ACTIVISION BLIZZARD, INC. Business Overview
Activision Blizzard, Inc. is a leading global developer and publisher of interactive entertainment content and services. We develop and distribute content and services on video game consoles, personal computers ("PCs"), and mobile devices. We also operate esports leagues and offer digital advertising within some of our content. The terms "Activision Blizzard ," the "Company," "we," "us," and "our" are used to refer collectively toActivision Blizzard, Inc. and its subsidiaries. Merger Agreement OnJanuary 18, 2022 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Microsoft Corporation ("Microsoft") andAnchorage Merger Sub Inc. ("Merger Sub"), a wholly owned subsidiary of Microsoft. Subject to the terms and conditions of the Merger Agreement, Microsoft agreed to acquire the Company for$95.00 per issued and outstanding share of our common stock, par value$0.000001 per share, in an all-cash transaction. Pursuant to the Merger Agreement, following consummation of the merger of Merger Sub with and into the Company (the "Merger"), the Company will be a wholly-owned subsidiary of Microsoft. As a result of the Merger, we will cease to be a publicly traded company. We have agreed to various customary covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs or capital expenditure requirements. The consummation of the Merger remains subject to customary closing conditions, including satisfaction of certain regulatory approvals. OnApril 28, 2022 , the Company's stockholders adopted the Merger Agreement at a special meeting of stockholders. The Merger is currently expected to close in Microsoft's fiscal year endingJune 30, 2023 . For additional information related to the Merger Agreement, please refer to the Definitive Proxy Statement on Schedule 14A filed with theU.S. Securities and Exchange Commission (the "SEC") onMarch 21, 2022 , as supplemented by the Current Report on Form 8-K filed with theSEC onApril 15, 2022 , as well as P art I Item 1 "Business" of our Annual Report on Form 10-K for the year ended December 31, 202 1 , and other relevant materials in connection with the proposed transaction with Microsoft that we will file with theSEC and that will contain important information about the Company and the Merger.
Employment Matters
We are subject to legal proceedings regarding our workplace and are experiencing adverse effects related to these proceedings and to concerns raised about our workplace. For information about these matters, see Note 16 of the notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q and Part I, Item 1A "Risk Factors" of our
Annual Report on Form 10-K for the year ended
InMay 2022 , a group of quality assurance workers at ourRaven Software studio inWisconsin voted in favor of forming a union with theCommunication Workers of America . InJuly 2022 , a group of quality assurance workers for Blizzard inNew York announced the formation of a union and have filed for union representation with theU.S. National Labor Relations Board .
Our Segments
Based upon our organizational structure, we conduct our business through three reportable segments, each of which is a leading global developer and publisher of interactive entertainment content and services based primarily on our internally-developed intellectual properties.
(i)
Activision Publishing, Inc. ("Activision") delivers content through both premium and free-to-play offerings and primarily generates revenue from full-game and in-game sales, as well as by licensing software to third-party or related-party companies that distribute Activision products. Activision's key product franchise is Call of Duty, a first-person action franchise. Activision also includes the activities of the Call ofDuty League , a global professional esports league with city-based teams. 35 -------------------------------------------------------------------------------- Table of Contents (ii)Blizzard Entertainment, Inc. Blizzard Entertainment, Inc. ("Blizzard") delivers content through both premium and free-to-play offerings and primarily generates revenue from full-game and in-game sales, subscriptions, and by licensing software to third-party or related-party companies that distribute Blizzard products. Blizzard also maintains a proprietary online gaming platform, Battle.net, which facilitates digital distribution of Blizzard content and selected Activision content, online social connectivity, and the creation of user-generated content. Blizzard's key product franchises include: Warcraft, which includes World of Warcraft, a subscription-based massive multi-player online role-playing game, and Hearthstone, an online collectible card game based in the Warcraft universe; Diablo, an action role-playing franchise; and Overwatch, a team-based first-person action franchise. Blizzard also includes the activities of theOverwatch League , a global professional esports league with city-based teams.
(iii)
Other
We also engage in other businesses that do not represent reportable segments,
including our Activision Blizzard Distribution ("Distribution") business, which
consists of operations in Europe that provide warehousing, logistics, and sales
distribution services to third-party publishers of interactive entertainment
software, our own publishing operations, and manufacturers of interactive
entertainment hardware.
Business Results and Highlights
Financial Results
For the three months ended
•consolidated net revenues decreased 28% to$1.6 billion and consolidated operating income decreased 65% to$338 million , as compared to consolidated net revenues of$2.3 billion and consolidated operating income of$959 million in 2021; and
•diluted earnings per common share decreased 68% to
For the six months ended
•consolidated net revenues decreased 25% to$3.4 billion and consolidated operating income decreased 53% to$817 million , as compared to consolidated net revenues of$4.6 billion and consolidated operating income of$1.8 billion in 2021;
•diluted earnings per common share decreased 55% to
•cash flows from operating activities were approximately
Since certain of our games are hosted online or include significant online functionality that represents a separate performance obligation, we defer the transaction price allocable to the online functionality from the sale of these games and recognize the attributable revenues over the relevant estimated service periods, which are generally less than a year. Net revenues and operating income for the three months endedJune 30, 2022 , include a net effect of$7 million and$1 million , respectively, from the recognition of deferred net revenues and related cost of revenues. Net revenues and operating income for the six months endedJune 30, 2022 , include a net effect of$293 million and$236 million , respectively, from the recognition of deferred net revenues and related cost of revenues. 36 -------------------------------------------------------------------------------- Table of Contents The percentages of our consolidated net revenues from revenue sources that are recognized at a "point-in-time" and from sources that are recognized "over-time and other" were as follows: For the Three Months Ended June 30, For the Six Months Ended June 30, 2022 2021 2022 2021 Point-in-time (1) 8 % 9 % 9 % 10 % Over-time and other (2) 92 % 91 % 91 % 90 % (1)Revenues recognized at a "point-in-time" are primarily comprised of the portion of revenues from software products that are recognized when the customer takes control of the product (i.e., upon delivery of the software product) and revenues from our Distribution business.
(2)Revenues recognized "over-time and other revenue" are primarily comprised of revenues associated with the online functionality of our games, in-game purchases, and subscriptions.
Summary of Title Release Dates
Below is a summary of release dates for titles that are discussed throughout our analysis for our operating metrics, our consolidated results, and operating segment results. Title Release Date Call of Duty: VanguardNovember 2021 , and when referred to herein, is inclusive of Call of Duty: Warzone from the release of Call of Duty: Vanguard Season 1 content and Call of Duty: Warzone Pacific onDecember 8, 2021 Call of Duty: Black Ops Cold WarNovember 2020 , and when referred to herein, is inclusive of Call of Duty: Warzone from the release of Call of Duty: Black Ops Cold War Season 1 content onDecember 16, 2020 throughDecember 8, 2021 Call of Duty: Modern WarfareOctober 2019 , and when referred to herein, is inclusive of Call of Duty: Warzone from its release inMarch 2020 throughDecember 16, 2020 Diablo ImmortalJune 2022
World of Warcraft: Burning Crusade
November 2020 Crash Bandicoot: On the Run!March 2021 Operating Metrics The following operating metrics are key performance indicators that we use to evaluate our business. The key drivers of changes in our operating metrics are presented in the order of significance.
Net bookings and in-game net bookings
We monitor net bookings and in-game net bookings as key operating metrics in
evaluating the performance of our business because they enable an analysis of
performance based on the timing of actual transactions with our customers and
provide a more timely indication of trends in our operating results. Net
bookings is the net amount of products and services sold digitally or sold-in
physically in the period and includes license fees, merchandise, and publisher
incentives, among others. Net bookings is equal to net revenues excluding the
impact from deferrals. In-game net bookings primarily includes the net amount of
microtransactions and downloadable content sold during the period and is equal
to in-game net revenues excluding the impact from deferrals.
Net bookings and in-game net bookings were as follows (amounts in millions):
For the Three Months Ended June 30, For the Six Months Ended June 30,
Increase Increase
2022 2021 (Decrease) 2022 2021 (Decrease)
Net bookings $ 1,637 $ 1,921 $ (284) $ 3,119 $ 3,987 $ (868)
In-game net bookings $ 1,197 $ 1,319 $ (122) $ 2,208 $ 2,661 $ (453)
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Table of Contents Q2 2022 vs. Q2 2021 Net bookings
The decrease in net bookings for the three months ended
•a$299 million decrease in Activision net bookings, driven by lower net bookings from (1) Call of Duty: Vanguard as compared to Call of Duty: Black Ops Cold War, and (2) Call of Duty: Black Ops Cold War as compared to Call of Duty: Modern Warfare; and
•a
The decrease in net bookings was partially offset by a$49 million increase in King net bookings, driven by higher net bookings from in-game player purchases in the Candy Crush franchise. In-game net bookings The decrease in in-game net bookings for the three months endedJune 30, 2022 , as compared to the three months endedJune 30, 2021 , was primarily due to a$206 million decrease in Activision in-game net bookings, driven by lower in-game net bookings from Call of Duty: Vanguard, as compared to Call of Duty: Black Ops Cold War.
The decrease in in-game net bookings was partially offset by:
•a
•a
YTD Q2 2022 vs. YTD Q2 2021
The decrease in net bookings for the six months ended
•a$737 million decrease in Activision net bookings, driven by lower net bookings from (1) Call of Duty: Vanguard as compared to Call of Duty: Black Ops Cold War, and (2) Call of Duty: Black Ops Cold War as compared to Call of Duty: Modern Warfare; and
•a
The decrease in net bookings was partially offset by a$122 million increase in King net bookings, driven by higher net bookings from in-game player purchases in the Candy Crush franchise. In-game net bookings
The decrease in in-game net bookings for the six months ended
•a$466 million decrease in Activision in-game net bookings, driven by lower in-game net bookings from Call of Duty: Vanguard, as compared to Call of Duty: Black Ops Cold War; and
•a
The decrease in in-game net bookings was partially offset by a
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Monthly Active Users
We monitor monthly active users ("MAUs") as a key measure of the overall size of
our user base. MAUs are the number of individuals who accessed a particular game
in a given month. We calculate average MAUs in a period by adding the total
number of MAUs in each of the months in a given period and dividing that total
by the number of months in the period. An individual who accesses two of our
games would be counted as two users. In addition, due to technical limitations,
for Activision and King, an individual who accesses the same game on two
platforms or devices in the relevant period would be counted as two users. For
Blizzard, an individual who accesses the same game on two platforms or devices
in the relevant period would generally be counted as a single user. In certain
instances, we rely on third parties to publish our games. In these instances,
MAU data is based on information provided to us by those third parties or, if
final data is not available, reasonable estimates of MAUs for these third-party
published games.
The number of MAUs for a given period can be significantly impacted by the
timing of new content releases, since new releases may cause a temporary surge
in MAUs. Accordingly, although we believe that overall trends in the number of
MAUs can be a meaningful performance metric, period-to-period fluctuations may
not be indicative of longer-term trends. The following table details our average
MAUs on a sequential quarterly basis for each of our reportable segments
(amounts in millions):
June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021
Activision 94 100 107 119 127
Blizzard 27 22 24 26 26
King 240 250 240 245 255
Total 361 372 371 390 408
Average MAUs decreased by 11 million or 3% for the three months ended June 30,
2022 , as compared to the three months ended March 31, 2022 . The decrease was
primarily due to lower average MAUs for King, driven by the Candy Crush
franchise, and Activision, driven by the Call of Duty franchise. This was
partially offset by higher average MAUs for Blizzard, driven by the launch of
Diablo Immortal.
Average MAUs decreased by 47 million or 12% for the three months ended June 30,
2022 , as compared to the three months ended June 30, 2021 . The decrease was
primarily due to lower average MAUs for Activision, driven by the Call of Duty
franchise and King, driven by Crash Bandicoot: On the Run!
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Management's Overview of Business Trends
We believe that our continued success and growth is directly related to our ability to attract, retain, and develop top talent. We have seen increased competition in the market for talent and expect the competitive environment to continue at least in the short term. We have experienced challenges in both the retention of our existing talent and attraction of new talent. If this competition, voluntary turnover, and recruiting difficulty persists, it could continue to negatively impact our ability to deliver content in a cadence that will be optimal for our business.
Upcoming Content Releases
We recently announced that several new titles and expansions will be released in the second half of 2022:
•Call of Duty: Modern Warfare II, the sequel to Call of Duty: Modern Warfare, is
expected to launch on
•World of Warcraft: Wrath of the Lich King Classic, a re-creation of the second
expansion to World of Warcraft, is expected to launch on
•Overwatch 2, a new free-to-play live experience within the world of Overwatch,
is expected to launch in early access on
•World of Warcraft: Dragonflight, the next expansion to World of Warcraft, is expected to launch later this year.
In addition, we expect to continue to deliver ongoing content for various of our
franchises. We will also continue to invest in opportunities that we believe
have the potential to drive our growth over the long-term, including continuing
to build on our advertising initiatives and investments in mobile titles.
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