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 ("PC"s), and
mobile devices. We also operate esports leagues and offer digital advertising
within our content. The terms "Activision Blizzard," the "Company," "we," "us,"
and "our" are used to refer collectively to Activision Blizzard, Inc. and its
subsidiaries.
The Company was originally incorporated in California in 1979 and was
reincorporated in Delaware in December 1992. In connection with the 2008
business combination by and among the Company (then known as Activision, Inc.),
Vivendi S.A, and Vivendi Games, Inc., pursuant to which we acquired Blizzard
Entertainment, Inc. ("Blizzard"), we were renamed Activision Blizzard, Inc. On
February 23, 2016, we acquired King Digital Entertainment plc ("King") by
purchasing all of its outstanding shares.
Our Segments
Based on our organizational structure, we conduct our business through three
reportable segments, as follows:

(i) Activision Publishing, Inc.

Activision Publishing, Inc. ("Activision") is a leading global developer and
publisher of interactive software products and entertainment content,
particularly for the console platform. Activision primarily delivers content
through retail and digital channels, including full-game and in-game sales, as
well as by licensing software to third-party or related-party companies that
distribute Activision products. Activision develops, markets, and sells products
primarily based on our internally developed intellectual properties. Activision
also includes the activities of the Call of Duty LeagueTM, a global professional
esports league with city-based teams.

Activision's key product franchise is Call of Duty®, a first-person action title for the console, PC, and mobile platforms.

(ii) Blizzard Entertainment, Inc.



Blizzard is a leading global developer and publisher of interactive software
products and entertainment content, particularly for the PC platform. Blizzard
primarily delivers content through retail and digital channels, including
subscriptions, full-game, and in-game sales, as well as by licensing software to
third-party or related-party companies that distribute Blizzard products.
Blizzard also maintains a proprietary online gaming service, Blizzard
Battle.net®, which facilitates digital distribution of Blizzard content and
selected Activision content, online social connectivity, and the creation of
user-generated content. Blizzard also includes the activities of the Overwatch
LeagueTM, a global professional esports league with city-based teams.

Blizzard's key product franchises include: World of Warcraft®, a
subscription-based massive multi-player online role-playing game for the PC
platform; Diablo®, an action role-playing franchise for the PC and console
platforms; Hearthstone®, an online collectible card franchise for the PC and
mobile platforms; and Overwatch®, a team-based first-person action title for the
PC and console platforms.

(iii) King Digital Entertainment



King is a leading global developer and publisher of interactive entertainment
content and services, particularly for the mobile platform. King also
distributes its content and services on the PC platform, primarily via Facebook.
King's games are free to play; however, players can acquire in-game items,
either with virtual currency or real currency, and we continue to focus on
in-game advertising as a growing source of revenue.

King's key product franchise is Candy CrushTM, which features "match three" games for the mobile and PC platforms.


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Other
We also engage in other businesses that do not represent reportable segments,
including the 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.

Impacts of the Global COVID-19 Pandemic
In December 2019, a novel strain of coronavirus ("COVID-19") emerged and has
since extensively impacted global health and the economic environment. On
February 28, 2020, the World Health Organization ("WHO") raised its assessment
of the COVID-19 threat from high to very high at a global level due to the
continued increase in the number of cases and affected countries, and on March
11, 2020, the WHO characterized COVID-19 as a pandemic. In an effort to contain
the spread of COVID-19, domestic and international governments around the world
enacted various measures, including orders to close all businesses not deemed
"essential," quarantine orders for individuals to stay in their homes or places
of residence, and to practice social distancing when engaging in essential
activities. We anticipate that these actions and the global health crisis caused
by COVID-19 will continue to negatively impact many business activities and
financial markets across the globe.

The full extent of the impact of the COVID-19 pandemic on our business,
reputation, financial condition, results of operations, income, revenue,
profitability, cash flows, liquidity, or stock price will depend on numerous
evolving factors that we are not able to fully predict at this time. However, we
believe that given our strong balance sheet, with cash and cash equivalents and
short-term investments of $7.6 billion as of September 30, 2020, and the fact
that our business has increasingly shifted to digital channels, we have
substantial flexibility as we navigate through the uncertain environment and
near-term implications of the COVID-19 pandemic.

During the COVID-19 pandemic, our business has experienced an increase in demand
for certain of our products and services as a result of the stay-at-home orders
enacted in various regions as players have more time to engage with our games.
These trends contributed to strong full game and in-game content sales for Call
of Duty: Modern Warfare®, which also benefited from the launch of Call of Duty:
WarzoneTM in March. In addition, we saw further demand for World of Warcraft,
including its in-game content, which also continued to benefit from the release
of World of Warcraft Classic in August 2019. Beginning in the month of March,
our business also experienced an increase in monthly active users for certain
franchises. We have, however, seen a moderation in these trends since the
stay-at-home orders were originally enacted earlier in the year.

As a result of the COVID-19 pandemic and stay-at-home orders enacted in various
regions, both the Overwatch League and the Call of Duty League pivoted all
matches from their originally planned local homestand formats to online play and
remote production for the remainder of the regular and postseason in order to
keep players and fans safe while still delivering premium esports content to a
global audience. Additionally, to support our Overwatch League and Call of Duty
League team owners and ecosystems amid a challenging environment, which includes
losing the ability to have live fan-attended home venue events, we have taken
certain actions to support their short-term cash flow needs, adjusted our league
operations to reduce operating costs and improve franchise terms, and made
certain investments which have impacted our operating results in the third
quarter of 2020. This impact was primarily in the Blizzard segment.

The sustainability of these trends and long-term implications to our business is
dependent on future developments, including the duration of the COVID-19
pandemic and the related length of its impact on the global economy, which are
uncertain and cannot be predicted at this time. See Item 1A "Risk Factors"
within Part II of this Quarterly Report on Form 10-Q for additional details on
risks and uncertainties regarding the impacts of the global COVID-19 pandemic on
our business, reputation, financial condition, results of operations, income,
revenue, profitability, cash flows, liquidity, and stock price.

In an effort to protect the health and safety of our employees, the majority of
our workforce is currently working from home and we have placed restrictions on
non-essential business travel. We have implemented business continuity plans and
have increased support and resources to enable our employees to work remotely
and, thus far, our business has been able to operate with minimal disruption to
our game titles' published release dates. The global COVID-19 pandemic remains a
rapidly evolving situation. We will continue to actively monitor the
developments of the COVID-19 pandemic and may take further actions that could
alter our business operations as may be required by federal, state, local, or
foreign authorities, or that we determine are in the best interests of our
employees, customers, partners and shareholders. It is not clear what effects
any such potential actions may have on our business, including the effects on
our employees, players and consumers, customers, partners, game development and
content pipelines, or on our reputation, financial condition, results of
operations, income, revenue, profitability, cash flows, liquidity, or stock
price.

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Business Results and Highlights

Financial Results

For the three months ended September 30, 2020:



•consolidated net revenues increased 52% to $1.95 billion, while consolidated
operating income increased 215% to $778 million, as compared to consolidated net
revenues of $1.28 billion and consolidated operating income of $247 million for
the three months ended September 30, 2019;

•revenues from digital online channels were $1.75 billion, or 90% of consolidated net revenues, as compared to $1.01 billion, or 79% of consolidated net revenues, for the three months ended September 30, 2019;



•operating margin was 39.8%, which includes $9 million in restructuring and
related costs, as compared to 19.3%, for the three months ended September 30,
2019, which included $28 million in restructuring and related costs;

•consolidated net income increased 196% to $604 million, as compared to $204 million for the three months ended September 30, 2019; and

•diluted earnings per common share increased 200% to $0.78, as compared to $0.26 for the three months ended September 30, 2019.

For the nine months ended September 30, 2020:



•consolidated net revenues increased 26% to $5.67 billion, while consolidated
operating income increased 86% to $2.14 billion, as compared to consolidated net
revenues of $4.50 billion and consolidated operating income of $1.15 billion for
the nine months ended September 30, 2019;

•revenues from digital online channels were $4.78 billion, or 84% of consolidated net revenues, as compared to $3.49 billion, or 78% of consolidated net revenues, for the nine months ended September 30, 2019;



•operating margin was 37.7%, which includes $39 million in restructuring and
related costs, as compared to 25.6%, for the nine months ended September 30,
2019, which included $108 million in restructuring and related costs;

•consolidated net income increased 73% to $1.69 billion, as compared to $978 million for the nine months ended September 30, 2019;

•diluted earnings per common share increased 71% to $2.17, as compared to $1.27 for the nine months ended September 30, 2019; and

•cash flows from operating activities were $1.11 billion, an increase of 22%, as compared to $913 million for the nine months ended September 30, 2019.



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 ended September 30, 2020, include a net
effect of $187 million and $150 million, respectively, from the recognition of
deferred net revenues and related cost of revenues. Net revenues and operating
income for the nine months ended September 30, 2020, include a net effect of
$306 million and $169 million, respectively, from the recognition of deferred
net revenues and related cost of revenues.

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Additionally, for the three months ended September 30, 2020 and 2019, 12% and
14%, respectively, of total net revenues recognized were from revenue sources
that were recognized at a "point-in-time," while "over-time and other" revenues
were the remaining 88% and 86%, respectively, of total net revenues. For the
nine months ended September 30, 2020 and 2019, 12% and 13%, respectively, of
total net revenues recognized were from revenue sources that were recognized at
a "point-in-time," while "over-time and other" revenues were the remaining 88%
and 87%, respectively, of total net revenues. Revenues recognized at a
"point-in-time" are primarily comprised of the portion of revenue from software
products that is recognized when the customer takes control of the product
(i.e., upon delivery of the software product) and revenues from our Distribution
business. "Over-time and other revenues" are primarily comprised of revenue
associated with the online functionality of our games, in-game purchases, and
subscriptions.

Content Release and Event Highlights

Games and other major content releases during the three months ended September 30, 2020, include Activision's Tony Hawk'sTM Pro SkaterTM 1 and 2, a remaster of the first two titles in the Tony Hawk video game franchise.

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 as a key operating metric in evaluating the performance
of our business because it enables an analysis of performance based on the
timing of actual transactions with our customers and provides more timely
indications 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 downloadable content and
microtransactions 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 September 30,                       For the Nine Months Ended September 30,
                                                                        Increase                                                        Increase
                                   2020               2019             (Decrease)                2020                 2019             (Decrease)
Net bookings                   $    1,767          $  1,214          $        553          $        5,368          $  3,679          $      1,689

In-game net bookings           $    1,200          $    709          $        491          $        3,529          $  2,281          $      1,248



Net bookings

Q3 2020 vs. Q3 2019

The increase in net bookings for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, was primarily due to:



•a $564 million increase in Activision net bookings driven by higher net
bookings from (1) Call of Duty: Modern Warfare (which was released in October
2019, and when referred to herein, is inclusive of Call of Duty: Warzone, which
was released in March 2020), as compared to Call of Duty: Black Ops 4, which was
released in October 2018, (2) Call of Duty: Mobile, which was released in
October 2019, and (3) Tony Hawk's Pro Skater 1 and 2, which was released in
September 2020; and

•a $17 million increase in Blizzard net bookings driven by higher net bookings from World of Warcraft, primarily from higher in-game and subscription net bookings, partially offset by lower net bookings from the Overwatch League.


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YTD Q3 2020 vs. YTD Q3 2019

The increase in net bookings for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was primarily due to:



•a $1.49 billion increase in Activision net bookings, driven by higher net
bookings from (1) Call of Duty: Modern Warfare, as compared to Call of Duty:
Black Ops 4, (2) Call of Duty: Mobile, and (3) the Call of Duty franchise
catalog titles, partially offset by lower net bookings from SekiroTM: Shadows
Die Twice, which was released in March 2019; and

•a $204 million increase in Blizzard net bookings, driven by higher net bookings from World of Warcraft, primarily from higher subscription and in-game net bookings.



In-game net bookings

Q3 2020 vs. Q3 2019

The increase in in-game net bookings for the three months ended September 30,
2020, as compared to the three months ended September 30, 2019, was primarily
due to:

•a $432 million increase in Activision in-game net bookings, driven by higher
in-game net bookings from (1) Call of Duty: Modern Warfare, as compared to Call
of Duty: Black Ops 4 and (2) Call of Duty: Mobile; and

•a $40 million increase in Blizzard in-game net bookings, driven by World of Warcraft.



YTD Q3 2020 vs. YTD Q3 2019

The increase in in-game net bookings for the nine months ended September 30,
2020, as compared to the nine months ended September 30, 2019, was primarily due
to a $1.15 billion increase in Activision in-game net bookings and an
$88 million increase in Blizzard in-game net bookings, driven by the same
factors as noted for the three-month period above.

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 trending 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):

                               September 30, 2020             June 30, 2020             March 31, 2020             December 31, 2019            September 30, 2019
Activision                               111                        125                        102                          128                            36
Blizzard                                  30                         32                         32                           32                            33
King                                     249                        271                        273                          249                           247
Total                                    390                        428                        407                          409                           316



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Table of Contents Average MAUs decreased by 38 million, or 9%, for the three months ended September 30, 2020, as compared to the three months ended June 30, 2020, primarily due to:

•a decrease in average MAUs for King, driven by a decrease in average MAUs for the Candy Crush franchise; and

•a decrease in average MAUs for Activision, driven by a decrease in average MAUs for Call of Duty: Modern Warfare, which was released in October 2019.

Average MAUs increased by 74 million, or 23%, for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, primarily due to:

•an increase in Activision's average MAUs, driven by an increase in average MAUs for Call of Duty: Mobile, which launched in October 2019, and Call of Duty: Modern Warfare, which benefited from the launch of Call of Duty: Warzone in March 2020; and



•a slight increase in King's average MAUs driven by an increase in average MAUs
for the Candy Crush franchise, partially offset by decreases in various other
franchises.

Management's Overview of Business Trends

Interactive Entertainment and Mobile Gaming Growth
Our business participates in the global interactive entertainment industry.
Games have become an increasingly popular form of entertainment, and we estimate
the total industry grew, on average, 13% annually from 2016 to 2019. The
industry continues to benefit from additional players entering the market as
interactive entertainment becomes more commonplace across age groups and as more
developing regions gain access to this form of entertainment.
Further, wide adoption of smartphones globally and the free-to-play business
model on those platforms has increased the total addressable audience for gaming
significantly by introducing gaming to new age groups and new regions and
allowing gaming to occur more widely outside the home. Mobile gaming is
estimated to be larger than console and PC gaming, and continues to grow at a
significant rate. King is a leading developer of mobile and free-to-play games,
and our other business units have mobile efforts underway that present the
opportunity for us to expand the reach of, and drive additional player
investment in our franchises. The October 2019 launch of Call of Duty: Mobile is
an example of these efforts.

Concentration of Sales Among the Most Popular Franchises



The concentration of retail revenues among key titles has continued as a trend
in the overall interactive entertainment industry. According to The NPD Group,
the top 10 titles accounted for 33% of the retail sales in the U.S. interactive
entertainment industry in 2019. Similarly, a significant portion of our revenues
historically has been derived from video games based on a few popular
franchises, and these video games have also been responsible for a
disproportionately high percentage of our profits. For example, in 2019, the
Call of Duty, Candy Crush, and World of Warcraft franchises, collectively,
accounted for 67% of our consolidated net revenues-and a significantly higher
percentage of our operating income.

In addition to investing in, and developing sequels and content for, our top
franchises, with the aim of releasing content more frequently, we are
continually exploring additional ways to expand those franchises, such as our
March 2020 release of Activision's Call of Duty: Warzone, a free-to-play
experience from the world of Call of Duty: Modern Warfare for the console and PC
platforms. We also have been focusing on expanding our franchises to the mobile
platform, as demonstrated by the release of Call of Duty: Mobile in the fourth
quarter of 2019, as well as our plans for Diablo ImmortalTM and recently
announced Crash Bandicoot: On the Run!™, which are both currently in
development.

Overall, we do expect that a limited number of popular franchises will continue
to produce a disproportionately high percentage of our, and the industry's,
revenues and profits in the near future. Accordingly, our ability to maintain
our top franchises and our ability to successfully compete against our
competitors' top franchises can significantly impact our performance.

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