ACTIVISION BLIZZARD, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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 (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 Merger
Agreement, following consummation of the merger of Merger Sub with and into the
Company (the "Merger"), the Company will be a wholly-owned subsidiary of
Microsoft. As a result of the Merger, we will cease to be a publicly traded
company. We have agreed to various customary covenants and agreements,
including, among others, agreements to conduct our business in the ordinary
course during the period between the execution of the Merger Agreement and the
effective time of the Merger. We do not believe these restrictions will prevent
us from meeting our debt service obligations, ongoing costs of operations,
working capital needs or capital expenditure requirements. The consummation of
the Merger remains subject to customary closing conditions, including
satisfaction of certain regulatory approvals. On April 28, 2022, the Company's
stockholders adopted the Merger Agreement at a special meeting of stockholders.
The Merger is currently expected to close in Microsoft's fiscal year ending June
30, 2023.

For additional information related to the Merger Agreement, please refer to the
Definitive Proxy Statement on Schedule 14A filed with the U.S. Securities and
Exchange Commission (the "SEC") on March 21, 2022, as supplemented by the
Current Report on Form 8-K filed with the SEC on April 15, 2022, as well as
  P    art I Item 1 "Business" of our Annual Report on     Form 10-K for the
year ended December 31, 202    1  , and other relevant materials in connection
with the proposed transaction with Microsoft that we will file with the SEC and
that will contain important information about the Company and the Merger.

Employment Matters


We are subject to legal proceedings regarding our workplace and are experiencing
adverse effects related to these proceedings and to concerns raised about our
workplace. For information about these matters, see   Note 16   of the notes to
the condensed consolidated financial statements included in Item 1 of this
Quarterly Report on Form 10-Q and   Part I, Item 1A "Risk Factors" of our

Annual Report on Form 10-K for the year ended December 31, 2021 .


In May 2022, a group of quality assurance workers at our Raven Software studio
in Wisconsin voted in favor of forming a union with the Communication Workers of
America. In July 2022, a group of quality assurance workers for Blizzard in New
York announced the formation of a union and have filed for union representation
with the U.S. National Labor Relations Board.

Our Segments


Based upon our organizational structure, we conduct our business through three
reportable segments, each of which is a leading global developer and publisher
of interactive entertainment content and services based primarily on our
internally-developed intellectual properties.

(i) Activision Publishing, Inc.


Activision Publishing, Inc. ("Activision") delivers content through both premium
and free-to-play offerings and primarily generates revenue from full-game and
in-game sales, as well as by licensing software to third-party or related-party
companies that distribute Activision products. Activision's key product
franchise is Call of Duty, a first-person action franchise. Activision also
includes the activities of the Call of Duty League, a global professional
esports league with city-based teams.

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(ii) Blizzard Entertainment, Inc.

Blizzard Entertainment, Inc. ("Blizzard") delivers content through both premium
and free-to-play offerings and primarily generates revenue from full-game and
in-game sales, subscriptions, and by licensing software to third-party or
related-party companies that distribute Blizzard products. Blizzard also
maintains a proprietary online gaming platform, Battle.net, which facilitates
digital distribution of Blizzard content and selected Activision content, online
social connectivity, and the creation of user-generated content. Blizzard's key
product franchises include: Warcraft, which includes World of Warcraft, a
subscription-based massive multi-player online role-playing game, and
Hearthstone, an online collectible card game based in the Warcraft universe;
Diablo, an action role-playing franchise; and Overwatch, a team-based
first-person action franchise. Blizzard also includes the activities of the
Overwatch League, a global professional esports league with city-based teams.

(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 franchise is 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.

Business Results and Highlights

Financial Results

For the three months ended June 30, 2022:


•consolidated net revenues decreased 28% to $1.6 billion and consolidated
operating income decreased 65% to $338 million, as compared to consolidated net
revenues of $2.3 billion and consolidated operating income of $959 million in
2021; and

•diluted earnings per common share decreased 68% to $0.36as compared to $1.12
in 2021.

For the six months ended June 30, 2022:


•consolidated net revenues decreased 25% to $3.4 billion and consolidated
operating income decreased 53% to $817 million, as compared to consolidated net
revenues of $4.6 billion and consolidated operating income of $1.8 billion in
2021;

•diluted earnings per common share decreased 55% to $0.86as compared to $1.91
in 2021; and

•cash flows from operating activities were approximately $840 milliona decrease of 32%, as compared to $1.2 billion in 2021.


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 June 30, 2022, include a net effect
of $7 million and $1 million, respectively, from the recognition of deferred net
revenues and related cost of revenues. Net revenues and operating income for the
six months ended June 30, 2022, include a net effect of $293 million and $236
million, respectively, from the recognition of deferred net revenues and related
cost of revenues.

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The percentages of our consolidated net revenues from revenue sources that are
recognized at a "point-in-time" and from sources that are recognized "over-time
and other" were as follows:

                                             For the Three Months Ended June 30,               For the Six Months Ended June 30,
                                                 2022                    2021                     2022                    2021
Point-in-time (1)                                       8  %                    9  %                     9  %                   10  %
Over-time and other (2)                                92  %                   91  %                    91  %                   90  %



(1)Revenues recognized at a "point-in-time" are primarily comprised of the
portion of revenues from software products that are recognized when the customer
takes control of the product (i.e., upon delivery of the software product) and
revenues from our Distribution business.

(2)Revenues recognized “over-time and other revenue” are primarily comprised of revenues associated with the online functionality of our games, in-game purchases, and subscriptions.

Summary of Title Release Dates


Below is a summary of release dates for titles that are discussed throughout our
analysis for our operating metrics, our consolidated results, and operating
segment results.

Title                                    Release Date
Call of Duty: 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
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: Modern Warfare             October 2019, and when referred to herein, is inclusive
                                         of Call of Duty: Warzone from its release in March 2020
                                         through December 16, 2020

Diablo Immortal                          June 2022

World of Warcraft: Burning Crusade June 2021
Classic World of Warcraft: Shadowlands

           November 2020
Crash Bandicoot: On the Run!             March 2021



Operating Metrics

The following operating metrics are key performance indicators that we use to
evaluate our business. The key drivers of changes in our operating metrics are
presented in the order of significance.

Net bookings and in-game net bookings


We monitor net bookings and in-game net bookings as key operating metrics in
evaluating the performance of our business because they enable an analysis of
performance based on the timing of actual transactions with our customers and
provide a more timely indication of trends in our operating results. Net
bookings is the net amount of products and services sold digitally or sold-in
physically in the period and includes license fees, merchandise, and publisher
incentives, among others. Net bookings is equal to net revenues excluding the
impact from deferrals. In-game net bookings primarily includes the net amount of
microtransactions and downloadable content sold during the period and is equal
to in-game net revenues excluding the impact from deferrals.

Net bookings and in-game net bookings were as follows (amounts in millions):

                                        For the Three Months Ended June 30,                                For the Six Months Ended June 30,
                                                                          Increase                                                          Increase
                                   2022                2021              (Decrease)                  2022                2021              (Decrease)
Net bookings                 $       1,637          $  1,921          $        (284)            $      3,119          $  3,987          $        (868)
In-game net bookings         $       1,197          $  1,319          $        (122)            $      2,208          $  2,661          $        (453)


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Q2 2022 vs. Q2 2021

Net bookings

The decrease in net bookings for the three months ended June 30, 2022as compared to the three months ended June 30, 2021was primarily due to:


•a $299 million decrease in Activision net bookings, driven by lower net
bookings from (1) Call of Duty: Vanguard as compared to Call of Duty: Black Ops
Cold War, and (2) Call of Duty: Black Ops Cold War as compared to Call of Duty:
Modern Warfare; and

•a $32 million reduce in Blizzard net bookings, driven by lower net bookings from World of Warcraft, partially offset by higher net bookings from Diablo Immortal, a new free-to-play title released on mobile and PC.


The decrease in net bookings was partially offset by a $49 million increase in
King net bookings, driven by higher net bookings from in-game player purchases
in the Candy Crush franchise.

In-game net bookings

The decrease in in-game net bookings for the three months ended June 30, 2022,
as compared to the three months ended June 30, 2021, was primarily due to a
$206 million decrease in Activision in-game net bookings, driven by lower
in-game net bookings from Call of Duty: Vanguard, as compared to Call of Duty:
Black Ops Cold War.

The decrease in in-game net bookings was partially offset by:

•a $53 million increase in Blizzard in-game net bookings, driven by Diablo Immortal; and

•a $31 million increase in King in-game net bookings, driven by the Candy Crush franchise.


YTD Q2 2022 vs. YTD Q2 2021

The decrease in net bookings for the six months ended June 30, 2022as compared to the six months ended June 30, 2021was primarily due to:


•a $737 million decrease in Activision net bookings, driven by lower net
bookings from (1) Call of Duty: Vanguard as compared to Call of Duty: Black Ops
Cold War, and (2) Call of Duty: Black Ops Cold War as compared to Call of Duty:
Modern Warfare; and

•a $241 million decrease in Blizzard net bookings, driven by lower net bookings from World of Warcraft.


The decrease in net bookings was partially offset by a $122 million increase in
King net bookings, driven by higher net bookings from in-game player purchases
in the Candy Crush franchise.

In-game net bookings

The decrease in-game net bookings for the six months ended June 30, 2022as compared to the six months ended June 30, 2021was primarily due to:


•a $466 million decrease in Activision in-game net bookings, driven by lower
in-game net bookings from Call of Duty: Vanguard, as compared to Call of Duty:
Black Ops Cold War; and

•a $58 million decrease in Blizzard in-game net bookings, driven by lower in-game net bookings from World of Warcraft.

The decrease in in-game net bookings was partially offset by a $72 million
increase in King in-game net bookings, driven by the Candy Crush franchise.

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Monthly Active Users

We monitor monthly active users ("MAUs") as a key measure of the overall size of
our user base. MAUs are the number of individuals who accessed a particular game
in a given month. We calculate average MAUs in a period by adding the total
number of MAUs in each of the months in a given period and dividing that total
by the number of months in the period. An individual who accesses two of our
games would be counted as two users. In addition, due to technical limitations,
for Activision and King, an individual who accesses the same game on two
platforms or devices in the relevant period would be counted as two users. For
Blizzard, an individual who accesses the same game on two platforms or devices
in the relevant period would generally be counted as a single user. In certain
instances, we rely on third parties to publish our games. In these instances,
MAU data is based on information provided to us by those third parties or, if
final data is not available, reasonable estimates of MAUs for these third-party
published games.

The number of MAUs for a given period can be significantly impacted by the
timing of new content releases, since new releases may cause a temporary surge
in MAUs. Accordingly, although we believe that overall trends in the number of
MAUs can be a meaningful performance metric, period-to-period fluctuations may
not be indicative of longer-term trends. The following table details our average
MAUs on a sequential quarterly basis for each of our reportable segments
(amounts in millions):

                          June 30, 2022              March 31, 2022              December 31, 2021              September 30, 2021               June 30, 2021
Activision                        94                         100                           107                             119                          127
Blizzard                          27                          22                            24                              26                           26
King                             240                         250                           240                             245                          255
Total                            361                         372                           371                             390                          408



Average MAUs decreased by 11 million or 3% for the three months ended June 30,
2022, as compared to the three months ended March 31, 2022. The decrease was
primarily due to lower average MAUs for King, driven by the Candy Crush
franchise, and Activision, driven by the Call of Duty franchise. This was
partially offset by higher average MAUs for Blizzard, driven by the launch of
Diablo Immortal.

Average MAUs decreased by 47 million or 12% for the three months ended June 30,
2022, as compared to the three months ended June 30, 2021. The decrease was
primarily due to lower average MAUs for Activision, driven by the Call of Duty
franchise and King, driven by Crash Bandicoot: On the Run!


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Management's Overview of Business Trends

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. If this
competition, voluntary turnover, and recruiting difficulty persists, it could
continue to negatively impact our ability to deliver content in a cadence that
will be optimal for our business.

Upcoming Content Releases

We recently announced that several new titles and expansions will be released in the second half of 2022:

Call of Duty: Modern Warfare II, the sequel to Call of Duty: Modern Warfare, is expected to launch on October 28, 2022;

World of Warcraft: Wrath of the Lich King Classic, a re-creation of the second expansion to World of Warcraft, is expected to launch on September 26, 2022;

•Overwatch 2, a new free-to-play live experience within the world of Overwatch, is expected to launch in early access on October 4, 2022; and

World of Warcraft: Dragonflight, the next expansion to World of Warcraft, is expected to launch later this year.


In addition, we expect to continue to deliver ongoing content for various of our
franchises. We will also continue to invest in opportunities that we believe
have the potential to drive our growth over the long-term, including continuing
to build on our advertising initiatives and investments in mobile titles.

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