UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2023

OR

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 1-15839

ACTIVISION BLIZZARD, INC.

(Exact name of registrant as specified in its charter)

Delaware			95-4803544
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
2701 Olympic Boulevard Building B	Santa Monica,	CA	90404
(Address of principal executive offices)			(Zip Code)

 

(310) 255-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.000001 per share	ATVI	The Nasdaq Global Select Market

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☒	Non-accelerated Filer	☐	Accelerated Filer	☐
				Smaller reporting company	☐
				Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒

The number of shares of the registrant’s Common Stock outstanding at April 28, 2023 was 786,158,727.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

Table of Contents

	Cautionary Statement	3
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets at March 31, 2023 and December 31, 2022	4
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2023 and March 31, 2022	5
	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023 and March 31, 2022	6
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and March 31, 2022	7
	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2023 and March 31, 2022	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	47
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 6.	Exhibits	50
SIGNATURE		51

2

CAUTIONARY STATEMENT

This Quarterly Report on Form 10-Q contains, or incorporates by reference, statements reflecting our views about our future performance that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements consist of any statement other than a recitation of historical facts and include, but are not limited to: (1) projections of revenues, expenses, income or loss, earnings or loss per share, cash flow, or other financial items; (2) statements of our plans and objectives, including those related to releases of products or services and restructuring activities; (3) statements of future financial or operating performance, including the impact of tax items thereon; (4) statements regarding the proposed transaction between Activision Blizzard, Inc. (“Activision Blizzard”) and Microsoft Corporation (“Microsoft”) pursuant to the Agreement and Plan of Merger, dated as of January 18, 2022, by and among Activision Blizzard, Microsoft, and Anchorage Merger Sub Inc., a wholly owned subsidiary of Microsoft (the “Merger Agreement” and such transaction, “the proposed transaction with Microsoft”), including any statements regarding the expected timetable for completing the proposed transaction with Microsoft, the ability to complete the proposed transaction with Microsoft, and the expected benefits of the proposed transaction with Microsoft; and (5) statements of assumptions underlying such statements. Activision Blizzard generally uses words such as “outlook,” “forecast,” “will,” “could,” “should,” “would,” “to be,” “plan,” “aims,” “believes,” “may,” “might,” “expects,” “intends,” “seeks,” “anticipates,” “estimate,” “future,” “positioned,” “potential,” “project,” “remain,” “scheduled,” “set to,” “subject to,” “upcoming,” and the negative version of these words and other similar words and expressions to help identify forward-looking statements. Forward-looking statements are subject to business and economic risks, reflect management’s current expectations, estimates, and projections about our business, and are inherently uncertain and difficult to predict.

We caution that a number of important factors, many of which are beyond our control, could cause our actual future results and other future circumstances to differ materially from those expressed in any forward-looking statements. Such factors include, but are not limited to: the risk that the proposed transaction with Microsoft may not be completed in a timely manner or at all, which may adversely affect our business and the price of our common stock; the failure to satisfy the conditions to the consummation of the proposed transaction with Microsoft, including the receipt of certain governmental and regulatory approvals (which may or may not be received on a timely basis or at all); the occurrence of any event, change, or other circumstance that could give rise to the termination of the Merger Agreement; the effect of the announcement or pendency of the proposed transaction with Microsoft on our business relationships, operating results, and business generally; risks that the proposed transaction with Microsoft disrupts our current plans and operations and potential difficulties in employee retention and recruitment as a result of the proposed transaction with Microsoft; risks related to diverting management’s attention from ongoing business operations; the outcome of any legal proceedings that have been or may be instituted against us related to the Merger Agreement or the transactions contemplated thereby; restrictions during the pendency of the proposed transaction with Microsoft that may impact our ability to pursue certain business opportunities or strategic transactions; uncertainty about current and future economic conditions and other adverse changes in general political conditions in any of the major countries in which we do business; decline in demand for our products and services if general economic conditions decline; fluctuations in currency exchange rates; our ability to deliver popular, high-quality content in a timely manner; negative impacts on our business resulting from concerns regarding our workplace, including associated legal proceedings; our ability to attract, retain, and motivate skilled personnel; future impacts from COVID-19; the level of demand for our games and products; our ability to meet customer expectations with respect to our brands, games, services, and/or business practices; competition; our reliance on a relatively small number of franchises for a significant portion of our revenues and profits; negative impacts from the results of collective bargaining, legal proceedings related to unionization, or campaigns by unions directed at our workforce; our ability to adapt to rapid technological change and allocate our resources accordingly; the increasing importance of digital sales and the risks of that business model; our ability to effectively manage the scope and complexity of our business, including risks related to our professional esports business model; our reliance on third-party platforms, which are also our competitors, for the distribution of products; our dependence on the success and availability of video game consoles manufactured by third parties and our ability to develop commercially successful products for these consoles; the increasing importance of free-to-play games and the risks of that business model; the risks and uncertainties of conducting business outside the United States (the “U.S.”)., including the need for regulatory approval to operate, the relatively weaker protection for our intellectual property rights, and the impact of cultural differences on consumer preferences; insolvency or business failure of any of our business partners; the importance of retail sales to our business and the risks of that business model; any difficulties in integrating acquired businesses or realizing the anticipated benefits of strategic transactions; seasonality in the sale of our products; fluctuation in our recurring business; the risk of distributors, retailers, development, and licensing partners or other third parties being unable to honor their commitments or otherwise putting our brand at risk; our reliance on tools and technologies owned by third parties; our use of open source software; risks associated with undisclosed content or features in our games; the impact of objectionable consumer- or other third-party-created content on our operating results or reputation; outages, disruptions, or degradations in our services, products, and/or technological infrastructure; cybersecurity-related attacks, significant data breaches, fraudulent activity, or disruption of our information technology systems or networks; significant disruption during our live events; catastrophic events; climate change; provisions in our corporate documents and Delaware state law that could delay or prevent a change of control; other legal proceedings; increasing regulation in key territories over our business, products, and distribution; changes in government regulation relating to the Internet; our compliance with evolving data privacy laws and regulations; scrutiny regarding the appropriateness of the content in our games and our ability to receive target ratings for certain titles; changes in tax rates and/or tax laws and exposure to additional tax liabilities; changes in financial accounting standards or the application of existing or future standards as our business evolves; and the other factors included in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the U.S. Securities and Exchange Commission (the “SEC”).

The forward-looking statements contained herein are based on information available to Activision Blizzard as of the date of this filing, and we assume no obligation to update any such forward-looking statements. Actual events or results may differ from those expressed in forward-looking statements. As such, you should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, prospects, strategy, and financial needs. These statements are not guarantees of our future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and may cause actual results to differ materially from current expectations.

Activision Blizzard, Inc.’s names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or trade names of Activision Blizzard, Inc. All other product or service names are the property of their respective owners. All dollar amounts referred to in, or contemplated by, this Quarterly Report on Form 10-Q refer to U.S. dollars unless otherwise explicitly stated to the contrary.

3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in millions, except share data)

	At March 31, 2023		At December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	9,236	$	7,060
Held-to-maturity investments	3,280		4,932
Accounts receivable, net	764		1,204
Software development	715		640
Other current assets	524		633
Total current assets	14,519		14,469
Software development	622		641
Property and equipment, net	199		193
Deferred income taxes, net	1,180		1,201
Other assets	507		508
Intangible assets, net	437		442
Goodwill	9,929		9,929
Total assets	$	27,393	$	27,383
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	177	$	324
Deferred revenues	1,653		2,088
Accrued expenses and other liabilities	987		1,143
Total current liabilities	2,817		3,555
Long-term debt, net	3,611		3,611
Deferred income taxes, net	32		158
Other liabilities	818		816
Total liabilities	7,278		8,140
Commitments and contingencies (Note 13)
Shareholders’ equity:
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,214,763,143 and 1,212,894,055 shares issued at March 31, 2023 and December 31, 2022, respectively	—		—
Additional paid-in capital	12,396		12,260
Less: Treasury stock, at cost, 428,676,471 shares at March 31, 2023 and December 31, 2022	(5,563)		(5,563)
Retained earnings	13,911		13,171
Accumulated other comprehensive loss	(629)		(625)
Total shareholders’ equity	20,115		19,243
Total liabilities and shareholders’ equity	$	27,393	$	27,383

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in millions, except per share data)

	For the Three Months Ended March 31,
	2023		2022
Net revenues
Product sales	$	695	$	386
In-game, subscription, and other revenues	1,688		1,382
Total net revenues	2,383		1,768
Costs and expenses
Cost of revenues—product sales:
Product costs	136		91
Software royalties and amortization	101		81
Cost of revenues—in-game, subscription, and other:
Game operations and distribution costs	363		288
Software royalties and amortization	65		19
Product development	402		346
Sales and marketing	278		252
General and administrative	238		212
Total costs and expenses	1,583		1,289
Operating income	800		479
Interest expense from debt	27		27
Other (income) expense, net (Note 10)	(122)		(13)
Income before income tax expense	895		465
Income tax expense	155		70
Net income	$	740	$	395
Earnings per common share
Basic	$	0.94	$	0.51
Diluted	$	0.93	$	0.50
Weighted-average number of shares outstanding
Basic	785		780
Diluted	792		786

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

5

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Amounts in millions)

	For the Three Months Ended March 31,
	2023		2022
Net income	$	740	$	395
Other comprehensive (loss) income:
Foreign currency translation adjustments, net of tax	7		(4)
Unrealized gains (losses) on forward contracts designated as hedges, net of tax	(11)		(5)
Unrealized gains (losses) on available-for-sale securities, net of tax	—		1
Total other comprehensive (loss) income	$	(4)	$	(8)
Comprehensive income	$	736	$	387

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

6

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in millions)

	For the Three Months Ended March 31,
	2023		2022
Cash flows from operating activities:
Net income	$	740	$	395
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	(100)		(64)
Non-cash operating lease cost	21		18
Depreciation and amortization	21		24
Amortization of capitalized software development costs (1)	102		75
Share-based compensation expense (2)	124		98
Other	(35)		(22)
Changes in operating assets and liabilities, net of effect of business acquisitions:
Accounts receivable, net	443		440
Software development	(161)		(104)
Other assets	86		125
Deferred revenues	(447)		(278)
Accounts payable	(150)		(76)
Accrued expenses and other liabilities	(67)		11
Net cash provided by operating activities	577		642
Cash flows from investing activities:
Proceeds from maturities of available-for-sale investments	—		22
Proceeds from maturities of held-to-maturity investments	1,700		—
Capital expenditures	(37)		(15)
Net cash provided by investing activities	1,663		7
Cash flows from financing activities:
Proceeds from issuance of common stock to employees	13		16
Tax payment related to net share settlements on restricted stock units	(84)		(113)
Net cash used in financing activities	(71)		(97)
Effect of foreign exchange rate changes on cash and cash equivalents	8		(10)
Net increase in cash and cash equivalents and restricted cash	2,177		542
Cash and cash equivalents and restricted cash at beginning of period	7,086		10,438
Cash and cash equivalents and restricted cash at end of period	$	9,263	$	10,980
Supplemental cash flow information - Non-cash financing activities:
Dividends payable	$	—	$	367

(1)Excludes deferral and amortization of share-based compensation expense, including liability awards accounted for under Accounting Standards Codification (“ASC”) 718.

(2)Includes the net effects of capitalization, deferral, and amortization of share-based compensation expense, including liability awards accounted for under ASC 718.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

7

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three Months Ended March 31, 2023 and March 31, 2022

(Unaudited)

(Amounts and shares in millions, except per share data)

	Common Stock			Treasury Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2022	1,213	$	—	(429)	$	(5,563)	$	12,260	$	13,171	$	(625)	$	19,243
Components of comprehensive income:
Net income	—	—		—	—		—		740		—		740
Other comprehensive income (loss)	—	—		—	—		—		—		(4)		(4)
Issuance of common stock pursuant to employee stock options	—	—		—	—		14		—		—		14
Issuance of common stock pursuant to restricted stock units	3	—		—	—		—		—		—		—
Restricted stock surrendered for employees’ tax liability	(1)	—		—	—		(92)		—		—		(92)
Settlement of liability-classified awards in restricted stock units (Note 9)	—	—		—	—		93		—		—		93
Share-based compensation expense related to employee stock options and restricted stock units	—	—		—	—		121		—		—		121
Balance at March 31, 2023	1,215	$	—	(429)	$	(5,563)	$	12,396	$	13,911	$	(629)	$	20,115

	Common Stock			Treasury Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2021	1,208	$	—	(429)	$	(5,563)	$	11,715	$	12,025	$	(578)	$	17,599
Components of comprehensive income:
Net income	—	—		—	—		—		395		—		395
Other comprehensive income (loss)	—	—		—	—		—		—		(8)		(8)
Issuance of common stock pursuant to employee stock options	—	—		—	—		15		—		—		15
Issuance of common stock pursuant to restricted stock units	4	—		—	—		—		—		—		—
Restricted stock surrendered for employees’ tax liability	(2)	—		—	—		(131)		—		—		(131)
Settlement of liability-classified awards in restricted stock units (Note 9)	—	—		—	—		204		—		—		204
Share-based compensation expense related to employee stock options and restricted stock units	—	—		—	—		124		—		—		124
Dividends ($0.47 per common share)	—	—		—	—		—		(367)		—		(367)
Balance at March 31, 2022	1,210	$	—	(429)	$	(5,563)	$	11,927	$	12,053	$	(586)	$	17,831

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

8

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Description of Business and Basis of Consolidation and Presentation

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 to Activision Blizzard, Inc. and its subsidiaries.

Merger Agreement

On January 18, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Microsoft Corporation (“Microsoft”) and Anchorage 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 terms of the Merger Agreement, our acquisition will be accomplished through the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as 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.

If the Merger Agreement is terminated under certain specified circumstances, we or Microsoft will be required to pay a termination fee. We will be required to pay Microsoft a termination fee of approximately $2.27 billion under specified circumstances, including termination of the Merger Agreement due to our material breach of representations, warranties, covenants or agreements in the Merger Agreement. Microsoft will be required to pay us a reverse termination fee under specified circumstances, including termination of the Merger Agreement due to a permanent injunction arising from Antitrust Laws (as defined in the Merger Agreement) when we are not then in material breach of any provision of the Merger Agreement and if certain other conditions are met, in an amount equal to $3.0 billion if the termination notice is provided at any time after April 18, 2023.

For additional information related to the Merger Agreement, please refer to Part I Item 1 “Business” of our Annual Report on Form 10-K for the year ended December 31, 2022, and other relevant materials in connection with the proposed transaction with Microsoft that we will file with the SEC and that will contain important information about the Company and the Merger.

On December 8, 2022, the United States Federal Trade Commission (the “FTC”) issued an administrative complaint against the Company and Microsoft alleging that the Company and Microsoft executed the Merger Agreement in violation of Section 5 of the FTC Act, as amended, 15 U.S.C. § 45, which, if consummated, would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18 and Section 5 of the FTC Act, as amended, 15 U.S.C. § 45. For more information regarding the FTC complaint regarding the pending Merger, see Note 13 of the condensed consolidated consolidated financial statements.

On April 26, 2023, the United Kingdom Competition and Markets Authority ("CMA") announced a decision to block the Merger, stating that competition concerns arose in relation to cloud gaming and that Microsoft’s remedies addressing any concerns in cloud gaming were not sufficient. Microsoft has announced its decision to appeal the CMA’s ruling, and Activision Blizzard intends to fully support Microsoft’s efforts on this appeal. The parties continue to fully engage with other regulators reviewing the transaction to obtain required regulatory approvals.

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.

9

(i) Activision Publishing, Inc.

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 offerings include titles and content for Call of Duty®, a first-person action franchise. Activision also includes the activities of the Call of Duty League™, a global professional esports league.

(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 offerings include titles and content for: the Warcraft® franchise, 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® in the action role-playing genre; and Overwatch® in the team-based first-person action genre. Blizzard also includes the activities of the Overwatch League™, a global professional esports league.

(iii) King Digital Entertainment

King Digital Entertainment (“King”) delivers content through free-to-play offerings and primarily generates revenue from in-game sales and in-game advertising on mobile platforms. King’s key product offerings include titles and content for Candy Crush™, a “match three” franchise.

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.

Basis of Consolidation and Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC and accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim reporting. Accordingly, certain notes or other information that are normally required by U.S. GAAP have been condensed or omitted if they substantially duplicate the disclosures contained in our annual audited consolidated financial statements. Additionally, the year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. Accordingly, the unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. In the opinion of management, all adjustments considered necessary for the fair statement of our financial position and results of operations in accordance with U.S. GAAP (consisting of normal recurring adjustments) have been included in the accompanying unaudited condensed consolidated financial statements. Actual results could differ from these estimates and assumptions.

The accompanying condensed consolidated financial statements include the accounts and operations of the Company. All intercompany accounts and transactions have been eliminated. Certain amounts in the prior year condensed consolidated financial statements have been reclassified to conform to the current year presentation.

10

2. Held-to-Maturity Investments

The following tables summarizes the Company's held-to-maturity investments (amount in millions):

	At March 31, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized losses		Estimated Fair Value (Level 1)
U.S. treasuries and government agency securities	$	3,280	$	—	$	(1)	$	3,279

	At December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized losses		Estimated Fair Value (Level 1)
U.S. treasuries and government agency securities	$	4,932	$	1	$	(3)	$	4,930

At March 31, 2023 and December 31, 2022, all contractual maturities of held-to-maturity investments were less than 12 months.

3. Software Development

Our total capitalized software development costs were $1.3 billion as of March 31, 2023 and December 31, 2022, respectively, and primarily relate to internal development costs.

Amortization of capitalized software development costs was as follows (amounts in millions):

	For the Three Months Ended March 31,
	2023		2022
Amortization of capitalized software development costs	$	125	$	79

4. Fair Value Measurements

The Financial Accounting Standards Board literature regarding fair value measurements for certain assets and liabilities establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value are as follows:

•Level 1—Quoted prices in active markets for identical assets or liabilities;

•Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data; and

•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.

11

Fair Value Measurements on a Recurring Basis

The table below segregates all of our financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date (amounts in millions):

			Fair Value Measurements at March 31, 2023 Using
	As of March 31, 2023		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance Sheet Classification
Financial Assets:
Recurring fair value measurements:
Money market funds	$	8,888	$	8,888	$	—	$	—	Cash and cash equivalents
Equity securities	47		47		—		—		Other current assets
Foreign currency forward contracts designated as hedges	3		—		3		—		Other current assets
Total	$	8,938	$	8,935	$	3	$	—
Financial Liabilities:
Foreign currency forward contracts designated as hedges	$	(8)	$	—	$	(8)	$	—	Accrued expenses and other liabilities

			Fair Value Measurements at December 31, 2022 Using
	As of December 31, 2022		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance Sheet Classification
Financial Assets:
Recurring fair value measurements:
Money market funds	$	6,639	$	6,639	$	—	$	—	Cash and cash equivalents
Equity securities	49		49		—		—		Other current assets
Foreign currency forward contracts designated as hedges	6		—		6		—		Other current assets
Total	$	6,694	$	6,688	$	6	$	—
Financial Liabilities:
Foreign currency forward contracts designated as hedges	$	(6)	$	—	$	(6)	$	—	Accrued expenses and other liabilities

12

Foreign Currency Forward Contracts

Foreign Currency Forward Contracts Designated as Hedges (“Cash Flow Hedges”)

The total gross notional amounts and fair values of our Cash Flow Hedges, which generally had remaining maturities of nine months or less as of March 31, 2023, are as follows (amounts in millions):

	As of March 31, 2023				As of December 31, 2022
	Notional amount		Fair value gain (loss)		Notional amount		Fair value gain (loss)
Foreign Currency:
Buy USD, Sell EUR	$	475	$	(5)	$	509	$	—

For the three months ended March 31, 2023 and 2022, pre-tax net realized gains (losses) associated with our Cash Flow Hedges that were reclassified out of “Accumulated other comprehensive income (loss)” and into earnings were not material.

5. Deferred Revenues

We record deferred revenues when cash payments are received or due in advance of the fulfillment of our associated performance obligations. The aggregate of the current and non-current balances of deferred revenues as of March 31, 2023 and December 31, 2022, were $1.7 billion and $2.1 billion, respectively. For the three months ended March 31, 2023, the additions to our deferred revenues balance were primarily due to cash payments received or due in advance of satisfying our performance obligations, while the reductions to our deferred revenues balance were primarily due to the recognition of revenues upon fulfillment of our performance obligations, which were in the ordinary course of business. During the three months ended March 31, 2023 and March 31, 2022, $1.3 billion and $0.7 billion, respectively, of revenues were recognized that were included in the deferred revenues balance at the beginning of the period.

As of March 31, 2023, the aggregate amount of contracted revenues allocated to our unsatisfied performance obligations was $1.8 billion, which included our deferred revenues balances and amounts to be invoiced and recognized as revenue in future periods. We expect to recognize approximately $1.8 billion over the next 12 months. This balance did not include an estimate for variable consideration arising from sales-based royalty license revenue in excess of the contractual minimum guarantee or any estimated amounts of variable consideration that are subject to constraint in accordance with the revenue accounting standard.

6. Debt

Credit Facilities

As of March 31, 2023 and December 31, 2022, we had $1.5 billion available under a revolving credit facility (the “Revolver”) pursuant to a credit agreement entered into on October 11, 2013 (as amended thereafter and from time to time, the “Credit Agreement”). To date, we have not drawn on the Revolver and we were in compliance with the terms of the Credit Agreement as of March 31, 2023. The Revolver is scheduled to mature on August 24, 2023.

Refer to Note 13 contained in our Annual Report on Form 10-K for the year ended December 31, 2022 for further details regarding the Credit Agreement and its key terms.

13

Unsecured Senior Notes

As of March 31, 2023 and December 31, 2022, we had $3.7 billion of gross unsecured senior notes outstanding. A summary of our outstanding unsecured senior notes is as follows (amounts in millions):

				At March 31, 2023				At December 31, 2022
Unsecured Senior Notes	Interest Rate	Semi-Annual Interest Payments Due On	Maturity	Principal		Fair Value (Level 2)		Principal		Fair Value (Level 2)
2026 Notes	3.40%	Mar. 15 & Sept. 15	Sept. 2026	$	850	$	823	$	850	$	810
2027 Notes	3.40%	Jun. 15 & Dec. 15	Jun. 2027	400		384		400		378
2030 Notes	1.35%	Mar. 15 & Sept. 15	Sept. 2030	500		406		500		391
2047 Notes	4.50%	Jun. 15 & Dec. 15	Jun. 2047	400		378		400		353
2050 Notes	2.50%	Mar. 15 & Sept. 15	Sept. 2050	1,500		1,009		1,500		936
Total gross long-term debt				$	3,650			$	3,650
Unamortized discount and deferred financing costs				(39)				(39)
Total net carrying amount				$	3,611			$	3,611

We were in compliance with the terms of the notes outstanding as of March 31, 2023. Refer to Note 13 contained in our Annual Report on Form 10-K for the year ended December 31, 2022 for further details regarding key terms under our indentures that govern our outstanding notes.

7. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) were as follows (amounts in millions):

	For the Three Months Ended March 31, 2023
	Foreign currency translation adjustments		Unrealized gain (loss) on forward contracts		Total
Balance at December 31, 2022	$	(636)	$	11	$	(625)
Other comprehensive income (loss) before reclassifications	7		—		7
Amounts reclassified from accumulated other comprehensive income (loss) into earnings	—		(11)		(11)
Balance at March 31, 2023	$	(629)	$	—	$	(629)

	For the Three Months Ended March 31, 2022
	Foreign currency translation adjustments		Unrealized gain (loss) on available-for- sale securities		Unrealized gain (loss) on forward contracts		Total
Balance at December 31, 2021	$	(606)	$	3	$	25	$	(578)
Other comprehensive income (loss) before reclassifications	(4)		2		6		4
Amounts reclassified from accumulated other comprehensive income (loss) into earnings	—		(1)		(11)		(12)
Balance at March 31, 2022	$	(610)	$	4	$	20	$	(586)

14

8. Operating Segments and Geographic Regions

We have three reportable segments—Activision, Blizzard, and King. Our operating segments are consistent with the manner in which our operations are reviewed and managed by our Chief Executive Officer, who is our chief operating decision maker (“CODM”). The CODM reviews segment performance exclusive of: the impact of the change in deferred revenues and related cost of revenues with respect to certain of our online-enabled games; share-based compensation expense (including liability awards accounted for under ASC 718); amortization of intangible assets as a result of purchase price accounting; fees and other expenses (including legal fees, expenses, and accruals) related to acquisitions, associated integration activities, and financings; certain restructuring and related costs; certain partnership wind down and related costs; and certain other non-cash charges. The CODM does not review any information regarding total assets on an operating segment basis, and accordingly, no disclosure is made with respect thereto.

Our operating segments are also consistent with our internal organizational structure, the way we assess operating performance and allocate resources, and the availability of separate financial information. We do not aggregate operating segments.

Information on reportable segment net revenues and operating income are presented below (amounts in millions):

	Three Months Ended March 31, 2023
	Activision		Blizzard		King		Total
Segment Revenues
Net revenues from external customers	$	580	$	435	$	739	$	1,754
Intersegment net revenues (1)	—		8		—		8
Segment net revenues	$	580	$	443	$	739	$	1,762
Segment operating income	$	179	$	56	$	241	$	476
	Three Months Ended March 31, 2022
	Activision		Blizzard		King		Total
Segment Revenues
Net revenues from external customers	$	453	$	265	$	682	$	1,400
Intersegment net revenues (1)	—		9		—		9
Segment net revenues	$	453	$	274	$	682	$	1,409
Segment operating income	$	59	$	53	$	243	$	355

(1)Intersegment revenues reflect licensing and service fees charged between segments.

15

Reconciliations of total segment net revenues and total segment operating income to consolidated net revenues and consolidated income before income tax expense are presented in the table below (amounts in millions):

	Three Months Ended March 31,
	2023		2022
Reconciliation to consolidated net revenues:
Segment net revenues	$	1,762	$	1,409
Revenues from non-reportable segments (1)	101		81
Net effect from recognition (deferral) of deferred net revenues (2)	528		287
Elimination of intersegment revenues (3)	(8)		(9)
Consolidated net revenues	$	2,383	$	1,768
Reconciliation to consolidated income before income tax expense:
Segment operating income	$	476	$	355
Operating income (loss) from non-reportable segments (1)	6		19
Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (2)	471		235
Share-based compensation expense (4)	(124)		(98)
Amortization of intangible assets (5)	(4)		(2)
Restructuring and related costs (6)	—		2
Partnership wind down and related costs (7)	(4)		—
Merger and acquisition-related fees and other expenses (8)	(21)		(32)
Consolidated operating income	800		479
Interest expense from debt	27		27
Other (income) expense, net	(122)		(13)
Consolidated income before income tax expense	$	895	$	465

(1)Includes other income and expenses outside of our reportable segments, including our Distribution business and unallocated corporate income and expenses.

(2)Reflects the net effect from recognition (deferral) of deferred net revenues, along with related cost of revenues, on certain of our online-enabled products.

(3)Intersegment revenues reflect licensing and service fees charged between segments.

(4)Reflects expenses related to share-based compensation.

(5)Reflects amortization of intangible assets from purchase price accounting.

(6)Reflects restructuring initiatives.

(7)Reflects expenses related to the wind down of our partnership with NetEase, Inc. in Mainland China in regards to licenses covering the publication of several Blizzard titles which expired in January 2023.

(8)Reflects fees and other expenses related to our proposed transaction with Microsoft, which primarily consist of legal and advisory fees.

16

Net revenues by distribution channel, including a reconciliation to each of our reportable segment’s revenues, were as follows (amounts in millions):

	Three Months Ended March 31, 2023
	Activision		Blizzard		King		Non-reportable segments		Elimination of intersegment revenues (3)		Total
Net revenues by distribution channel:
Digital online channels (1)	$	902	$	525	$	738	$	—	$	(8)	$	2,157
Retail channels	102		2		—		—		—		104
Other (2)	6		4		—		112		—		122
Total consolidated net revenues	$	1,010	$	531	$	738	$	112	$	(8)	$	2,383
Change in deferred revenues:
Digital online channels (1)	$	(362)	$	(87)	$	1	$	—	$	—	$	(448)
Retail channels	(68)		(1)		—		—		—		(69)
Other (2)	—		—		—		(11)		—		(11)
Total change in deferred revenues	$	(430)	$	(88)	$	1	$	(11)	$	—	$	(528)
Segment net revenues:
Digital online channels (1)	$	540	$	438	$	739	$	—	$	(8)	$	1,709
Retail channels	34		1		—		—		—		35
Other (2)	6		4		—		101		—		111
Total segment net revenues	$	580	$	443	$	739	$	101	$	(8)	$	1,855

	Three Months Ended March 31, 2022
	Activision		Blizzard		King		Non-reportable segments		Elimination of intersegment revenues (3)		Total
Net revenues by distribution channel:
Digital online channels (1)	$	616	$	300	$	682	$	—	$	(9)	$	1,589
Retail channels	83		2		—		—		—		85
Other (2)	11		2		—		81		—		94
Total consolidated net revenues	$	710	$	304	$	682	$	81	$	(9)	$	1,768
Change in deferred revenues:
Digital online channels (1)	$	(192)	$	(30)	$	—	$	—	$	—	$	(222)
Retail channels	(65)		1		—		—		—		(64)
Other (2)	—		(1)		—		—		—		(1)
Total change in deferred revenues	$	(257)	$	(30)	$	—	$	—	$	—	$	(287)
Segment net revenues:
Digital online channels (1)	$	424	$	270	$	682	$	—	$	(9)	$	1,367
Retail channels	18		3		—		—		—		21
Other (2)	11		1		—		81		—		93
Total segment net revenues	$	453	$	274	$	682	$	81	$	(9)	$	1,481

17

(1)Net revenues from “Digital online channels” include revenues from digitally-distributed downloadable content, microtransactions, subscriptions, and products, as well as licensing royalties.

(2)Net revenues from “Other” primarily include revenues from our Distribution business, the Overwatch League, and the Call of Duty League.

(3)Intersegment revenues reflect licensing and service fees charged between segments.

Geographic information presented below is based on the location of the paying customer. Net revenues by geographic region, including a reconciliation to each of our reportable segment’s net revenues, were as follows (amounts in millions):

	Three Months Ended March 31, 2023
	Activision		Blizzard		King		Non-reportable segments		Elimination of intersegment revenues (2)		Total
Net revenues by geographic region:
Americas	$	652	$	257	$	473	$	1	$	(5)	$	1,378
EMEA (1)	256		153		181		111		(2)		699
Asia Pacific	102		121		84		—		(1)		306
Total consolidated net revenues	$	1,010	$	531	$	738	$	112	$	(8)	$	2,383
Change in deferred revenues:
Americas	$	(280)	$	(44)	$	1	$	—	$	—	$	(323)
EMEA (1)	(125)		(28)		—		(11)		—		(164)
Asia Pacific	(25)		(16)		—		—		—		(41)
Total change in deferred revenues	$	(430)	$	(88)	$	1	$	(11)	$	—	$	(528)
Segment net revenues:
Americas	$	372	$	213	$	474	$	1	$	(5)	$	1,055
EMEA (1)	131		125		181		100		(2)		535
Asia Pacific	77		105		84		—		(1)		265
Total segment net revenues	$	580	$	443	$	739	$	101	$	(8)	$	1,855

18

	Three Months Ended March 31, 2022
	Activision		Blizzard		King		Non-reportable segments		Elimination of intersegment revenues (2)		Total
Net revenues by geographic region:
Americas	$	460	$	125	$	437	$	—	$	(6)	$	1,016
EMEA (1)	184		94		170		81		(2)		527
Asia Pacific	66		85		75		—		(1)		225
Total consolidated net revenues	$	710	$	304	$	682	$	81	$	(9)	$	1,768
Change in deferred revenues:
Americas	$	(164)	$	(11)	$	1	$	—	$	—	$	(174)
EMEA (1)	(80)		(13)		—		—		—		(93)
Asia Pacific	(13)		(6)		(1)		—		—		(20)
Total change in deferred revenues	$	(257)	$	(30)	$	—	$	—	$	—	$	(287)
Segment net revenues:
Americas	$	296	$	114	$	438	$	—	$	(6)	$	842
EMEA (1)	104		81		170		81		(2)		434
Asia Pacific	53		79		74		—		(1)		205
Total segment net revenues	$	453	$	274	$	682	$	81	$	(9)	$	1,481

(1)    “EMEA” consists of the Europe, Middle East, and Africa geographic regions.

(2)    Intersegment revenues reflect licensing and service fees charged between segments.

The Company’s net revenues in the U.S. was 51% of consolidated net revenues for both the three months ended March 31, 2023 and 2022, respectively. The Company’s net revenues in the U.K. was 10% of consolidated net revenues for both the three months ended March 31, 2023 and 2022, respectively. No other country’s net revenues exceeded 10% of consolidated net revenues for the three months ended March 31, 2023 or 2022.

Net revenues by platform, including a reconciliation to each of our reportable segment’s net revenues, were as follows (amounts in millions):

19

	Three Months Ended March 31, 2023
	Activision		Blizzard		King		Non-reportable segments		Elimination of intersegment revenues (3)		Total
Net revenues by platform:
Console	$	597	$	42	$	—	$	—	$	—	$	639
PC	270		386		18		—		(8)		666
Mobile and ancillary (1)	137		99		720		—		—		956
Other (2)	6		4		—		112		—		122
Total consolidated net revenues	$	1,010	$	531	$	738	$	112	$	(8)	$	2,383
Change in deferred revenues:
Console	$	(278)	$	(4)	$	—	$	—	$	—	$	(282)
PC	(151)		(52)		—		—		—		(203)
Mobile and ancillary (1)	(1)		(32)		1		—		—		(32)
Other (2)	—		—		—		(11)		—		(11)
Total change in deferred revenues	$	(430)	$	(88)	$	1	$	(11)	$	—	$	(528)
Segment net revenues:
Console	$	319	$	38	$	—	$	—	$	—	$	357
PC	119		334		18		—		(8)		463
Mobile and ancillary (1)	136		67		721		—		—		924
Other (2)	6		4		—		101		—		111
Total segment net revenues	$	580	$	443	$	739	$	101	$	(8)	$	1,855

	Three Months Ended March 31, 2022
	Activision		Blizzard		King		Non-reportable segments		Elimination of intersegment revenues (3)		Total
Net revenues by platform:
Console	$	460	$	24	$	—	$	—	$	—	$	484
PC	124		251		17		—		(9)		383
Mobile and ancillary (1)	115		27		665		—		—		807
Other (2)	11		2		—		81		—		94
Total consolidated net revenues	$	710	$	304	$	682	$	81	$	(9)	$	1,768
Change in deferred revenues:
Console	$	(216)	$	(5)	$	—	$	—	$	—	$	(221)
PC	(62)		(18)		—		—		—		(80)
Mobile and ancillary (1)	21		(6)		—		—		—		15
Other (2)	—		(1)		—		—		—		(1)
Total change in deferred revenues	$	(257)	$	(30)	$	—	$	—	$	—	$	(287)
Segment net revenues:
Console	$	244	$	19	$	—	$	—	$	—	$	263
PC	62		233		17		—		(9)		303
Mobile and ancillary (1)	136		21		665		—		—		822
Other (2)	11		1		—		81		—		93
Total segment net revenues	$	453	$	274	$	682	$	81	$	(9)	$	1,481

20

(1)Net revenues from “Mobile and ancillary” primarily include revenues from mobile devices.

(2)Net revenues from “Other” primarily include revenues from our Distribution business, the Overwatch League, and the Call of Duty League.

(3)Intersegment revenues reflect licensing and service fees charged between segments.

Long-lived assets by geographic region were as follows (amounts in millions):

	At March 31, 2023		At December 31, 2022
Long-lived assets* by geographic region:
Americas	$	289	$	279
EMEA	102		103
Asia Pacific	21		21
Total long-lived assets by geographic region	$	412	$	403

*    The only long-lived assets that we classify by region are our long-term tangible fixed assets, which consist of property, plant, and equipment assets and lease right-of-use assets. All other long-term assets are not allocated by location.

9. Share-Based Payments

Stock Option Activity

Stock option activity is as follows:

	Number of shares (in thousands)	Weighted-average exercise price per stock option		Weighted-average remaining contractual term (in years)	Aggregate intrinsic value (in millions)
Outstanding stock options at December 31, 2022	7,861	$	58.85
Granted	—	—
Exercised	(262)	51.98
Forfeited	(89)	88.68
Expired	(25)	77.01
Outstanding stock options at March 31, 2023	7,485	$	58.68	5.57	$	206
Vested and expected to vest at March 31, 2023	7,415	$	58.41	5.55	$	206
Exercisable at March 31, 2023	6,656	$	55.41	5.30	$	203

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between our closing stock price on the last trading day of the period and the exercise price, times the number of shares for options where the closing stock price is greater than the exercise price) that would have been received by the option holders had all option holders exercised their options on that date. This amount changes based on the market value of our stock.

Restricted Stock Units (“RSUs”) Activity

We grant RSUs, which represent the right to receive shares of our common stock. Vesting for RSUs is generally contingent upon the holder’s continued employment with us and may be subject to other conditions (which may include the satisfaction of a performance measure). Also, certain of our performance-based RSUs, including those that are market-based, include a range of shares that may be released at vesting, which are above or below the targeted number of RSUs based on actual performance relative to the performance measure. If the vesting conditions are not met, unvested RSUs will be forfeited. Upon vesting of the RSUs, we may withhold shares otherwise deliverable to satisfy tax withholding requirements.

21

The following table summarizes our RSU activity with performance-based RSUs, including those with market conditions, presented at 100% of the target level shares that may potentially vest (amounts in thousands, except per share data):

	Number of shares	Weighted- average grant date fair value per RSU
Unvested RSUs at December 31, 2022	13,754	$	74.53
Granted	1,667	78.73
Vested	(2,796)	77.40
Forfeited	(394)	78.39
Unvested RSUs at March 31, 2023	12,231	$	74.33

As of December 31, 2022 and 2021, we had recorded a share-based compensation liability related to compensation payments under our annual performance plans for 2022 and 2021, respectively, which the Company determined to settle certain amounts not yet paid in stock as opposed to cash. During the three months ended March 31, 2023 and 2022, we settled the respective share-based compensation liability by granting 1,188 thousand and 2,777 thousand RSUs, respectively, that vested during the first quarter shortly after grant. The number of shares issued was based on the Company’s closing stock price on the date of grant. The impact of this settlement was recorded in “Additional Paid-In-Capital” in our condensed consolidated statement of changes in shareholders’ equity for the three months ended March 31, 2023 and 2022.

At March 31, 2023, $405 million of total unrecognized compensation cost related to RSUs is expected to be recognized over a weighted-average period of 1.35 years.

10. Other (Income) Expense, Net

Other (income) expense, net is comprised of the following (amounts in millions):

	For the Three Months Ended March 31,
	2023		2022
Interest income	$	(126)	$	(1)
Realized and unrealized loss (gain) on equity investment	2		(11)
Other (income) expense	2		(1)
Other (income) expense, net	$	(122)	$	(13)

11. Income Taxes

We account for our provision for income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the interim period, taking into account year-to-date amounts and projected results for the full year. The provision for income taxes represents federal, foreign, state, and local income taxes. Our effective tax rate could be different from the statutory U.S. income tax rate due to: the effect of state and local income taxes; tax rates that apply to our foreign income (including U.S. tax on foreign income); research and development credits; and certain nondeductible expenses. Our effective tax rate could fluctuate significantly from quarter to quarter based on recurring and nonrecurring factors including, but not limited to: variations in the estimated and actual level of pre-tax income or loss by jurisdiction; changes in enacted tax laws and regulations, and interpretations thereof, including with respect to tax credits and state and local income taxes; developments in tax audits and other matters; recognition of excess tax benefits and tax deficiencies from share-based payments; and certain nondeductible expenses. Changes in judgment from the evaluation of new information resulting in the recognition, derecognition, or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.

The income tax expense of $155 million for the three months ended March 31, 2023, reflects an effective tax rate of 17%, which is higher than the effective tax rate of 15% for the three months ended March 31, 2022. Our tax rate in the current quarter is higher than in the prior year due to changes in the mix of our pre-tax income between countries and an increase in the U.K. corporate tax rate that became effective in 2023.

22

The effective tax rate of 17% for the three months ended March 31, 2023, is lower than the U.S. statutory rate of 21%, primarily due to lower taxes on foreign earnings and U.S. research and development credits.

Activision Blizzard’s tax years after 2008 remain open to examination by certain major taxing jurisdictions to which we are subject. The Internal Revenue Service is currently examining our federal tax returns for the 2012 through 2019 tax years. In addition, King’s pre-acquisition tax returns remain open in various jurisdictions, primarily as a result of transfer pricing matters. We anticipate resolving King’s transfer pricing for both pre- and post-acquisition tax years through a collaborative multilateral process with the tax authorities in the relevant jurisdictions, which include the U.K. and Sweden. While the outcome of this process remains uncertain, it could result in an agreement that changes the allocation of profits and losses between these and other relevant jurisdictions or a failure to reach an agreement that results in unilateral adjustments to the amount and timing of taxable income in the jurisdictions in which King operates.

In addition, certain of our subsidiaries are under examination or investigation, or may be subject to examination or investigation, by tax authorities in various jurisdictions. These proceedings may lead to adjustments or proposed adjustments to our taxes or provisions for uncertain tax positions. Such proceedings may have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations in the earlier of the period or periods in which the matters are resolved and in which appropriate tax provisions are taken into account in our financial statements. If we were to receive a materially adverse assessment from a taxing jurisdiction, we would plan to vigorously contest it and consider all of our options, including the pursuit of judicial remedies.

We regularly assess the likelihood of adverse outcomes resulting from these examinations and monitor the progress of ongoing discussions with tax authorities in determining the appropriateness of our tax provisions. The final resolution of the Company’s global tax disputes is uncertain. There is significant judgment required in the analysis of disputes, including the probability determination and estimation of the potential exposure. Based on current information, in the opinion of the Company’s management, the ultimate resolution of these matters is not expected to have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations.

12. Computation of Basic/Diluted Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per common share (amounts in millions, except per share data):

	For the Three Months Ended March 31,
	2023		2022
Numerator:
Consolidated net income	$	740	$	395
Denominator:
Denominator for basic earnings per common share—weighted-average common shares outstanding	785		780
Effect of dilutive stock options and awards under the treasury stock method	7		6
Denominator for diluted earnings per common share—weighted-average common shares outstanding plus dilutive common shares under the treasury stock method	792		786
Basic earnings per common share	$	0.94	$	0.51
Diluted earnings per common share	$	0.93	$	0.50

23

13. Commitments and Contingencies

Legal Proceedings

We are party to routine claims, suits, investigations, audits, and other proceedings arising from the ordinary course of business, including with respect to intellectual property rights, contractual claims, labor and employment matters, regulatory matters, tax matters, unclaimed property matters, compliance matters, and collection matters. In the opinion of management, such routine claims and lawsuits are not significant, and we do not expect them to have a material adverse effect on our business, financial condition, results of operations, or liquidity. We are also party to the proceedings set forth below.

EEOC Settlement

In September 2021, the Company entered into a proposed consent decree with the U.S. Equal Employment Opportunity Commission (the “EEOC”) to settle claims regarding certain employment practices. The consent decree was approved by the United States District Court, Central District of California on March 29, 2022. The consent decree, among other things, provides for the creation of an $18 million settlement fund for eligible claimants; upgrading Company policies, practices, and training to further prevent and eliminate harassment and discrimination in its workplaces, including implementing an expanded performance review system with a new equal opportunity focus; and providing ongoing oversight and review of the Company’s training programs, investigation policies, disciplinary framework and compliance by appointing a third-party equal opportunity consultant for the next three years whose findings will be regularly reported to the EEOC and shared with our Board of Directors.

The California Civil Rights Department (formerly known as the Department of Fair Employment and Housing) (the “CRD”) filed a motion to intervene in the matter, seeking to object to the consent decree, including the amount of the settlement fund; that motion was denied. The CRD filed a notice of appeal of the order denying the CRD’s motion to intervene. The CRD filed its opening brief for its appeal of the Court’s order denying its motion to intervene with the United States Court of Appeals for the Ninth Circuit on May 18, 2022. On April 19, 2022, the CRD filed a second motion to intervene with the United States District Court. The CRD’s second motion to intervene was denied on June 3, 2022. On June 7, 2022, the CRD filed a notice of appeal of the order denying the CRD’s second motion to intervene with the United States Court of Appeals for the Ninth Circuit. On March 4, 2022, Jessica Gonzalez, a former Blizzard Entertainment employee, filed a motion to intervene with the United States District Court; it was denied on March 22, 2022. On May 23, 2022, Gonzalez filed a notice of appeal of the order denying her motion to intervene with the United States Court of Appeals for the Ninth Circuit. The CRD appeals and Gonzalez appeal are pending before the Ninth Circuit. Oral argument for the CRD appeals and Gonzalez appeal is scheduled for June 13, 2023.

Pending Employment-Related Matters

On July 20, 2021, the CRD filed a complaint (the “CRD Matter”) in California Superior Court, County of Los Angeles against Activision Blizzard, Blizzard Entertainment and Activision Publishing (together, the “Defendants”) alleging violations of the California Fair Employment and Housing Act and the California Equal Pay Act. The CRD filed a First Amended Complaint in the CRD Matter on August 23, 2021. The Defendants moved to dismiss the First Amended Complaint; the motion was heard on February 15, 2022. The Defendants’ motion was denied in part and granted in part, and the CRD did not amend with respect to the granted portion. On May 6, 2022, Defendants moved for partial summary adjudication seeking to dismiss claims asserted under the Fair Employment & Housing Act, which the Court denied. Defendants filed a Petition for Peremptory Writ or Other Appropriate Relief regarding the Court’s denial of Defendants’ motion for partial summary adjudication, which was denied. Defendants appealed the denial of their writ to the California Supreme Court, which was denied. On October 27, 2022, the CRD filed a Motion for Summary Adjudication on certain of Defendants’ affirmative defenses with a hearing date scheduled for June 29, 2023; the June 29, 2023 hearing date was vacated and has not been reset. On October 28, 2022, the February 27, 2023 trial date was vacated and a new trial date will be set by the Court. Defendants were granted leave to file a cross complaint against various staffing agencies implicated in CRD’s complaint on January 20, 2023. On January 24, 2023, Cross-Defendants Creative Circle and Apex challenged the judicial assignment. On February 7, 2023, Defendants sought reassignment to the complex courts, which was denied on April 26, 2023. In addition, in January 2022, the Company’s Board of Directors received notice of an investigation by the CRD and investigatory subpoenas; on February 8, 2023, the CRD issued a letter indicating that it had decided to close this matter.

24

On August 3, 2021, a putative class action was filed in the United States District Court, Central District of California, entitled Gary Cheng v. Activision Blizzard, Inc., et al., Case No. 2:21-cv-06240-PA-JEM. Plaintiffs assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), against the Company and five current or former officers. An amended complaint was filed on December 3, 2021, purportedly on behalf of a class of the Company’s shareholders who purchased stock between February 28, 2017 and November 16, 2021. In an order dated April 18, 2022, the Court granted defendants’ motion to dismiss the amended complaint with leave to amend. Plaintiffs filed a second amended complaint on May 18, 2022, on behalf of shareholders who purchased stock between November 8, 2018 and November 16, 2021, which defendants moved to dismiss on June 16, 2022. In an order dated August 30, 2022, the Court granted defendants’ motion to dismiss the second amended complaint with leave to amend. Plaintiff filed a third amended complaint on September 29, 2022. Defendants’ motion to dismiss the third amended complaint was filed October 31, 2022. In an order entered January 23, 2023, the Court granted defendants’ motion to dismiss the third amended complaint without leave to amend and on the same date entered judgment in accordance with that order. Plaintiffs have filed an appeal in the United States Court of Appeals for the Ninth Circuit.

Beginning on August 6, 2021, three putative shareholder derivative actions were filed in California Superior Court, County of Los Angeles, and those cases have now been consolidated in an action entitled York County on Behalf of County of York Retirement Fund v. Robert A. Kotick, et al., Case No. 21STCV28949. Another related putative shareholder derivative action, entitled Lesley Warren Savage v. Robert A. Kotick, et al., Case No. 22STCV17478, was filed in California Superior Court, County of Los Angeles on May 23, 2022. These related shareholder derivative actions in California Superior Court are currently stayed. On November 15, 2021, a putative shareholder derivative action was filed in the United States District Court, Central District of California, entitled Luke Kahnert v. Robert A. Kotick, et al., Case No. 2:21-cv-08968-PA-JEM. The putative derivative actions collectively assert claims on the Company’s behalf against a number of current or former officers, employees and directors for breach of fiduciary duty, corporate waste, unjust enrichment, misappropriation, contribution, and alleged violation of Section 14(a) of the Exchange Act based on allegations similar to those in the CRD Matter and in the securities class action. The Company is named as a nominal defendant. An amended complaint in the Kahnert case was filed on January 7, 2022 and, in an order dated May 20, 2022, the Court granted defendants’ motion to dismiss the amended complaint with leave to amend. Plaintiffs filed a second amended complaint on June 1, 2022 in the Kahnert case. In an order dated September 8, 2022, the Court granted defendants’ motion to dismiss the second amended complaint with leave to amend. Plaintiffs in the Kahnert case filed a third amended complaint on September 23, 2022. Defendants’ motion to dismiss the third amended complaint in the Kahnert case was filed October 24, 2022. In an order dated January 17, 2023, the Court granted defendants’ motion to dismiss the third amended complaint without leave to amend and on the same date entered judgment in accordance with that order. No appeal from the order and judgment was filed and the time for doing so has passed.

We are unable to predict the impact of the above pending matters on our business, financial condition, results of operations, or liquidity at this time.

On February 3, 2023, the Company settled the previously-disclosed investigation by the SEC related to the Company’s disclosures on employment matters and related issues without admitting or denying the SEC’s findings. As part of the settlement, the Company consented to the entry of an order finding violations of Exchange Act Rule 13a-15, requiring issuers to maintain effective disclosure controls and procedures, and Exchange Act Rule 21F-17(a), providing certain whistleblower protections. The order requires the Company to cease and desist from future violations of these provisions and to pay a $35 million civil monetary penalty, which we have paid.

25

Legal Proceedings Regarding the Merger

Following the announcement of the proposed transaction with Microsoft, complaints were filed in the United States District Court for the Southern District of New York, the United States District Court for the Eastern District of New York, the United States District Court for the Central District of California, the United States District Court for the Eastern District of Pennsylvania and the United States District Court for the District of Delaware against the Company and its directors: Stein v. Activision Blizzard, Inc. et al., No. 1:22-cv-01560 (S.D.N.Y.); Perry v. Activision Blizzard, Inc. et al., No. 1:22-cv-02074 (S.D.N.Y.); Whitfield v. Activision Blizzard, Inc. et al., 2:22-cv-01182 (E.D.N.Y.); Lande v. Activision Blizzard, Inc. et al., No. 1:22-cv-01267 (E.D.N.Y.); Watson v. Activision Blizzard, Inc. et al., No. 2:22-cv-01268 (C.D. Cal.); Rubin v. Activision Blizzard, Inc. et al., No. 2:22-cv-01343 (C.D. Cal.); Baker v. Activision Blizzard, Inc. et al., No. 2:22cv-00875 (E.D. Pa.); and David v. Activision Blizzard, Inc. et al., No. 1:22-cv-00339 (D. Del.). The complaints each assert violations of Section 14(a) and Section 20(a) of the Exchange Act and allege that the preliminary proxy statement filed in connection with the proposed transaction with Microsoft omitted certain purportedly material information which rendered the preliminary proxy statement incomplete and misleading. Specifically, the complaints allege that the preliminary proxy statement failed to disclose material information regarding the sales process, the Company’s projections and the financial analyses of the Company’s financial advisor. The complaints sought, among other things, an order to enjoin the transaction unless additional disclosures were issued; and, if the transaction closes, damages. The Watson complaint also alleges that the Company’s directors entered into the transaction for self-interested reasons, including receipt of personal benefits in the transaction. All of the complaints have been voluntarily dismissed.

Following the announcement of the proposed transaction with Microsoft, the Company also received several demand letters from purported stockholders and two lawsuits, Sjunde AP-Fonden v. Activision Blizzard, Inc., No. 2022-0281-KSJM (Del. Ch.) and New York City Employees’ Retirement System et al. v. Activision Blizzard, Inc., No. 2022-0365-KSJM (Del. Ch.) (together, the “220 Complaints”), for books and records pursuant to 8 Del. C. § 220. Among other things, the demand letters and the 220 Complaints seek to investigate purported breaches of fiduciary duty related to the proposed transaction with Microsoft. Specifically, the demands seek to investigate Mr. Kotick’s role in the proposed transaction with Microsoft with one of the demands alleging that Mr. Kotick’s position at the Company was at risk given workplace issues and he chose to pursue a transaction rather than resign. Such demand further alleges that Mr. Kotick agreed to a price range without authorization from our Board of Directors and that our Board of Directors allowed Mr. Kotick to control the transaction process. Such demand also alleges that the transaction price is inadequate because Microsoft’s opportunistic offer took advantage of the Company’s purportedly depressed stock price and that management may have attempted to validate the consideration through downward adjustments to the Company’s long-range plan.

On November 3, 2022 a lawsuit captioned, Sjunde AP-Fonden v. Activision Blizzard, Inc. et al., C.A. No. 2022-1001-CM (Del. Ch.) was filed under seal in the Court of Chancery of the State of Delaware on behalf of a class of stockholders of the Company. The complaint names the Company, our directors, Microsoft and Merger Sub as defendants. The complaint alleges that the director defendants breached their fiduciary duty in connection with the initiation, timing, negotiation, approval and disclosure of the Merger. The complaint also alleges that the Merger was not approved in compliance with the requirements of 8 Del. C. § 251, and seeks a declaration that the Merger would be invalid if consummated. The complaint also asserts a claim against Microsoft and Merger Sub for aiding and abetting the purported breaches of fiduciary duty and conspiring with the director defendants in those breaches. On January 25, 2023, an amended complaint was filed in the Sjunde AP-Fonden action. On March 24, 2023, Activision Blizzard filed a motion to stay the action, which will be heard on May 16, 2023. On May 1, 2023, Plaintiff filed a motion for limited expedited proceedings and a motion for a preliminary injunction to enjoin defendants from amending, extending or waiving the termination date until the purported 8 Del. C. § 251 issues are addressed. The motion for limited expedited proceedings will be heard on May 16, 2023.

On December 8, 2022, the United States Federal Trade Commission (“FTC”) issued an administrative complaint against the Company and Microsoft alleging that the Company and Microsoft executed the Merger Agreement in violation of Section 5 of the FTC Act, as amended, 15 U.S.C. § 45, which, if consummated, would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18 and Section 5 of the FTC Act, as amended, 15 U.S.C. § 45. The Company filed an answer to the FTC’s administrative complaint on December 22, 2022, and thereafter filed an amended answer on January 4, 2023. The administrative trial is currently scheduled to take place before an FTC administrative law judge starting August 2, 2023.

On April 26, 2023, the United Kingdom Competition and Markets Authority ("CMA") announced a decision to block the merger, stating that competition concerns arose in relation to cloud gaming and that Microsoft’s remedies addressing any concerns in cloud gaming were not sufficient. Microsoft has announced its decision to appeal the CMA’s ruling, and Activision Blizzard intends to fully support Microsoft’s efforts on this appeal.

26

We are unable to predict the impact of the above pending matters on our business, financial condition, results of operations, or liquidity at this time.

The Company has received voluntary requests for information from the SEC and a grand jury subpoena from the United States Department of Justice related to their respective investigations into trading by third parties—including persons known to the Company’s CEO—in securities prior to the announcement of the proposed transaction with Microsoft. The Company has fully cooperated with these investigations.

Commitments and Obligations

Subsequent to March 31, 2023, we entered into certain agreements under which we have future minimum commitments of approximately $1.4 billion. The commitments relate primarily to advertising and hosting services which comprise approximately 60% and 40%, respectively, of the total future minimum commitments. Payments of these commitments will be made over the next three years.

27

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 to Activision Blizzard, Inc. and its subsidiaries.

Merger Agreement

On January 18, 2022, we entered into an Agreement and Plan of Merger Agreement (“the Merger Agreement”) with Microsoft Corporation (“Microsoft”) and Anchorage 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 terms of the Merger Agreement, our acquisition will be accomplished through the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as 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.

If the Merger Agreement is terminated under certain specified circumstances, we or Microsoft will be required to pay a termination fee. We will be required to pay Microsoft a termination fee of approximately $2.27 billion under specified circumstances, including termination of the Merger Agreement due to our material breach of representations, warranties, covenants or agreements in the Merger Agreement. Microsoft will be required to pay us a reverse termination fee under specified circumstances, including termination of the Merger Agreement due to a permanent injunction arising from Antitrust Laws (as defined in the Merger Agreement) when we are not then in material breach of any provision of the Merger Agreement and if certain other conditions are met, in an amount equal to $3.0 billion if the termination notice is provided at any time after April 18, 2023.

For additional information related to the Merger Agreement, please refer to Part I, Item 1 “Business” of our Annual Report on Form 10-K for the year ended December 31, 2022, and other relevant materials in connection with the proposed transaction with Microsoft that we will file with the SEC and that will contain important information about the Company and the Merger.

On December 8, 2022, the United States Federal Trade Commission (the “FTC”) issued an administrative complaint against the Company and Microsoft alleging that the Company and Microsoft executed the Merger Agreement in violation of Section 5 of the FTC Act, as amended, 15 U.S.C. § 45, which, if consummated, would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18 and Section 5 of the FTC Act, as amended, 15 U.S.C. § 45. For more information regarding the FTC complaint regarding the pending Merger, see Note 13 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

On April 26, 2023, the United Kingdom Competition and Markets Authority ("CMA") announced a decision to block the Merger, stating that competition concerns arose in relation to cloud gaming and that Microsoft’s remedies addressing any concerns in cloud gaming were not sufficient. Microsoft has announced its decision to appeal the CMA’s ruling, and Activision Blizzard intends to fully support Microsoft’s efforts on this appeal. The parties continue to fully engage with other regulators reviewing the transaction to obtain required regulatory approvals.

28

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 Part I, Item 1A “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2022 and Note 13 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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 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 offerings include titles and content for Call of Duty®, a first-person action franchise. Activision also includes the activities of the Call of Duty League™, a global professional esports league.

(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 offerings include titles and content for: the Warcraft® franchise, 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® in the action role-playing genre; and Overwatch® in the team-based first-person action genre. Blizzard also includes the activities of the Overwatch League™, a global professional esports league.

(iii) King Digital Entertainment

King Digital Entertainment (“King”) delivers content through free-to-play offerings and primarily generates revenue from in-game sales and in-game advertising on mobile platforms. King’s key product offerings include titles and content for Candy Crush™, a “match three” franchise.

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.

29

Business Results and Highlights

Financial Results

For the three months ended March 31, 2023:

•consolidated net revenues increased 35% to $2.4 billion and consolidated operating income increased 67% to $800 million, as compared to consolidated net revenues of $1.8 billion and consolidated operating income of $479 million in 2022;

•diluted earnings per common share increased 86% to $0.93, as compared to $0.50 in 2022; and

•cash flows from operating activities were approximately $577 million, a decrease of 10%, as compared to $642 million in 2022.

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 March 31, 2023, include a net effect of $528 million and $471 million, respectively, from the recognition of deferred net revenues and related cost of revenues.

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 March 31,
	2023		2022
Point-in-time (1)	9	%	9	%
Over-time and other (2)	91	%	91	%

(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.

30

Summary of Title Release Dates

Throughout the year we regularly release new content through seasonal and live services updates within our franchises, including Call of Duty, Warcraft, and Candy Crush. Below is a summary of release dates for certain of our titles, including those discussed throughout our analysis for our operating metrics, consolidated results, and operating segment results.

Title	Release Date
Call of Duty: Modern Warfare® II	October 2022, and when referred to herein, is inclusive of Call of Duty: Warzone 2.0 from its release on November 16, 2022
Call of Duty: Vanguard	November 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 on December 8, 2021 through November 16, 2022
Call of Duty: Black Ops Cold War	November 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 on December 16, 2020 through December 8, 2021
Call of Duty: Mobile	October 2019
World of Warcraft: Dragonflight™	November 2022
Overwatch 2	October 2022
World of Warcraft: Wrath of the Lich King® Classic	September 2022
Diablo Immortal	June 2022

31

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 March 31,
	2023		2022		Increase (Decrease)
Net bookings	$	1,855	$	1,481	$	374
In-game net bookings	$	1,289	$	1,011	$	278

Net bookings

The increase in net bookings for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to:

•a $169 million increase in Blizzard net bookings, driven by higher net bookings from (1) Diablo Immortal and (2) Overwatch 2;

•a $127 million increase in Activision net bookings, driven by higher net bookings from Call of Duty: Modern Warfare II as compared to Call of Duty: Vanguard, partially offset by lower net bookings from Call of Duty: Vanguard as compared to Call of Duty: Black Ops Cold War; and

•a $57 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 increase in in-game net bookings for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to:

•a $150 million increase in Blizzard in-game net bookings, driven by in-game net bookings from (1) Diablo Immortal and (2) Overwatch 2;

•a $66 million increase in King in-game net bookings, driven by the Candy Crush franchise; and

•a $63 million increase in Activision in-game net bookings, driven by higher in-game net bookings from Call of Duty: Modern Warfare II as compared to Call of Duty: Vanguard.

32

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):

	March 31, 2023	December 31, 2022	September 30, 2022	June 30, 2022	March 31, 2022
Activision	98	111	97	94	100
Blizzard	27	45	31	27	22
King	243	233	240	240	250
Total	368	389	368	361	372

Average MAUs decreased by 21 million or 5% for the three months ended March 31, 2023, as compared to the three months ended December 31, 2022. The decrease was primarily due to lower average MAUs for (1) Blizzard, driven by lower average MAUs for Overwatch 2, and (2) Activision, driven by lower average MAUs for the Call of Duty franchise. These decreases were partially offset by an increase in average MAUs for King, driven by the Candy Crush franchise.

Average MAUs for the three months ended March 31, 2023, were comparable to the three months ended March 31, 2022, as higher average MAUs for Blizzard, driven by the launch of Overwatch 2, was largely offset by lower average MAUs for King, driven by decreases in non-Candy Crush franchise titles.

33

Management’s Overview of Business Trends

Mobile Gaming and Free-to-Play Games

Wide adoption of smartphones globally and the free-to-play business model, which allows players to try a new game with no upfront cost, on mobile platforms have 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 has grown at a significant rate over the last five years. All of our reportable segments now have successful live mobile titles in the market, and we continue to develop new mobile titles that present the opportunity for us to expand the reach of, and drive additional player investment in, our products. The June 2022 launch of Diablo Immortal is our most recent example of this continued expansion on the mobile platform and we expect 2023 to include the release of Call of Duty: Warzone Mobile.

In addition, the free-to-play business model has begun to receive broader acceptance on PC and console platforms. This has provided opportunities for us to increase the reach of our intellectual properties and games through free-to-play offerings, which, in turn, provides opportunities to further drive player investment, as was seen with our Call of Duty: Warzone release in March 2020. We have continued to invest in these opportunities, with 2022 including the free-to-play releases of Overwatch 2 in October 2022 and Call of Duty: Warzone 2.0 in November 2022.

Importance of our Franchises

A significant portion of our revenues historically has been derived from video games based on our franchises, and these video games have also been responsible for a disproportionately higher percentage of our profits. For example, in 2022, our three franchises—Call of Duty, Warcraft, and Candy Crush—collectively accounted for 79% of our consolidated net revenues—and a significantly higher percentage of our operating income.

In addition to investing in new content for our games, with the aim of releasing such content more frequently, we are continually exploring additional ways to expand our franchises and games. In recent years we have expanded the Call of Duty franchise with Call of Duty: Warzone and Call of Duty Mobile, as well as bringing Diablo content to mobile for the first time with Diablo Immortal. We have similar plans to bring the Warcraft franchise to mobile with Warcraft Arclight Rumble™, which is currently in development. Our collaborative arrangements for our professional esports leagues (i.e., the Overwatch League and the Call of Duty League) continue to face headwinds which are negatively impacting the operations and, potentially, the longevity of the leagues under the current business model. We continue to work to address these challenges, which could result in significant costs, and such efforts may prove unsuccessful.

Overall, we expect that our most popular franchises will continue to produce a disproportionately high percentage of our revenues and profits in the near future. Accordingly, our ability to maintain these franchises and to successfully compete against the wide range of competitive titles available in the industry could significantly impact our performance.

Recurring Revenue Business Models

Increased consumer online connectivity has allowed us to offer players new investment opportunities and to shift our business further towards a more consistently recurring and year-round model through our live services. While our business does continue to experience some periods of “seasonality,” driven primarily by the timing of our new premium full game releases, our in-game content and free-to-play offerings allow our players to access and invest in new content throughout the year. This incremental content not only provides additional high-margin revenues, but it can also increase player engagement.

Increased Competition for Talent

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, but we have also more recently seen increasingly positive trends in these areas, which have continued into the current year.

34

Consolidated Statements of Operations Data

The following table sets forth condensed consolidated statements of operations data for the periods indicated (amounts in millions) and as a percentage of total net revenues, except for cost of revenues, which are presented as a percentage of associated revenues:

	For the Three Months Ended March 31,
	2023				2022
Net revenues
Product sales	$	695	29	%	$	386	22	%
In-game, subscription, and other revenues	1,688		71		1,382		78
Total net revenues	2,383		100		1,768		100
Costs and expenses
Cost of revenues—product sales:
Product costs	136		20		91		24
Software royalties and amortization	101		15		81		21
Cost of revenues—in-game, subscription, and other:
Game operations and distribution costs	363		22		288		21
Software royalties and amortization	65		4		19		1
Product development	402		17		346		20
Sales and marketing	278		12		252		14
General and administrative	238		10		212		12
Total costs and expenses	1,583		66		1,289		73
Operating income	800		34		479		27
Interest expense from debt	27		1		27		2
Other (income) expense, net	(122)		(5)		(13)		(1)
Income before income tax expense	895		38		465		26
Income tax expense	155		7		70		4
Net income	$	740	31	%	$	395	22	%

35

Consolidated Net Revenues

The key drivers of changes in our consolidated results, operating segment results, and sources of liquidity are presented in the order of significance.

The following table summarizes our consolidated net revenues and in-game net revenues (amounts in millions):

	For the Three Months Ended March 31,
	2023		2022		Increase (Decrease)		% Change
Consolidated net revenues	$	2,383	$	1,768	$	615	35	%
In-game net revenues (1)	$	1,430	$	1,134	$	296	26	%

(1)    In-game net revenues primarily includes the net amount of revenues recognized for microtransactions and downloadable content during the period.

Consolidated net revenues

The increase in consolidated net revenues for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily driven by an increase in revenues of $734 million due to higher revenues from:

•Call of Duty: Modern Warfare II as compared to Call of Duty: Vanguard;

•Diablo Immortal;

•World of Warcraft;

•Overwatch 2; and

•the Candy Crush franchise.

This increase was partially offset by a decrease in revenues of $98 million due to lower revenues from Call of Duty: Vanguard as compared to Call of Duty: Black Ops Cold War.

In-game net revenues

The increase in in-game net revenues for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily driven by an increase in in-game net revenues of $369 million due to higher in-game net revenues from:

•Diablo Immortal;

•Call of Duty: Modern Warfare II as compared to Call of Duty: Vanguard;

•Overwatch 2; and

•the Candy Crush franchise.

This increase was partially offset by a decrease in in-game net revenues of $80 million due to lower in-game net revenues from Call of Duty: Vanguard as compared to Call of Duty: Black Ops Cold War.

Foreign Exchange Impact

Changes in foreign exchange rates had a negative impact of approximately $66 million on our consolidated net revenues for the three months ended March 31, 2023, as compared to the same period in the previous year. The changes are primarily due to changes in the value of the U.S. dollar relative to the euro and the British pound.

36

Operating Segment Results

We have three reportable segments—Activision, Blizzard, and King. Our operating segments are consistent with the manner in which our operations are reviewed and managed by our Chief Executive Officer, who is our chief operating decision maker (“CODM”). The CODM reviews segment performance exclusive of: the impact of the change in deferred revenues and related cost of revenues with respect to certain of our online-enabled games; share-based compensation expense (including liability awards accounted for under ASC 718); amortization of intangible assets as a result of purchase price accounting; fees and other expenses (including legal fees, expenses, and accruals) related to acquisitions, associated integration activities, and financings; certain restructuring and related costs; certain partnership wind down and related costs; and certain other non-cash charges. The CODM does not review any information regarding total assets on an operating segment basis, and accordingly, no disclosure is made with respect thereto.

Our operating segments are also consistent with our internal organizational structure, the way we assess operating performance and allocate resources, and the availability of separate financial information. We do not aggregate operating segments.

Information on the reportable segment net revenues and segment operating income is presented below (amounts in millions):

	For the Three Months Ended March 31, 2023								Increase / (decrease)
	Activision		Blizzard		King		Total		Activision		Blizzard		King		Total
Segment Revenues
Net revenues from external customers	$	580	$	435	$	739	$	1,754	$	127	$	170	$	57	$	354
Intersegment net revenues (1)	—		8		—		8		—		(1)		—		(1)
Segment net revenues	$	580	$	443	$	739	$	1,762	$	127	$	169	$	57	$	353
Segment operating income	$	179	$	56	$	241	$	476	$	120	$	3	$	(2)	$	121
	For the Three Months Ended March 31, 2022
	Activision		Blizzard		King		Total
Segment Revenues
Net revenues from external customers	$	453	$	265	$	682	$	1,400
Intersegment net revenues (1)	—		9		—		9
Segment net revenues	$	453	$	274	$	682	$	1,409
Segment operating income	$	59	$	53	$	243	$	355

(1)Intersegment revenues reflect licensing and service fees charged between segments.

37

Reconciliations of total segment net revenues and total segment operating income to consolidated net revenues and consolidated income before income tax expense are presented in the table below (amounts in millions):

	For the Three Months Ended March 31,
	2023		2022
Reconciliation to consolidated net revenues:
Segment net revenues	$	1,762	$	1,409
Revenues from non-reportable segments (1)	101		81
Net effect from recognition (deferral) of deferred net revenues (2)	528		287
Elimination of intersegment revenues (3)	(8)		(9)
Consolidated net revenues	$	2,383	$	1,768
Reconciliation to consolidated income before income tax expense:
Segment operating income	$	476	$	355
Operating income (loss) from non-reportable segments (1)	6		19
Net effect from recognition (deferral) of deferred net revenues and related cost of revenues (2)	471		235
Share-based compensation expense (4)	(124)		(98)
Amortization of intangible assets (5)	(4)		(2)
Restructuring and related costs (6)	—		2
Partnership wind down and related costs (7)	(4)		—
Merger and acquisition-related fees and other expenses (8)	(21)		(32)
Consolidated operating income	800		479
Interest expense from debt	27		27
Other (income) expense, net	(122)		(13)
Consolidated income before income tax expense	$	895	$	465

(1)Includes other income and expenses outside of our reportable segments, including our Distribution business and unallocated corporate income and expenses.

(2)Reflects the net effect from recognition (deferral) of deferred net revenues, along with related cost of revenues, on certain of our online-enabled products.

(3)Intersegment revenues reflect licensing and service fees charged between segments.

(4)Reflects expenses related to share-based compensation.

(5)Reflects amortization of intangible assets from purchase price accounting.

(6)Reflects restructuring initiatives.

(7)Reflects expenses related to the wind down of our partnership with NetEase, Inc. in Mainland China in regards to licenses covering the publication of several Blizzard titles which expired in January 2023.

(8)Reflects fees and other expenses related to our proposed transaction with Microsoft, which primarily consist of legal and advisory fees.

38

Segment Results

Activision

The increase in Activision’s segment net revenues and operating income for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to higher revenues from Call of Duty: Modern Warfare II as compared to Call of Duty: Vanguard, partially offset by a decrease in revenues from Call of Duty: Vanguard as compared to Call of Duty: Black Ops Cold War. Additionally, segment operating income also benefited from lower sales and marketing costs for Call of Duty: Mobile. Higher product development costs due to expanded development teams was offset by higher capitalization of development costs.

The increase in segment operating income was partially offset by higher cost of revenues from the Call of Duty franchise.

Blizzard

The increase in Blizzard’s segment net revenues for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to higher revenues from:

•Diablo Immortal;

•Overwatch 2; and

•World of Warcraft.

Despite the increase in segment net revenues, Blizzard’s segment operating income for three months ended March 31, 2023 was comparable to the three months ended March 31, 2022, primarily due to:

•higher cost of revenues, primarily from Overwatch 2 and Diablo Immortal;

•higher product development costs due to expanded development teams; and

•higher sales and marketing costs, primarily for the upcoming release of Diablo IV.

King

The increase in King’s segment net revenues for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to higher revenues from in-game player purchases in the Candy Crush franchise.

Despite the increase in segment net revenues, King’s segment operating income for the three months ended March 31, 2023, was comparable to the three months ended March 31, 2022, primarily due to:

•higher sales and marketing costs, primarily for the Candy Crush franchise; and

•higher service provider fees, primarily digital storefront fees, driven by the higher revenues from in-game player purchases.

Foreign Exchange Impact

Changes in foreign exchange rates had a negative impact of $42 million on Activision Blizzard’s segment net revenues for the three months ended March 31, 2023 as compared to the same period in the previous year. The changes are primarily due to changes in the value of the U.S. dollar relative to the euro and the British pound.

39

Consolidated Results

Net Revenues by Distribution Channel

The following table details our consolidated net revenues by distribution channel (amounts in millions):

	For the Three Months Ended March 31,
	2023		2022		Increase/ (decrease)		% Change
Net revenues by distribution channel:
Digital online channels (1)	$	2,157	$	1,589	$	568	36	%
Retail channels	104		85		19		22
Other (2)	122		94		28		30
Total consolidated net revenues	$	2,383	$	1,768	$	615	35

(1)Net revenues from “Digital online channels” include revenues from digitally-distributed downloadable content, microtransactions, subscriptions, and products, as well as licensing royalties.

(2)Net revenues from “Other” primarily include revenues from our Distribution business, the Overwatch League, and the Call of Duty League.

Digital Online Channel Net Revenues

The increase in net revenues from digital online channels for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to higher revenues from:

•Call of Duty: Modern Warfare II as compared to Call of Duty: Vanguard;

•Diablo Immortal;

•World of Warcraft;

•Overwatch 2; and

•the Candy Crush franchise.

This increase was partially offset by lower revenues from Call of Duty: Vanguard as compared to Call of Duty: Black Ops Cold War.

Retail Channel Net Revenues

The increase in net revenues from retail channels for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to higher revenues from Call of Duty: Modern Warfare II as compared to Call of Duty: Vanguard.

40

Net Revenues by Platform

The following tables detail our net revenues by platform (amounts in millions):

	For the Three Months Ended March 31,
	2023		2022		Increase/ (decrease)		% Change
Net revenues by platform:
Console	$	639	$	484	$	155	32	%
PC	666		383		283		74
Mobile and ancillary (1)	956		807		149		18
Other (2)	122		94		28		30
Total consolidated net revenues	$	2,383	$	1,768	$	615	35

(1)Net revenues from “Mobile and ancillary” primarily include revenues from mobile devices.

(2)Net revenues from “Other” primarily include revenues from our Distribution business, the Overwatch League, and the Call of Duty League.

Console

The increase in net revenues from the console platform for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to higher revenues from:

•Call of Duty: Modern Warfare II as compared to Call of Duty: Vanguard; and

•Overwatch 2.

The increase was partially offset by a decrease in net revenues from Call of Duty: Vanguard as compared to Call of Duty: Black Ops Cold War.

PC

The increase in net revenues from the PC platform for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to the same drivers and offsets noted above for the console platform, along with higher revenues from World of Warcraft and Diablo Immortal.

Mobile and Ancillary

The increase in net revenues from mobile and ancillary for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to higher revenues from:

•Diablo Immortal; and

•the Candy Crush franchise.

41

Costs and Expenses

Cost of Revenues

The following tables detail the components of cost of revenues in dollars (amounts in millions) and as a percentage of associated net revenues:

	Three Months Ended March 31, 2023		% of associated net revenues		Three Months Ended March 31, 2022		% of associated net revenues		Increase (Decrease)
Cost of revenues—product sales:
Product costs	$	136	20	%	$	91	24	%	$	45
Software royalties and amortization	101		15		81		21		20
Cost of revenues—in-game, subscription, and other:
Game operations and distribution costs	363		22		288		21		75
Software royalties and amortization	65		4		19		1		46
Total cost of revenues	$	665	28	%	$	479	27	%	$	186

Cost of Revenues—Product Sales:

The increase in product costs for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was driven by:

•a $31 million increase in product costs for our Distribution business due to higher revenues; and

•a $23 million increase in product costs from Activision, driven by higher product costs for Call of Duty: Modern Warfare II as compared to Call of Duty: Vanguard due to higher revenues.

The increase in software royalties and amortization related to product sales for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to a $13 million increase in software amortization and royalties from Activision, driven by higher software amortization and royalties from Call of Duty: Modern Warfare II as compared to Call of Duty: Vanguard.

Cost of Revenues—In-game, Subscription, and Other:

The increase in game operations and distribution costs for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to a $70 million increase in service provider fees, primarily digital storefront fees (e.g., fees retained by Apple and Google for our sales on their platforms), as a result of higher revenues.

The increase in software royalties and amortization related to in-game, subscription, and other for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, was primarily due to a $39 million increase in software amortization and royalties from Blizzard, driven by Overwatch 2 and Diablo Immortal.

Product Development (amounts in millions)

	March 31, 2023		% of consolidated net revenues		March 31, 2022		% of consolidated net revenues		Increase (Decrease)
Product development	$	402	17	%	$	346	20	%	$	56

The increase in product development costs for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was driven by a $79 million increase in development spending primarily due to expanded development teams, partially offset by higher capitalization of development costs of $23 million.

42

Sales and Marketing (amounts in millions)

	March 31, 2023		% of consolidated net revenues		March 31, 2022		% of consolidated net revenues		Increase (Decrease)
Sales and marketing	$	278	12	%	$	252	14	%	$	26

The increase in sales and marketing expenses for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to higher marketing spending for the Candy Crush franchise and our upcoming release of Diablo IV, partially offset by lower marketing spending for Call of Duty: Mobile.

General and Administrative (amounts in millions)

	March 31, 2023		% of consolidated net revenues		March 31, 2022		% of consolidated net revenues		Increase (Decrease)
General and administrative	$	238	10	%	$	212	12	%	$	26

The increase in general and administrative expenses for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to an increase in personnel costs.

Interest Expense from Debt (amounts in millions)

	March 31, 2023		% of consolidated net revenues		March 31, 2022		% of consolidated net revenues		Increase (Decrease)
Interest expense from debt	$	27	1	%	$	27	2	%	$	—

Interest expense from debt for the three months ended March 31, 2023 was comparable to March 31, 2022.

Other (Income) Expense, Net (amounts in millions)

	March 31, 2023		% of consolidated net revenues		March 31, 2022		% of consolidated net revenues		Decrease (Increase)
Other (income) expense, net	$	(122)	(5)	%	$	(13)	(1)	%	$	(109)

The increase in other (income) expense, net, for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to a $125 million increase in interest income due to higher market interest rate yields compared to the prior year.

Income Tax Expense (amounts in millions)

	March 31, 2023		% of Pretax income		March 31, 2022		% of Pretax income		Increase (Decrease)
Income tax expense	$	155	17	%	$	70	15	%	$	85

The income tax expense of $155 million for the three months ended March 31, 2023 reflects an effective tax rate of 17%, which is higher than the effective tax rate of 15% for the three months ended March 31, 2022. Our tax rate in the current quarter is higher than in the prior year due to changes in the mix of our pre-tax income between countries and an increase in the U.K. corporate tax rate that became effective in 2023.

The effective tax rate of 17% for the three months ended March 31, 2023, is lower than the U.S. statutory rate of 21%, primarily due to foreign earnings taxed at lower rates and research and development credits.

43

The overall effective income tax rate in future periods will depend on a variety of factors, such as changes in pre-tax income or loss by jurisdiction, applicable accounting rules, applicable tax laws and regulations, and rulings and interpretations thereof, developments in tax audits and other matters, and variations in the estimated and actual level of annual pre-tax income or loss.

Other information about our income taxes is provided in Note 11 of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Liquidity and Capital Resources

We believe our ability to generate cash flows from operating activities is one of our fundamental financial strengths. In the near term, we expect our business and financial condition to remain strong and to continue to generate significant operating cash flows. We believe these operating cash flows, in combination with our existing balance of cash and cash equivalents and short-term investments of $12.6 billion, will be sufficient to finance our operational and financing requirements for the next 12 months and beyond. Our primary sources of liquidity include our cash and cash equivalents, short-term investments, and cash flows provided by operating activities. Our material cash requirements include operating expenses, potential dividend payments and share repurchases, scheduled debt maturities (the next of which is in 2026), capital expenditures and other commitments, as discussed below.

As of March 31, 2023, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $3.0 billion, as compared to $4.6 billion as of December 31, 2022. These cash balances are generally available for use in the U.S., subject in some cases to certain restrictions.

Our cash provided from operating activities is somewhat impacted by seasonality. Working capital needs are impacted by sales, which are generally highest in the fourth quarter due to title release timing and holiday-related sales patterns. We consider, on a continuing basis, various transactions to increase shareholder value and enhance our business results, including acquisitions, divestitures, joint ventures, dividends, share repurchases, and other structural changes, with certain of the foregoing actions, if we were to move forward with them, requiring Microsoft's approval under the Merger Agreement (which may not be unreasonably withheld, conditioned, or delayed), subject to certain exceptions. These transactions may result in future cash proceeds or payments.

Sources of Liquidity (amounts in millions)

	March 31, 2023			December 31, 2022			Increase (Decrease)
Cash and cash equivalents	$	9,236		$	7,060		$	2,176
Short-term investments	3,350			5,005			(1,655)
	$	12,586		$	12,065		$	521
Percentage of total assets	46		%	44		%

	For the Three Months Ended March 31,
	2023		2022		Increase (Decrease)
Net cash provided by operating activities	$	577	$	642	$	(65)
Net cash provided by investing activities	1,663		7		1,656
Net cash used in financing activities	(71)		(97)		26
Effect of foreign exchange rate changes	8		(10)		18
Net increase in cash and cash equivalents and restricted cash	$	2,177	$	542	$	1,635

Net Cash Provided by Operating Activities

The primary driver of net cash flows associated with our operating activities is the income generated from the sale of our products and services. This is partially offset by: working capital requirements used in the development, sale, and support of our products; payments to our workforce; payments for tax liabilities; and payments for interest on our debt.

44

Net cash provided by operating activities for the three months ended March 31, 2023, was $577 million, as compared to $642 million for the three months ended March 31, 2022. The decrease was primarily due to cash flows generated as a result of higher net income were offset by unfavorable working capital changes in accrued expenses and other liabilities, including a higher portion of our 2022 annual incentive compensation plans settled in cash instead of equity, and timing of settlements for accounts payable.

Net Cash Provided by Investing Activities

The primary drivers of net cash flows associated with investing activities typically include purchases and sales of investments, capital expenditures, and cash used for acquisitions.

Net cash provided by investing activities for the three months ended March 31, 2023, was $1.7 billion, as compared to $7 million for the three months ended March 31, 2022. The increase was primarily due to proceeds received from the maturity of $1.7 billion of held-to-maturity investments during the three months ended March 31, 2023 with no similar activity in the prior year.

Net Cash Used in Financing Activities

The primary drivers of net cash flows associated with financing activities typically include the proceeds from, and repayments of, our long-term debt and transactions involving our common stock, including the issuance of shares of common stock to employees upon the exercise of stock options, as well as the payment of dividends.

Net cash used in financing activities for the three months ended March 31, 2023, was $71 million, as compared to $97 million for the three months ended March 31, 2022. The decrease was primarily due to $29 million lower tax payments relating to net share settlements on restricted stock units.

Effect of Foreign Exchange Rate Changes

Changes in foreign exchange rates had a positive impact of $8 million on our cash and cash equivalents for the three months ended March 31, 2023 as compared to a negative impact of $10 million for the three months ended March 31, 2022. The change was primarily due to changes in the value of the U.S. dollar relative to the euro and the British pound.

Debt

At both March 31, 2023 and December 31, 2022, our total gross unsecured senior notes outstanding was $3.7 billion, bearing interest at a weighted average rate of 2.87%.

A summary of our outstanding debt is as follows (amounts in millions):

	At March 31, 2023		At December 31, 2022
2026 Notes	$	850	$	850
2027 Notes	400		400
2030 Notes	500		500
2047 Notes	400		400
2050 Notes	1,500		1,500
Total gross long-term debt	$	3,650	$	3,650
Unamortized discount and deferred financing costs	(39)		(39)
Total net carrying amount	$	3,611	$	3,611

Refer to Note 6 of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further disclosures regarding our debt obligations.

45

Capital Expenditures

We made capital expenditures of $37 million during the three months ended March 31, 2023, as compared to $15 million during the three months ended March 31, 2022. In 2023, we anticipate total capital expenditures of approximately $100 million, primarily for computer hardware, leasehold improvements, and software purchases.

Commitments

Refer to Note 13 of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further disclosures regarding updates to our commitments.

Off-Balance Sheet Arrangements

At each of March 31, 2023 and December 31, 2022, Activision Blizzard had no significant relationships with unconsolidated entities or financial parties, often referred to as “structured finance” or “special purpose” entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that they are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments, and assumptions, and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results, include the following:

•Revenue Recognition;

•Income Taxes; and

•Software Development Costs.

During the three months ended March 31, 2023, there were no significant changes to the above critical accounting policies and estimates. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, for a more complete discussion of our critical accounting policies and estimates.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily include fluctuations in foreign currency exchange rates and interest rates.

Foreign Currency Exchange Rate Risk

We transact business in many different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates. Revenues and related expenses generated from our international operations are generally denominated in their respective local currencies. Primary currencies include euros, British pounds, Australian dollars, South Korean won, Chinese yuan, and Swedish krona. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions will result in reduced revenues, operating expenses, net income, and cash flows from our international operations. Similarly, our revenues, operating expenses, net income, and cash flows will increase for our international operations if the U.S. dollar weakens against foreign currencies. Since we have significant international sales but incur the majority of our costs in the U.S., the impact of foreign currency fluctuations, particularly the strengthening of the U.S. dollar, generally cause a disproportional impact on our business. We monitor currency volatility throughout the year.

46

To mitigate our foreign currency risk resulting from our foreign currency-denominated monetary assets, liabilities, and earnings and our foreign currency risk related to functional currency-equivalent cash flows, we periodically enter into currency derivative contracts, principally forward contracts. These forward contracts generally have a maturity of less than one year. The counterparties for our currency derivative contracts are large and reputable commercial or investment banks.

The fair values of our foreign currency contracts are estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period.

We do not hold or purchase any foreign currency forward contracts for trading or speculative purposes.

Foreign Currency Forward Contracts Designated as Hedges (“Cash Flow Hedges”)

Refer to Note 4 of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for disclosures regarding our foreign currency forward contracts.

In the absence of hedging activities for the three months ended March 31, 2023, a hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in a theoretical decline of our net income of approximately $41 million. This sensitivity analysis assumes a parallel adverse shift of all foreign currency exchange rates against the U.S. dollar; however, all foreign currency exchange rates do not always move in this manner, and actual results may differ materially.

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio, as our outstanding debt is all at fixed rates. Our investment portfolio consists primarily of money market funds and government securities with high credit quality and short average maturities. Because short-term securities mature relatively quickly and must be reinvested at the then-current market rates, interest income on a portfolio consisting of cash, cash equivalents, or short-term securities is more subject to market fluctuations than a portfolio of longer-term securities. Conversely, the fair value of such a portfolio is less sensitive to market fluctuations than a portfolio of longer-term securities. At March 31, 2023, our cash and cash equivalents were comprised primarily of money market funds and we had approximately $3.3 billion invested in securities classified as held-to-maturity investments which have fixed interest yields and will mature over the next six months.

As of March 31, 2023, based on the composition of our investment portfolio, material movements (higher or lower) of short-term interest rates by the U.S. Federal Reserve can have a material impact on our future interest income.

Item 4.    Controls and Procedures

Definition and Limitations of Disclosure Controls and Procedures

Our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act is: (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. A control system, no matter how well designed and operated, can provide only reasonable assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports. Inherent limitations to any system of disclosure controls and procedures include, but are not limited to, the possibility of human error and the circumvention or overriding of such controls by one or more persons. In addition, we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, and our system of controls may therefore not achieve its desired objectives under all possible future events.

47

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures at March 31, 2023, the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at March 31, 2023, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (1) recorded, processed, summarized, and reported on a timely basis and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated any changes in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2023. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at March 31, 2023, there have not been any changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

48

PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

Refer to Note 13 of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further disclosures regarding our legal proceedings.

Item 1A. Risk Factors

Various risks associated with our business are described in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Risk Factors” in the 2022 Form 10-K, any of which could materially affect our business, reputation, financial condition, results of operations, income, revenue, profitability, cash flows, liquidity, or stock price.

49

Item 6.    Exhibits

EXHIBIT INDEX

Exhibit Number	Exhibit
3.1	Third Amended and Restated Certificate of Incorporation of Activision Blizzard, Inc., dated June 5, 2014 (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed June 6, 2014).
3.2	Fifth Amended and Restated Bylaws of Activision Blizzard, Inc., adopted as of January 17, 2022 (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed January 19, 2022).
10.1*	Extension Amendment to Employment Agreement entered into as of April 25, 2023, between Activision Blizzard, Inc. and Robert A. Kotick.
31.1	Certification of Robert A. Kotick pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Armin Zerza pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Robert A. Kotick pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Armin Zerza pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	Inline XBRL Taxonomy Extension Schema Document.
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB	Inline XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Management contract or compensatory plan, contract or arrangement in which a director or executive officer of the Company participates.

50

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:  May 4, 2023

ACTIVISION BLIZZARD, INC.

 

/s/ ARMIN ZERZA	/s/ JESSE YANG
Armin Zerza	Jesse Yang
Chief Financial Officer and Principal Financial Officer	Deputy Chief Financial Officer and Comptroller, and Principal Accounting Officer
of Activision Blizzard, Inc.	of Activision Blizzard, Inc.

51