush franchise (player purchases)[210] Costs and Expenses This section details the changes in various cost and expense categories, including cost of revenues, product development, sales and marketing, general and administrative, restructuring, and interest and other expense (income), net, for the three and six months ended June 30, 2020, compared to the prior year Cost of Revenues | Cost of Revenues (Millions) | Q2 2020 | Q2 2019 | Increase (Decrease) | YTD Q2 2020 | YTD Q2 2019 | Increase (Decrease) | | :-------------------------- | :------ | :------ | :------------------ | :---------- | :---------- | :------------------ | | Product costs | $137 | $99 | $38 | $255 | $251 | $4 | | Software royalties, amortization, & IP licenses (product sales) | $33 | $51 | $(18) | $115 | $162 | $(47) | | Game operations & distribution costs | $271 | $230 | $41 | $529 | $469 | $60 | | Software royalties, amortization, & IP licenses (subscription, licensing, & other) | $28 | $53 | $(25) | $74 | $114 | $(40) | | Total cost of revenues | $469| $433| $36 | $973 | $996 | $(23) | - Q2 2020 product costs increase due to higher Distribution business revenues[214] - Q2 2020 software royalties, amortization, and IP licenses (product sales) decrease due to lower costs from Call of Duty: Modern Warfare vs. Black Ops 4, partially offset by Modern Warfare 2 Campaign Remastered[215] - Q2 2020 game operations and distribution costs increase due to higher service provider fees (digital storefront, payment processor, server bandwidth) from higher revenues[218] - Q2 2020 software royalties, amortization, and IP licenses (subscription, licensing, & other) decrease due to lower amortization of King's acquired intangible assets, partially offset by Call of Duty: Mobile[219] Product Development | Metric (Millions) | Q2 2020 | Q2 2019 | Increase (Decrease) | YTD Q2 2020 | YTD Q2 2019 | Increase (Decrease) | | :---------------- | :------ | :------ | :------------------ | :---------- | :---------- | :------------------ | | Product development costs | $291 | $244 | $47 | $528 | $492 | $36 | - Q2 2020 increase primarily due to higher development costs ($98 million) from personnel bonuses due to strong business performance, partially offset by a $51 million increase in capitalization of development costs (Blizzard's game development cycles)[224] - YTD Q2 2020 increase primarily due to higher development costs ($127 million) from personnel bonuses, partially offset by a $91 million increase in capitalization of development costs[225] Sales and Marketing | Metric (Millions) | Q2 2020 | Q2 2019 | Increase (Decrease) | YTD Q2 2020 | YTD Q2 2019 | Increase (Decrease) | | :---------------- | :------ | :------ | :------------------ | :---------- | :---------- | :------------------ | | Sales and marketing expenses | $242 | $191 | $51 | $485 | $397 | $88 | - The increase in sales and marketing expenses for Q2 2020 ($51 million) and YTD Q2 2020 ($96 million) was primarily due to increased marketing spending associated with Call of Duty: Mobile and the Candy Crush franchise[227][228] General and Administrative | Metric (Millions) | Q2 2020 | Q2 2019 | Increase (Decrease) | YTD Q2 2020 | YTD Q2 2019 | Increase (Decrease) | | :---------------- | :------ | :------ | :------------------ | :---------- | :---------- | :------------------ | | General and administrative expenses | $175 | $170 | $5 | $343 | $350 | $(7) | - General and administrative expenses for Q2 2020 and YTD Q2 2020 were comparable to the prior-year periods[229][230] Restructuring and related costs | Metric (Millions) | Q2 2020 | Q2 2019 | Increase (Decrease) | YTD Q2 2020 | YTD Q2 2019 | Increase (Decrease) | | :---------------- | :------ | :------ | :------------------ | :---------- | :---------- | :------------------ | | Restructuring and related costs | $6 | $22 | $(16) | $29 | $79 | $(50) | - Restructuring and related costs decreased significantly in Q2 and YTD Q2 2020, primarily relating to severance costs under the ongoing restructuring plan initiated in 2019[230] Interest and Other Expense (Income), Net | Metric (Millions) | Q2 2020 | Q2 2019 | Increase (Decrease) | YTD Q2 2020 | YTD Q2 2019 | Increase (Decrease) | | :---------------- | :------ | :------ | :------------------ | :---------- | :---------- | :------------------ | | Interest and other expense (income), net | $22 | $(34) | $56 | $30 | $(31) | $61 | - Q2 2020 increase primarily due to a $38 million gain recognized in prior-year period from adjusting an equity investment to fair value (no comparable activity in current year)[232] - Also, a $17 million decrease in interest income due to lower returns on investment portfolio from interest rate cuts[232] - Investment yields are anticipated to remain low due to recent central bank actions, including U.S. Federal Reserve interest rate cuts, which will continue to negatively impact future interest income but is not expected to materially impact liquidity[234] Income Tax Expense | Metric (Millions) | Q2 2020 | Q2 2019 | Increase (Decrease) | YTD Q2 2020 | YTD Q2 2019 | Increase (Decrease) | | :---------------- | :------ | :------ | :------------------ | :---------- | :---------- | :------------------ | | Income tax expense| $147 | $42 | $105 | $247 | $163 | $84 | | % of pretax income| 20% | 11% | 9 pp | 19% | 17% | 2 pp | - Q2 2020 effective tax rate (20%) is higher than Q2 2019 (11%) due to a prior-year discrete tax benefit from audit settlements and a current-quarter discrete tax expense for a change in valuation allowance[235][236] - YTD Q2 2020 effective tax rate (19%) is higher than YTD Q2 2019 (17%) primarily due to a prior-year discrete tax benefit from tax audit settlements[235][236] - Effective tax rates for both periods are lower than the U.S. statutory rate of 21% due to lower U.S. taxes on foreign earnings and federal research and development credits[237] Liquidity and Capital Resources The company maintains a strong liquidity position with significant cash flows from operations and a substantial balance of cash and investments. This section details the sources and uses of cash, including operating, investing, and financing activities, debt obligations, dividends, and capital expenditures Sources of Liquidity - The company's ability to generate cash flows from operating activities is a fundamental financial strength, expected to remain strong despite COVID-19 impacts[240](