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 toActivision Blizzard, Inc. and its subsidiaries. The Company was originally incorporated inCalifornia in 1979 and was reincorporated inDelaware inDecember 1992 . In connection with the 2008 business combination by and among the Company (then known asActivision, Inc. ), Vivendi S.A, andVivendi Games, Inc. , pursuant to which we acquiredBlizzard Entertainment, Inc. ("Blizzard"), we were renamedActivision Blizzard, Inc. OnFebruary 23, 2016 , we acquiredKing 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") 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 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 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.
35 -------------------------------------------------------------------------------- Table of Contents Other We also engage in other businesses that do not represent reportable segments, including the Activision Blizzard Distribution ("Distribution") business, which consists of operations inEurope 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 InDecember 2019 , a novel strain of coronavirus ("COVID-19") emerged and has since extensively impacted global health and the economic environment. OnFebruary 28, 2020 , theWorld 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 onMarch 11, 2020 , theWHO 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 ofSeptember 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 inAugust 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 theOverwatch League and the Call ofDuty 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 ourOverwatch League andCall 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. 36 -------------------------------------------------------------------------------- Table of Contents Business Results and Highlights
Financial Results
For the three months ended
•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 endedSeptember 30, 2019 ;
•revenues from digital online channels were
•operating margin was 39.8%, which includes$9 million in restructuring and related costs, as compared to 19.3%, for the three months endedSeptember 30, 2019 , which included$28 million in restructuring and related costs;
•consolidated net income increased 196% to
•diluted earnings per common share increased 200% to
For the nine months ended
•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 endedSeptember 30, 2019 ;
•revenues from digital online channels were
•operating margin was 37.7%, which includes$39 million in restructuring and related costs, as compared to 25.6%, for the nine months endedSeptember 30, 2019 , which included$108 million in restructuring and related costs;
•consolidated net income increased 73% to
•diluted earnings per common share increased 71% to
•cash flows from operating activities were
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 endedSeptember 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 endedSeptember 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. 37 -------------------------------------------------------------------------------- Table of Contents Additionally, for the three months endedSeptember 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 endedSeptember 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
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
•a$564 million increase in Activision net bookings driven by higher net bookings from (1) Call of Duty: Modern Warfare (which was released inOctober 2019 , and when referred to herein, is inclusive of Call of Duty: Warzone, which was released inMarch 2020 ), as compared to Call of Duty: Black Ops 4, which was released inOctober 2018 , (2) Call of Duty: Mobile, which was released inOctober 2019 , and (3)Tony Hawk's Pro Skater 1 and 2, which was released inSeptember 2020 ; and
•a
38 -------------------------------------------------------------------------------- Table of Contents YTD Q3 2020 vs. YTD Q3 2019
The increase in net bookings for the nine months ended
•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 inMarch 2019 ; and
•a
In-game net bookings Q3 2020 vs. Q3 2019 The increase in in-game net bookings for the three months endedSeptember 30, 2020 , as compared to the three months endedSeptember 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
YTD Q3 2020 vs. YTD Q3 2019 The increase in in-game net bookings for the nine months endedSeptember 30, 2020 , as compared to the nine months endedSeptember 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 individualswho 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 individualwho accesses two of our games would be counted as two users. In addition, due to technical limitations, for Activision and King, an individualwho accesses the same game on two platforms or devices in the relevant period would be counted as two users. For Blizzard, an individualwho 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 39
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Average MAUs decreased by 38 million, or 9%, for the three months ended
•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
Average MAUs increased by 74 million, or 23%, for the three months ended
•an increase in Activision's average MAUs, driven by an increase in average MAUs
for Call of Duty: Mobile, which launched in
•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. TheOctober 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 toThe NPD Group , the top 10 titles accounted for 33% of the retail sales in theU.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 ourMarch 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. 40
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