Edgar Filing: Activision Blizzard, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2019

o 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.)

3100 Ocean Park Boulevard, Santa Monica, CA		90405
(Address of principal executive offices)		(Zip Code)

(310) 255-2000

(Registrant’s telephone number, including area code)



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 x No o

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 x No o

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 x	Non-accelerated Filer o	Accelerated Filer o

		Smaller reporting company o
		Emerging growth company o

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. o

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

The number of shares of the registrant’s Common Stock outstanding at April 25, 2019 was 766,006,719.

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

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	Cautionary Statement	3

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at March 31, 2019 and December 31, 2018	4

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and March 31, 2018	5

	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and March 31, 2018	6

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and March 31, 2018	7

	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2019 and March 31, 2018	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50

Item 4.	Controls and Procedures	52

PART II.	OTHER INFORMATION	52

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 6.	Exhibits	52

EXHIBIT INDEX		53

SIGNATURE		54

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CAUTIONARY STATEMENT

This Quarterly Report on Form 10-Q contains, or incorporates by reference, certain 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; and (4) statements of assumptions underlying such statements. Activision Blizzard, Inc. generally uses words such as “outlook,” “forecast,” “will,” “could,” “should,” “would,” “to be,” “plan,” “plans,” “believes,” “may,” “might,” “expects,” “intends,” “intends as,” “anticipates,” “estimate,” “future,” “positioned,” “potential,” “project,” “remain,” “scheduled,” “set to,” “subject to,” “upcoming” and other similar 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 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: our ability to consistently deliver popular, high-quality titles in a timely manner; our ability to satisfy the expectations of consumers with respect to our brands, games, services, and/or business practices; concentration of revenue among a small number of titles; the continued growth in the scope and complexity of our business, including the diversion of management time and attention to issues relating to the operations of our newly acquired or started businesses and the potential impact of our expansion into new businesses on our existing businesses; our ability to realize the expected financial and operational benefits of, and effectively manage, our recently announced restructuring plans; increasing importance of revenues derived from digital distribution channels; risks associated with the retail sales business model; substantial influence of third-party platform providers over our products and costs; success and availability of video game consoles manufactured by third parties; risks associated with the free-to-play business model, including dependence on a relatively small number of consumers for a significant portion of revenues and profits from any given game; risks and costs associated with legal proceedings; changes in tax rates or exposure to additional tax liabilities, as well as the outcome of current or future tax disputes; rapid changes in technology and industry standards; competition, including from other forms of entertainment; our ability to sell products at assumed pricing levels; our ability to attract, retain, and motivate skilled personnel; reliance on external developers for development of some of our software products; the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt; counterparty risks relating to customers, licensees, licensors, and manufacturers; intellectual property claims; piracy and unauthorized copying of our products; risks and uncertainties of conducting business outside the U.S.; fluctuations in currency exchange rates; increasing regulation of our business, products, and distribution in key territories; compliance with continually evolving laws and regulations concerning data privacy; potential data breaches and other cybersecurity risks; and the other factors identified in “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.

The forward-looking statements contained herein are based on information available to Activision Blizzard, Inc. as of the date of this filing and we assume no obligation to update any such forward-looking statements. Although these forward-looking statements are believed to be true when made, they may ultimately prove to be incorrect. 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 United States (“U.S.”) dollars, unless otherwise explicitly stated to the contrary.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in millions, except share data)



	At March 31, 2019			At December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	4,696		$	4,225
Accounts receivable, net of allowances of $106 and $190, at March 31, 2019 and December 31, 2018, respectively	594			1,035
Inventories, net	45			43
Software development	184			264
Other current assets	518			539
Total current assets	6,037			6,106
Software development	80			65
Property and equipment, net	264			282
Deferred income taxes, net	373			458
Other assets	751			482
Intangible assets, net	680			735
Goodwill	9,763			9,762
Total assets	$	17,948		$	17,890

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	166		$	253
Deferred revenues	931			1,493
Accrued expenses and other liabilities	1,198			896
Total current liabilities	2,295			2,642
Long-term debt, net	2,672			2,671
Deferred income taxes, net	22			18
Other liabilities	1,363			1,167
Total liabilities	6,352			6,498
Commitments and contingencies (Note 19)
Shareholders’ equity:
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,194,600,733 and 1,192,093,991 shares issued at March 31, 2019 and December 31, 2018, respectively	—			—
Additional paid-in capital	11,004			10,963
Less: Treasury stock, at cost, 428,676,471 shares at March 31, 2019 and December 31, 2018	(5,563		)	(5,563		)
Retained earnings	6,757			6,593
Accumulated other comprehensive loss	(602		)	(601		)
Total shareholders’ equity	11,596			11,392
Total liabilities and shareholders’ equity	$	17,948		$	17,890

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

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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,
	2019		2018
Net revenues
Product sales	$	656	$	720
Subscription, licensing, and other revenues	1,169		1,245
Total net revenues	1,825		1,965

Costs and expenses
Cost of revenues—product sales:
Product costs	152		162
Software royalties, amortization, and intellectual property licenses	111		146
Cost of revenues—subscription, licensing, and other revenues:
Game operations and distribution costs	239		270
Software royalties, amortization, and intellectual property licenses	61		84
Product development	249		259
Sales and marketing	207		251
General and administrative	179		198
Restructuring and related costs	57		—
Total costs and expenses	1,255		1,370

Operating income	570		595
Interest and other expense (income), net	3		28
Income before income tax expense	567		567
Income tax expense	120		67
Net income	$	447	$	500

Earnings per common share
Basic	$	0.58	$	0.66
Diluted	$	0.58	$	0.65

Weighted-average number of shares outstanding
Basic	764		759
Diluted	770		770

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

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Amounts in millions)



	For the Three Months Ended March 31,
	2019			2018
Net income	$	447		$	500

Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax	2			1
Unrealized gains (losses) on forward contracts designated as hedges, net of tax	2			(12		)
Unrealized gains (losses) on investments, net of tax	(5		)	(3		)
Total other comprehensive income (loss)	$	(1	)	$	(14	)
Comprehensive income	$	446		$	486

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

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in millions)



	For the Three Months Ended March 31,
	2019			2018
Cash flows from operating activities:
Net income	$	447		$	500
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	86			29
Depreciation and amortization	87			155
Amortization of capitalized software development costs and intellectual property licenses(1)	104			150
Share-based compensation expense (2)	63			54
Other	30			10
Changes in operating assets and liabilities:
Accounts receivable, net	438			503
Inventories	(2		)	4
Software development and intellectual property licenses	(46		)	(100		)
Other assets	(19		)	22
Deferred revenues	(582		)	(551		)
Accounts payable	(91		)	(160		)
Accrued expenses and other liabilities	(65		)	(87		)
Net cash provided by operating activities	450			529

Cash flows from investing activities:
Proceeds from maturities of available-for-sale investments	13			—
Purchases of available-for-sale investments	—			(20		)
Capital expenditures	(18		)	(31		)
Net cash used in investing activities	(5		)	(51		)

Cash flows from financing activities:
Proceeds from issuance of common stock to employees	30			47
Tax payment related to net share settlements on restricted stock units	(6		)	(39		)
Net cash provided by financing activities	24			8
Effect of foreign exchange rate changes on cash and cash equivalents	2			18
Net increase in cash and cash equivalents and restricted cash	471			504
Cash and cash equivalents and restricted cash at beginning of period	4,229			4,720
Cash and cash equivalents and restricted cash at end of period	$	4,700		$	5,224


(1)	Excludes deferral and amortization of share-based compensation expense.


(2)	Includes the net effects of capitalization, deferral, and amortization of share-based compensation expense.

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

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three Months Ended March 31, 2019 and March 31, 2018

(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			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at December 31, 2018	1,192		$	—	(429	)	$	(5,563	)	$	10,963		$	6,593		$	(601	)	$	11,392
Components of comprehensive income:
Net income	—		—		—		—			—			447			—			447
Other comprehensive loss	—		—		—		—			—			—			(1		)	(1		)
Issuance of common stock pursuant to employee stock options	2		—		—		—			30			—			—			30
Issuance of common stock pursuant to restricted stock units	2		—		—		—			—			—			—			—
Restricted stock surrendered for employees’ tax liability	(1	)	—		—		—			(45		)	—			—			(45		)
Share-based compensation expense related to employee stock options and restricted stock units	—		—		—		—			56			—			—			56
Dividends ($0.37 per common share)	—		—		—		—			—			(283		)	—			(283		)
Balance at March 31, 2019	1,195		$	—	(429	)	$	(5,563	)	$	11,004		$	6,757		$	(602	)	$	11,596



	Common Stock				Treasury Stock					Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Shares		Amount		Shares		Amount			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at December 31, 2017	1,186		$	—	(429	)	$	(5,563	)	$	10,747		$	4,916		$	(638	)	$	9,462
Cumulative impact from adoption of new revenue accounting standard	—		—		—		—			—			88			3			91
Components of comprehensive income:
Net income	—		—		—		—			—			500			—			500
Other comprehensive loss	—		—		—		—			—			—			(14		)	(14		)
Issuance of common stock pursuant to employee stock options	3		—		—		—			47			—			—			47
Issuance of common stock pursuant to restricted stock units	2		—		—		—			—			—			—			—
Restricted stock surrendered for employees’ tax liability	(1	)	—		—		—			(64		)	—			—			(64		)
Share-based compensation expense related to employee stock options and restricted stock units	—		—		—		—			56			—			—			56
Dividends ($0.34 per common share)	—		—		—		—			—			(259		)	—			(259		)
Balance at March 31, 2018	1,190		$	—	(429	)	$	(5,563	)	$	10,786		$	5,245		$	(649	)	$	9,819

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

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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 (“PC”s), and mobile devices. We also operate esports leagues and events and create film and television content based on our intellectual property. The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries.

The Company was originally incorporated in California in 1979 and was reincorporated in Delaware in December 1992. In connection with the 2008 business combination by and among the Company (then known as Activision, Inc.), Vivendi S.A., and Vivendi Games, Inc., then an indirect wholly-owned subsidiary of Vivendi S.A., we were renamed Activision Blizzard, Inc.

Our Segments

Based upon our organizational structure, we conduct our business through three reportable segments, as follows:

(i) Activision Publishing, Inc.

Activision Publishing, Inc. (“Activision”) is a leading global developer and publisher of interactive software products and entertainment content, particularly for the console platform. Activision primarily delivers content through retail and digital channels, including full-game and in-game sales, as well as by licensing software to third-party or related-party companies that distribute Activision products. Activision develops, markets, and sells products primarily based on our internally developed intellectual properties, as well as some licensed properties. Activision’s key product franchise is Call of Duty^®, a first-person shooter for the console and PC platforms.

In 2010, Activision entered into an exclusive relationship with Bungie, Inc. (“Bungie”) to publish games in the Destiny franchise. Effective December 31, 2018, Activision and Bungie mutually agreed to terminate their publishing relationship related to the Destiny franchise. As part of this termination, Activision agreed to transfer its publishing rights for the Destiny franchise to Bungie in exchange for cash and Bungie’s assumption of on-going customer obligations of Activision. Activision no longer has any material rights or obligations related to the Destiny franchise.

(ii) Blizzard Entertainment, Inc.

Blizzard Entertainment, Inc. (“Blizzard”) is a leading global developer and publisher of interactive software products and entertainment content, particularly for the PC platform. Blizzard primarily delivers content through retail and digital channels, including subscriptions, full-game, and in-game sales, as well as by licensing software to third-party or related-party companies that distribute Blizzard products. Blizzard also maintains a proprietary online gaming service, Blizzard Battle.net^®, which facilitates digital distribution of Blizzard content and selected Activision content, online social connectivity, and the creation of user-generated content. Blizzard also includes the activities of the Overwatch League^TM, the first major global professional esports league with city-based teams, and our Major League Gaming (“MLG”) business, which is responsible for various esports events and serves as a multi-platform network for Activision Blizzard esports content.

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

(iii) King Digital Entertainment

King Digital Entertainment (“King”) is a leading global developer and publisher of interactive entertainment content and services, primarily on the mobile platform, including for Google Inc.’s Android and Apple Inc.’s iOS. King also distributes its content and services on the PC platform, primarily via Facebook. King’s games are free to play; however, players can acquire in-game items, either with virtual currency or real currency, and we continue to focus on in-game advertising as a growing source of additional revenue.

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King’s key product franchises, all of which are for the mobile and PC platforms, include: Candy Crush™, which features “match three” games; Farm Heroes™, which also features “match three” games; and Bubble Witch™, which features “bubble shooter” games.

Other

We also engage in other businesses that do not represent reportable segments, including:


•	the Activision Blizzard Studios (“Studios”) business, which is devoted to creating original film and television content based on our library of globally recognized intellectual properties, and which, in September 2018, released the third season of the animated TV series Skylanders™ Academy on Netflix; and


•	the Activision Blizzard Distribution (“Distribution”) business, which consists of operations in Europe that provide warehousing, logistics, and sales distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.

Basis of Consolidation and Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission 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, 2018.

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.

During the three months ended March 31, 2019, we identified an error principally related to the initial recognition of global intangible low-taxed income of foreign subsidiaries income taxes which should have been recorded in the three months and year ended December 31, 2018. Income tax expense for the three months and year ended December 31, 2018 should have been reduced by $35 million. This amount is not material to the consolidated financial statements for the year ended December 31, 2018, and we will revise our 2018 consolidated financial statements to correct this matter in our Annual Report on Form 10-K for the year ending December 31, 2019. Our condensed consolidated balance sheet as of December 31, 2018, as presented in this Form 10-Q, has been revised to reflect the correction of this error.

The Company considers events or transactions that occur after the balance sheet date, but before the financial statements are issued, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures.

Supplemental Cash Flow Information

As of March 31, 2019 and 2018, we had the following amounts associated with investing and financing activities recorded within “Accrued expenses and other liabilities”:


•	dividends payable of $283 million and $259 million, respectively; and


•	accrued withholding tax payments related to net share settlements on restricted stock units of $40 million and $26 million, respectively.

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The beginning and ending cash and cash equivalents and restricted cash reported within our condensed consolidated statement of cash flows included restricted cash amounts as follows (amounts in millions):



	At March 31,
	2019		2018
Beginning restricted cash	$	4	$	7
Ending restricted cash	4		6

2. Summary of Significant Accounting Policies

Adoption of Accounting Standards Codification (“ASC”) 842: Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance related to the accounting for leases. The new standard replaces all current U.S. GAAP guidance on this topic. The new standard, among other things, requires a lessee to classify a lease as either an operating or financing lease, and to recognize a lease liability and a right-of-use (“ROU”) asset for its leases. On January 1, 2019, we adopted the new lease accounting standard. As a result, we have updated our significant accounting policy disclosure to include our accounting policy for leases under the new standard. Refer to Note 3 for information about the impact of adoption on our condensed consolidated financial statements.

Leases

We determine if an arrangement is or contains a lease at contract inception. In certain of our lease arrangements, primarily those related to our data center arrangements, judgment is required in determining if a contract contains a lease. For these arrangements, there is judgment in evaluating if the arrangement provides us with an asset that is physically distinct, or that represents substantially all of the capacity of the asset, and if we have the right to direct the use of the asset. Lease assets and liabilities are recognized based on the present value of future lease payments over the lease term at the commencement date. Included in the lease liability are future lease payments that are fixed, in-substance fixed, or payments based on an index or rate known at the commencement date of the lease. Variable lease payments are recognized as lease expenses as incurred, and generally relate to variable payments made based on the level of services provided by the landlords of our leases. The operating lease ROU asset also includes any lease payments made prior to commencement, initial direct costs incurred, and lease incentives received. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate in determining the present value of future payments. The incremental borrowing rate represents the rate required to borrow funds over a similar term to purchase the leased asset, and is based on the information available at the commencement date of the lease. For leased assets with similar lease terms and asset type we applied a portfolio approach in determining a single incremental borrowing rate to apply to the leased assets.

In determining our lease liability, the lease term includes options to extend or terminate the lease when it is reasonably certain that we will exercise such option. For operating leases, the lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Finance lease assets are depreciated on a straight-line basis over the estimated life of the asset, not to exceed the length of the lease, with interest expense associated with finance lease liabilities recorded using the effective interest method. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and we recognize lease expense for these leases on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components. For our real estate, server and data center, and event production and broadcasting equipment leases, we elected the practical expedient to account for the lease and non-lease components as a single lease component. In all other lease arrangements, we account for lease and non-lease components separately. Additionally, for certain leases that have a group of leased assets with similar characteristics in size and composition, we may apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

Operating lease ROU assets are presented in “Other assets” and operating lease liabilities are presented in “Accrued expenses and other current liabilities” and “Other liabilities” on our condensed consolidated balance sheet.

Finance lease ROU assets are presented in “Property and equipment, net” and finance lease liabilities are presented in “Accrued expenses and other current liabilities” and “Other liabilities” on our condensed consolidated balance sheet.

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3. Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Leases

As noted in Note 2 above, we adopted the new lease accounting standard effective January 1, 2019. We elected to apply an optional adoption method, which uses the effective date as the initial date of application on transition with no retrospective adjustments to prior periods. Additionally, we elected to apply the package of transition practical expedients which permitted us to, among other things, (1) not reassess if existing contracts contained leases under the new lease accounting standard and (2) carry forward our historical lease classifications.

The impact from the adoption of the new lease accounting standard to our condensed consolidated balance sheet at January 1, 2019, was as follows (amounts in millions):



Condensed Consolidated Balance Sheet:	Balance at December 31, 2018		Adjustments due to adoption of new lease accounting standard			Balance at January 1, 2019
Assets
Other current assets	$	539	$	(8	)	$	531
Other assets	482		252			734
Liabilities
Accrued expenses and other liabilities	$	896	$	54		$	950
Other liabilities	1,167		190			1,357

The adoption of this standard did not have an impact on our condensed consolidated income statements or condensed consolidated statements of cash flows.

Recent Accounting Pronouncements Not Yet Adopted

Goodwill

In January 2017, the FASB issued new guidance that eliminates Step 2 from the goodwill impairment test. Instead, if an entity forgoes a Step 0 test, an entity will be required to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit, as determined in Step 1 from the goodwill impairment test, with its carrying amount and recognize an impairment charge, if any, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new standard is effective for fiscal years beginning after December 15, 2019, and should be applied prospectively. Early adoption is permitted. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption. We are evaluating the impact, if any, of adopting this new accounting guidance on our consolidated financial statements.

Cloud Computing Arrangements

In August 2018, the FASB issued new guidance related to a customer’s accounting for implementation costs incurred in a cloud computing arrangement (i.e. hosting arrangement) that is a service contract. The new guidance requires customers to capitalize implementation costs for these arrangements by applying the same criteria that are utilized for existing internal-use software guidance. The capitalized costs are required to be amortized over the associated term of the arrangement, generally on a straight-line basis, with amortization of these costs presented in the same financial statement line item as other costs associated with the arrangement. The new standard is effective for fiscal years beginning after December 15, 2019, and can be applied retrospectively or prospectively. Early adoption is permitted. We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements.

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4. Inventories, Net

Inventories, net, consist of the following (amounts in millions):



	At March 31, 2019		At December 31, 2018
Finished goods	$	44	$	40
Purchased parts and components	1		3
Inventories, net	$	45	$	43

At March 31, 2019 and December 31, 2018, inventory reserves were $20 million and $22 million, respectively.

5. Software Development and Intellectual Property Licenses

The following table summarizes the components of our capitalized software development costs (amounts in millions):



	At March 31, 2019		At December 31, 2018
Internally-developed software costs	$	244	$	291
Payments made to third-party software developers	20		38
Total software development costs	$	264	$	329

As of both March 31, 2019 and December 31, 2018, capitalized intellectual property licenses were not material.

Amortization of capitalized software development costs and intellectual property licenses was as follows (amounts in millions):



	For the Three Months Ended March 31,
	2019		2018
Amortization of capitalized software development costs and intellectual property licenses	$	110	$	152

6. Intangible Assets, Net

Intangible assets, net, consist of the following (amounts in millions):



	At March 31, 2019
	Estimated useful lives			Gross carrying amount		Accumulated amortization			Net carrying amount
Acquired definite-lived intangible assets:
Internally-developed franchises	3	-	11 years	$	1,154	$	(1,052	)	$	102
Developed software	2	-	5 years	601		(490		)	111
Trade names	7	-	10 years	54		(24		)	30
Other	1	-	15 years	19		(15		)	4
Total definite-lived intangible assets (1)				$	1,828	$	(1,581	)	$	247

Acquired indefinite-lived intangible assets:
Activision trademark	Indefinite								386
Acquired trade names	Indefinite								47
Total indefinite-lived intangible assets									$	433
Total intangible assets, net									$	680


(1)	At March 31, 2019, the balances of the customer base intangible assets have been removed as such amounts were fully amortized in the prior year.

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	At December 31, 2018
	Estimated useful lives			Gross carrying amount		Accumulated amortization			Net carrying amount
Acquired definite-lived intangible assets:
Internally-developed franchises	3	-	11 years	$	1,154	$	(1,032	)	$	122
Developed software	2	-	5 years	601		(456		)	145
Customer base	2 years			617		(617		)	—
Trade names	7	-	10 years	54		(23		)	31
Other	1	-	15 years	19		(15		)	4
Total definite-lived intangible assets				$	2,445	$	(2,143	)	$	302

Acquired indefinite-lived intangible assets:
Activision trademark	Indefinite								386
Acquired trade names	Indefinite								47
Total indefinite-lived intangible assets									$	433
Total intangible assets, net									$	735

Amortization expense of our intangible assets was $55 million and $119 million for the three months ended March 31, 2019 and 2018, respectively.

At March 31, 2019, future amortization of definite-lived intangible assets is estimated as follows (amounts in millions):



For the year ending December 31,
2019 (remaining nine months)	$	149
2020	74
2021	12
2022	7
2023	2
Thereafter	3
Total	$	247

7. Goodwill

The changes in the carrying amount of goodwill by reportable segment are as follows (amounts in millions):



	Activision		Blizzard		King		Total
Balance at December 31, 2018	$	6,897	$	190	$	2,675	$	9,762
Other	1		—		—		1
Balance at March 31, 2019	$	6,898	$	190	$	2,675	$	9,763

8. Fair Value Measurements

The FASB 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.

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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, 2019 Using
	As of March 31, 2019			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	$	3,991		$	3,991	$	—		$	—	Cash and cash equivalents
Foreign government treasury bills	34			34		—			—		Cash and cash equivalents
U.S. treasuries and government agency securities	139			139		—			—		Other current assets
Foreign currency forward contracts designated as hedges	21			—		21			—		Other current assets
Foreign currency forward contracts not designated as hedges	1			—		1			—		Other current assets
Total recurring fair value measurements	$	4,186		$	4,164	$	22		$	—

Financial liabilities:
Foreign currency forward contracts not designated as hedges	$	(3	)	$	—	$	(3	)	$	—	Accrued expenses and other liabilities



			Fair Value Measurements at December 31, 2018 Using
	As of December 31, 2018		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	$	3,925	$	3,925	$	—	$	—	Cash and cash equivalents
Foreign government treasury bills	32		32		—		—		Cash and cash equivalents
U.S. treasuries and government agency securities	150		150		—		—		Other current assets
Foreign currency forward contracts designated as hedges	13		—		13		—		Other current assets
Foreign currency forward contracts not designated as hedges	1		—		1		—