Activision Blizzard Announces Better-Than-Expected Third Quarter 2013 Financial Results

Activision Blizzard, Inc. (Nasdaq: ATVI) today announced better-than-expected financial results for the third quarter of 2013.
Third Quarter Nine Months
(in millions, except EPS) 2013   Prior

Outlook*
  2012   2013   2012

GAAP
   
Net Revenues $ 691 $ 635 $ 841 $ 3,065 $ 3,088
EPS $ 0.05   $ 0.03   $ 0.20 $ 0.73 $ 0.70

Non-GAAP
Net Revenues $ 657 $ 585 $ 751 $ 2,070 $ 2,393
EPS $ 0.08   $ 0.03   $ 0.15 $ 0.33 $ 0.40
 

*Prior Outlook was provided by the company in its August 1, 2013 earnings release
 

For the third quarter, which ended September 30, 2013, the company delivered GAAP net revenues of $691 million, as compared with $841 million for the third quarter of 2012. On a non-GAAP basis, the company’s net revenues were $657 million, as compared with $751 million for the third quarter of 2012. GAAP net revenues from digital channels were $409 million and represented a third-quarter record 59% of the company’s total net revenues. On a non-GAAP basis, net revenues from digital channels were $399 million and represented 61% of the quarter’s total net revenues.

For the third quarter of 2013, Activision Blizzard delivered GAAP earnings per diluted share of $0.05, as compared with $0.20 for the third quarter of 2012. On a non-GAAP basis, the company delivered earnings per diluted share of $0.08, as compared with $0.15 for the third quarter of 2012.

The company reports results on both a GAAP and a non-GAAP basis. Please refer to the tables at the back of this press release for a reconciliation of the company’s GAAP and non-GAAP results.

Bobby Kotick, Chief Executive Officer of Activision Blizzard, said, “Our third-quarter results exceeded our expectations, and we are able to raise our outlook for 2013 net revenues and earnings per share. Robust continued engagement with our core franchises drove digital revenue, which constituted a majority of all revenue. This quarter demonstrates that games like Call of Duty and World of Warcraft engage and entertain our fans year round.”

Kotick added, “We recently released new titles in two of the most popular franchises in entertainment, Call of Duty: Ghosts and Skylanders SWAP Force. We are thrilled by the quality of those games and we are excited to show what we can do with them on next-generation consoles in the coming weeks. We are also in the process of a beta launch for our first major free-to-play game, Hearthstone: Heroes of Warcraft. However, we continue to believe that the fourth quarter this year presents a unique and challenging landscape due to increased competition and uncertainties surrounding the console transition. We are confident in our ability to navigate these challenges successfully, particularly in light of the recent completion of our transaction with Vivendi and the focus and flexibility provided by our return to independence.”

Selected Business Highlights
  • Year to date, in both North America and Europe Activision Publishing had two of the top-five best-selling games with Skylanders Giants™ and Call of Duty: Black Ops II.¹
  • In both North America and Europe, Activision Publishing’s Skylanders Giants was the #1 best-selling kids console and hand-held game overall in dollars for the first nine months of 2013.¹
  • As of September 30, 2013, Blizzard Entertainment’s World of Warcraft remains the #1 subscription-based MMORPG, with approximately 7.6 million subscribers.²
  • In North America, Blizzard Entertainment’s StarCraft® II: Heart of the Swarm® was the #1 PC game for the first nine months of 2013.³
  • On September 19, 2013, the company issued $2.25 billion of long-term debt, consisting of $1.5 billion of 5.625% senior notes due 2021 and $750 million of 6.125% senior notes due 2023.
  • On October 11, 2013 the company borrowed approximately $2.5 billion under a seven-year secured term loan facility. The company now has a total of $4.75 billion in debt at a weighted average interest rate below 5%.
  • On October, 11, 2013, Activision Blizzard, Inc. completed its previously announced acquisition of approximately 429 million company shares and certain tax attributes from Vivendi for approximately $5.83 billion, or $13.60 per share, in cash. ASAC II LP, an investment vehicle led by Activision Blizzard CEO Bobby Kotick and Chairman Brian Kelly, has also completed its purchase of approximately 172 million company shares from Vivendi for approximately $2.34 billion in cash, or $13.60 per share, in a separate transaction. As a result of the transactions, Activision Blizzard is an independent company with a majority of its shares owned by public shareholders. Vivendi has retained a stake of approximately 83 million shares, or approximately 12% of the company’s outstanding shares.

Company Outlook

During October, Activision Publishing released several new titles including: Skylanders SWAP Force™ on October 13, 2013; Cabela’s® African Safari, and Wipeout™ Crash and Burn on October 15, 2013; SpongeBob SquarePants™: Plankton’s Robotic Revenge and Teenage Mutant Ninja Turtles™ on October 22, 2013; and Angry Birds™ Star Wars® on October 29, 2013.

On November 5, 2013, Activision Publishing released its highly anticipated game, Call of Duty: Ghosts, the next generation of Call of Duty and a stunning leap forward for the franchise .

As the repurchase transaction with Vivendi did not close on or before September 30, 2013 as previously expected, Activision Blizzard’s weighted average fully diluted share count is now expected to be 1.06 billion for the calendar year, and to be 785 million for the fourth quarter.

Activision Blizzard is raising its outlook for calendar year 2013 from the estimates it provided on August 1, 2013, as follows:
(Amounts in millions, except share data)   GAAP Outlook   Prior*

GAAP

Outlook
  Non-GAAP Outlook   Prior*

Non-GAAP Outlook

CY 2013
Net Revenues $ 4,320 $ 4,310 $ 4,285 $ 4,250
EPS $ 0.83 $ 0.80 – 0.82 $ 0.89 $ 0.85 – 0.87
Fully diluted shares** 1,060 1,050 1,060 1,050
 

Q4 2013
Net Revenues $ 1,255 $ 1,300 $ 2,215 $ 2,252
EPS $ 0.05 $ 0.01 – 0.04 $ 0.72 $ 0.76 – 0.79
Fully diluted shares** 785 743 785 743
 
*Prior outlook was provided by the company in its August 1, 2013 earnings release. This prior outlook assumed the transaction and its related financial impact (including interest expense from debt, associated fees and expenses, and lower weighted average share count as a result of the share repurchase) commenced on September 30, 2013. ** Fully diluted weighted average shares include participating securities and dilutive options on a weighted average basis. Prior outlook assumed the repurchase transaction was closed on September 30, 2013. The actual completion of the repurchase transaction was on October 11, 2013. This results in higher fully diluted shares outstanding and lower non-GAAP EPS by $0.01 and $0.04 (no impact to GAAP EPS) in the current outlook than prior outlook for the calendar year and fourth quarter, respectively.
 

Conference Call

Today at 4:30 p.m. EST, Activision Blizzard’s management will host a conference call and webcast to discuss the company’s results for the quarter ended September 30, 2013 and management’s outlook for the remainder of the calendar year.

The company welcomes all members of the financial and media communities and other interested parties to visit the “Investor Relations” area of www.activisionblizzard.com to listen to the conference call via live Webcast or to listen to the call live by dialing into 800 768 6544 in the U.S. with passcode 7807006.

About Activision Blizzard

Activision Blizzard, Inc. is the world’s largest and most profitable independent interactive entertainment publishing company. It develops and publishes some of the most successful and beloved entertainment franchises in any medium, including Call of Duty, Skylanders, World of Warcraft, StarCraft® and Diablo.

Headquartered in Santa Monica California, it maintains operations throughout the United States, Europe, and Asia. Activision Blizzard develops and publishes games on all leading interactive platforms and its games are available in most countries around the world. More information about Activision Blizzard and its products can be found on the company's website, www.activisionblizzard.com.

¹According to The NPD Group and GfK Chart-Track and Activision Blizzard internal estimates, including toys and accessories²According to Activision Blizzard internal estimates³According to The NPD Group

Subscriber Definition: World of Warcraft subscribers include individuals who have paid a subscription fee or have an active prepaid card to play World of Warcraft, as well as those who have purchased the game and are within their free month of access. Internet Game Room players who have accessed the game over the last thirty days are also counted as subscribers. The above definition excludes all players under free promotional subscriptions, expired or cancelled subscriptions, and expired prepaid cards. Subscribers in licensees' territories are defined along the same rules.

Non-GAAP Financial Measures: As a supplement to our financial measures presented in accordance with Generally Accepted Accounting Principles (“GAAP”), Activision Blizzard presents certain non-GAAP measures of financial performance. These non-GAAP financial measures are not intended to be considered in isolation from, as a substitute for, or as more important than, the financial information prepared and presented in accordance with GAAP. In addition, these non-GAAP measures have limitations in that they do not reflect all of the items associated with the company’s results of operations as determined in accordance with GAAP.

Activision Blizzard provides net revenues, net income (loss), earnings (loss) per share and operating margin data and guidance both including (in accordance with GAAP) and excluding (non-GAAP) certain items. In addition, Activision Blizzard provides EBITDA (defined as GAAP net income (loss) before interest (income) expense, income taxes, depreciation and amortization) and adjusted EBITDA (defined as non-GAAP operating margin (see non-GAAP financial measure below) before depreciation). The non-GAAP financial measures exclude the following items, as applicable in any given reporting period:
  • the change in deferred revenues and related cost of sales with respect to certain of the company’s online-enabled games;
  • expenses related to stock-based compensation;
  • the amortization of intangibles from purchase price accounting;
  • fees and other expenses related to the acquisition of 429 million shares of our common stock on October 11, 2013 from Vivendi, pursuant to the stock purchase agreement dated July 25, 2013 and related debt financings; and
  • the income tax adjustments associated with any of the above items.

In the future, Activision Blizzard may also consider whether other significant non-recurring items should also be excluded in calculating the non-GAAP financial measures used by the company. Management believes that the presentation of these non-GAAP financial measures provides investors with additional useful information to measure Activision Blizzard’s financial and operating performance. In particular, the measures facilitate comparison of operating performance between periods and help investors to better understand the operating results of Activision Blizzard by excluding certain items that may not be indicative of the company’s core business, operating results or future outlook. Internally, management uses these non-GAAP financial measures in assessing the company’s operating results, and measuring compliance with the requirements of the company’s debt financing agreements, as well as in planning and forecasting.

Activision Blizzard’s non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles, and the terms non-GAAP net revenues, non-GAAP net income, non-GAAP earnings per share, non-GAAP operating margin, and non-GAAP or adjusted EBITDA do not have a standardized meaning. Therefore, other companies may use the same or similarly named measures, but exclude different items, which may not provide investors a comparable view of Activision Blizzard’s performance in relation to other companies.

Management compensates for the limitations resulting from the exclusion of these items by considering the impact of the items separately and by considering Activision Blizzard’s GAAP, as well as non-GAAP, results and outlook, and by presenting the most comparable GAAP measures directly ahead of non-GAAP measures, and by providing a reconciliation that indicates and describes the adjustments made.

In addition to the reasons stated above, which are generally applicable to each of the items Activision Blizzard excludes from its non-GAAP financial measures, there are additional specific reasons why the company believes it is appropriate to exclude the change in deferred revenues and related cost of sales with respect to certain of the company’s online-enabled games.

Since Activision Blizzard has determined that some of our games’ online functionality represents an essential component of gameplay and, as a result, a more-than-inconsequential separate deliverable, we recognize revenues attributed to these game titles over their estimated service periods, which may range from five months to a maximum of less than a year. The related cost of sales is deferred and recognized as the related revenues are recognized. Internally, management excludes the impact of this change in deferred revenues and related cost of sales in its non-GAAP financial measures when evaluating the company’s operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team.

Management believes this is appropriate because doing so enables an analysis of performance based on the timing of actual transactions with our customers, which is consistent with the way the company is measured by investment analysts and industry data sources. In addition, excluding the change in deferred revenues and the related cost of sales provides a much more timely indication of trends in our operating results.

Cautionary Note Regarding Forward-looking Statements: Information in this press release that involves Activision Blizzard’s expectations, plans, intentions or strategies regarding the future, including statements under the heading “Company Outlook,” are forward-looking statements that are not facts and involve a number of risks and uncertainties. Activision Blizzard generally uses words such as “outlook,” “will,” “could,” “should,” “would,” “might,” “to be,” “plans,” “believes,” “may,” “expects,” “intends,” "anticipates," "estimate," “future," "plan," "positioned," "potential," "project," "remain," "scheduled," "set to," "subject to," "upcoming" and similar expressions to identify forward-looking statements. Factors that could cause Activision Blizzard’s actual future results to differ materially from those expressed in the forward-looking statements set forth in this release include, but are not limited to, sales levels of Activision Blizzard’s titles, increasing concentration of titles, shifts in consumer spending trends, the impact of the current macroeconomic environment, Activision Blizzard’s ability to predict consumer preferences, including interest in specific genres such as first-person action, “toys to life” and massively multiplayer online games and preferences among hardware platforms, the seasonal and cyclical nature of the interactive game market, changing business models including digital delivery of content, competition, including from used games and other forms of entertainment, possible declines in software pricing, product returns and price protection, product delays, adoption rate and availability of new hardware (including peripherals) and related software, particularly during the ongoing console transition, rapid changes in technology and industry standards, the current regulatory environment, litigation risks and associated costs, protection of proprietary rights, maintenance of relationships with key personnel, customers, licensees, licensors, vendors, and third-party developers, including the ability to attract, retain and develop key personnel and developers that can create high quality "hit" titles, counterparty risks relating to customers, licensees, licensors and manufacturers, domestic and international economic, financial and political conditions and policies, foreign exchange rates and tax rates, the identification of suitable future acquisition opportunities and potential challenges associated with geographic expansion, capital market risks, the possibility that expected benefits related to the recently completed transactions with Vivendi may not materialize as expected, the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt, and the other factors identified in the risk factors section of Activision Blizzard’s most recent annual report on Form 10-K, as amended, and our quarterly report on Form 10-Q for the quarter ended September 30, 2013. The forward-looking statements in this release are based upon information available to Activision Blizzard as of the date of this release, and Activision Blizzard assumes 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 the future performance of Activision Blizzard and are subject to risks, uncertainties and other factors, some of which are beyond its control and may cause actual results to differ materially from current expectations.
 
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in millions, except per share data)
           
    Three Months Ended September 30, Nine Months Ended September 30,
    2013 2012 2013 2012
 
Net revenues:
Product sales $ 332 $ 536 $ 2,049 $ 2,208
  Subscription, licensing and other revenues 1   359   305   1,016   880
  Total net revenues   691   841   3,065   3,088
 
Costs and expenses:
Cost of sales - product costs 111 146 551 633
Cost of sales - online subscriptions 43 62 154 201
Cost of sales - software royalties and amortization 16 19 116 107
Cost of sales - intellectual property licenses 5 10 56 37
Product development 140 125 387 384
Sales and marketing 144 131 367 346
  General and administrative   162   121   347   413
  Total costs and expenses   621   614   1,978   2,121
Operating income 70 227 1,087 967
Interest and other investment income (expense), net   (4)   1   (1)   4
Income before income tax expense 66 228 1,086 971
Income tax expense   10   2   249   176
Net income $ 56 $ 226 $ 837 $ 795
 
                   
Basic earnings per common share 2 $ 0.05 $ 0.20 $ 0.73 $ 0.70
Weighted average common shares outstanding   1,122   1,109   1,118   1,113
 
                   
Diluted earnings per common share 2 $ 0.05 $ 0.20 $ 0.73 $ 0.70
Weighted average common shares outstanding assuming dilution   1,134   1,114   1,127   1,118
 
1 Subscription, licensing and other revenues represents revenues from World of Warcraft subscriptions, Call of Duty Elite memberships, licensing royalties from our products and franchises, value-added services, downloadable content, and other miscellaneous revenues.
 
2 The company calculates earnings per share pursuant to the two-class method which requires the allocation of net income between common shareholders and participating security holders. We had, on a weighted-average basis, participating securities of approximately 24 million and 25 million for the three and nine months ended September 30, 2013, respectively. We had, on a weighted-average basis, participating securities of approximately 27 million and 23 million for the three and nine months ended September 30, 2012, respectively. Net income attributable to Activision Blizzard Inc. common shareholders used to calculate earnings per common share assuming dilution was $55 million and $819 million for the three and nine months ended September 30, 2013 as compared to the total net income of $56 million and $837 million for the same periods, respectively. Net income attributable to Activision Blizzard Inc. common shareholders used to calculate earnings per common share assuming dilution was $221 million and $779 million for the three and nine months ended September 30, 2012 as compared to total net income of $226 million and $795 million for the same periods, respectively.
 
 
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in millions)
         
September 30, December 31,
        2013   2012
ASSETS        
Current assets:
Cash and cash equivalents $ 4,444 $ 3,959
Cash in escrow 1 2,282 ---
Short-term investments 95 416
Accounts receivable, net 205 707
Inventories, net 313 209
Software development 347 164
Intellectual property licenses 12 11
Deferred income taxes, net 341 487
    Other current assets   212   321
    Total current assets   8,251   6,274
Long-term investments 9 8
Software development 54 129
Intellectual property licenses --- 30
Property and equipment, net 139 141
Other assets 18 11
Intangible assets, net 58 68
Trademark and trade names 433 433
    Goodwill   7,098   7,106
    Total assets $ 16,060 $ 14,200
             
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current liabilities:
Accounts payable $ 286 $ 343
Deferred revenues 641 1,657
    Accrued expenses and other liabilities   506   652
    Total current liabilities   1,433   2,652
Long-term debt, net 2,211 ---
Deferred income taxes, net 71 25
    Other liabilities   206   206
    Total liabilities   3,921   2,883
Shareholders’ equity:
Common stock --- ---
Additional paid-in capital 9,608 9,450
Retained earnings 2,513 1,893
    Accumulated other comprehensive income (loss)   18   (26)
    Total shareholders’ equity   12,139   11,317
    Total liabilities and shareholders’ equity $ 16,060 $ 14,200
 
1 Cash in escrow represents the deposit of the par value of the 5.625% unsecured senior notes due September 2021 and the 6.125% unsecured senior notes due September 2023 and related interest through December 18, 2013 pending the close of the Purchase Transaction. On October 11, 2013, the Cash in Escrow was released and used to fund the completion of the Purchase Transaction. For more details, refer to the company’s quarterly report on Form 10-Q for the quarter ended September 30, 2013.
 
 
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES
(Amounts in millions, except earnings per share data)
                   
Three months ended September 30, 2013   Net Revenues

Cost of Sales -Product Costs

Cost of Sales -Online Subscriptions

Cost of Sales -Software Royaltiesand Amortization

Cost of Sales -IntellectualProperty Licenses

ProductDevelopment

Sales andMarketing

General andAdministrative

Total Costs andExpenses
GAAP Measurement $ 691 $ 111 $ 43 $ 16 $ 5 $ 140 $ 144 $ 162 $ 621
Less: Net effect from deferral of net revenues and related cost of sales (a) (34) 1 - (3) - - - - (2)
Less: Stock-based compensation (b) - - - (1) - (9) (2) (13) (25)
Less: Amortization of intangible assets (c) - - - - (3) - - - (3)
Less: Fees and other expenses related to the Purchase Transaction and related debt financings (d)   -   -   -   -   -   -   -   (62)   (62)
Non-GAAP Measurement   $ 657 $ 112 $ 43 $ 12 $ 2 $ 131 $ 142 $ 87 $ 529
 
 
Three months ended September 30, 2013  

OperatingIncome

Net Income

BasicEarnings perShare

Diluted Earningsper Share
GAAP Measurement $ 70 $ 56 $ 0.05 $ 0.05
Less: Net effect from deferral of net revenues and related cost of sales (a) (32) (23) (0.02) (0.02)
Less: Stock-based compensation (b) 25 16 0.01 0.01
Less: Amortization of intangible assets (c) 3 2 - -
Less: Fees and other expenses related to the Purchase Transaction and related debt financings (d)   62   39   0.03   0.03
Non-GAAP Measurement   $ 128 $ 90 $ 0.08 $ 0.08
 
                 
Nine months ended September 30, 2013  

Net Revenues

Cost of Sales -Product Costs

Cost of Sales -OnlineSubscriptions

Cost of Sales -Software Royaltiesand Amortization

Cost of Sales -IntellectualProperty Licenses

ProductDevelopment

Sales andMarketing

General andAdministrative

Total Costs andExpenses
GAAP Measurement $ 3,065 $ 551 $ 154 $ 116 $ 56 $ 387 $ 367 $ 347 $ 1,978
  Less: Net effect from deferral of net revenues and related cost of sales (a) (995) (191) - (62) (4) - - - (257)
Less: Stock-based compensation (b) - - - (10) - (23) (5) (38) (76)
Less: Amortization of intangible assets (c) - - - - (8) - - - (8)
Less: Fees and other expenses related to the Purchase Transaction and related debt financings (d)   -   -   -   -   -   -   -   (62)   (62)
Non-GAAP Measurement   $ 2,070 $ 360 $ 154 $ 44 $ 44 $ 364 $ 362 $ 247 $ 1,575
 
 
Nine months ended September 30, 2013  

OperatingIncome
Net Income

BasicEarnings perShare

Diluted Earningsper Share
GAAP Measurement $ 1,087 $ 837 $ 0.73 $ 0.73
Less: Net effect from deferral of net revenues and related cost of sales (a) (738) (550) (0.48) (0.48)
Less: Stock-based compensation (b) 76 48 0.04 0.04
Less: Amortization of intangible assets (c) 8 5 - -
Less: Fees and other expenses related to the Purchase Transaction and related debt financings (d)   62   39   0.03   0.03
Non-GAAP Measurement   $ 495 $ 379 $ 0.33 $ 0.33
 
  (a) Reflects the net change in deferred revenues and related cost of sales.
(b) Includes expense related to stock-based compensation.
(c) Reflects amortization of intangible assets from purchase price accounting.
(d) Reflects fees and other expenses related to the repurchase of 429 million shares of our common stock from Vivendi (the "Purchase Transaction") completed on October 11, 2013 and related debt financings.
 
The company calculates earnings per share pursuant to the two-class method which requires the allocation of net income between common shareholders and participating security holders. Net income attributable to Activision Blizzard common shareholders used to calculate non-GAAP earnings per common share assuming dilution was $88 million and $370 million for the three and nine months ended September 30, 2013 as compared to the total non-GAAP net income of $90 million and $379 million for the same periods, respectively.
 
The per share adjustments are presented as calculated, and the GAAP and non-GAAP earnings per share information is also presented as calculated. The sum of these measures, as presented, may differ due to the impact of rounding.
 
 
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES
(Amounts in millions, except earnings per share data)
                   
Three months ended September 30, 2012 Net Revenues

Cost of Sales -Product Costs

Cost of Sales -OnlineSubscriptions

Cost of Sales -Software Royaltiesand Amortization

Cost of Sales -IntellectualProperty Licenses

ProductDevelopment

Sales andMarketing

General andAdministrative

Total Costs andExpenses
GAAP Measurement $ 841 $ 146 $ 62 $ 19 $ 10 $ 125 $ 131 $ 121 $ 614
Less: Net effect from deferral of net revenues and related cost of sales (a) (90) (5) - 23 2 - - - 20
Less: Stock-based compensation (b) - - - (1) - (5) (2) (26) (34)
Less: Amortization of intangible assets (c)   -   -   -   -   (3)   -   -   -   (3)
Non-GAAP Measurement $ 751 $ 141 $ 62 $ 41 $ 9 $ 120 $ 129 $ 95 $ 597
 
 
Three months ended September 30, 2012

OperatingIncome
Net Income

Basic Earningsper Share

Diluted Earningsper Share
GAAP Measurement $ 227 $ 226 $ 0.20 $ 0.20
Less: Net effect from deferral of net revenues and related cost of sales (a) (110) (83) (0.07) (0.07)
Less: Stock-based compensation (b) 34 23 0.02 0.02
Less: Amortization of intangible assets (c)   3   2   -   -
Non-GAAP Measurement $ 154 $ 168 $ 0.15 $ 0.15
 
                 
Nine months ended September 30, 2012 Net Revenues

Cost of Sales -Product Costs

Cost of Sales -Online Subscriptions

Cost of Sales -Software Royaltiesand Amortization

Cost of Sales -IntellectualProperty Licenses

ProductDevelopment

Sales andMarketing

General andAdministrative

Total Costs andExpenses
GAAP Measurement $ 3,088 $ 633 $ 201 $ 107 $ 37 $ 384 $ 346 $ 413 $ 2,121
  Less: Net effect from deferral of net revenues and related cost of sales (a) (695) (186) - 5 - - - - (181)
Less: Stock-based compensation (b) - - - (6) - (14) (5) (60) (85)
Less: Amortization of intangible assets (c)   -   -   -   -   (7)   -   -   -   (7)
Non-GAAP Measurement $ 2,393 $ 447 $ 201 $ 106 $ 30 $ 370 $ 341 $ 353 $ 1,848
 
 
Nine months ended September 30, 2012

OperatingIncome
Net Income

Basic Earningsper Share

Diluted Earningsper Share
GAAP Measurement $ 967 $ 795 $ 0.70 $ 0.70
Less: Net effect from deferral of net revenues and related cost of sales (a) (514) (401) (0.35) (0.35)
Less: Stock-based compensation (b) 85 60 0.05 0.05
Less: Amortization of intangible assets (c)   7   5   -   -
Non-GAAP Measurement $ 545 $ 459 $ 0.40 $ 0.40
 
  (a) Reflects the net change in deferred revenues and related cost of sales.
(b) Includes expense related to stock-based compensation.
(c) Reflects amortization of intangible assets from purchase price accounting.
 
The company calculates earnings per share pursuant to the two-class method which requires the allocation of net income between common shareholders and participating security holders. Net income attributable to Activision Blizzard Inc. common shareholders used to calculate non-GAAP earnings per common share assuming dilution was $164 million and $449 million for the three and nine months ended September 30, 2012 as compared to total non-GAAP net income of $168 million and $459 million for the same periods, respectively.
 
The per share adjustments are presented as calculated, and the GAAP and non-GAAP earnings per share information is also presented as calculated. The sum of these measures, as presented, may differ due to the impact of rounding.
 
 
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
For the Three And Nine Months Ended September 30, 2013 and 2012
(Amounts in millions)
                         
Three Months Ended
September 30, 2013 September 30, 2012

$ Increase
% Increase
Amount % of Total4 Amount % of Total4 (Decrease) (Decrease)
GAAP Net Revenues by Distribution Channel
Retail channels $ 226 33 % $ 357 42 % $ (131) (37) %
Digital online channels1   409 59   430 51   (21) (5)
Total Activision and Blizzard 635 92 787 94 (152) (19)
 
Distribution   56 8   54 6   2 4
Total consolidated GAAP net revenues   691 100   841 100   (150) (18)
 
Change in Deferred Revenues2
Retail channels (24) (87)
Digital online channels1   (10)   (3)
Total changes in deferred revenues   (34)   (90)
 
Non-GAAP Net Revenues by Distribution Channel
Retail channels 202 31 270 36 (68) (25)
Digital online channels1   399 61   427 57   (28) (7)
Total Activision and Blizzard 601 91 697 93 (96) (14)
 
Distribution   56 9   54 7   2 4
Total non-GAAP net revenues3 $ 657 100 % $ 751 100 % $ (94) (13) %
 
 
Nine Months Ended
September 30, 2013 September 30, 2012 $ Increase % Increase
Amount % of Total4 Amount % of Total4 (Decrease) (Decrease)
GAAP Net Revenues by Distribution Channel
Retail channels $ 1,748 57 % $ 1,837 59 % $ (89) (5) %
Digital online channels1   1,174 38   1,085 35   89 8
Total Activision and Blizzard 2,922 95 2,922 95 --- ---
 
Distribution   143 5   166 5   (23) (14)
Total consolidated GAAP net revenues   3,065 100   3,088 100   (23) (1)
 
Change in Deferred Revenues2
Retail channels (1,033) (832)
Digital online channels1   38   137
Total changes in deferred revenues   (995)   (695)
 
Non-GAAP Net Revenues by Distribution Channel
Retail channels 715 35 1,005 42 (290) (29)
Digital online channels1   1,212 59   1,222 51   (10) (1)
Total Activision and Blizzard 1,927 93 2,227 93 (300) (13)
 
Distribution   143 7   166 7   (23) (14)
Total non-GAAP net revenues3 $ 2,070 100 % $ 2,393 100 % $ (323) (13) %
 
1 Net revenues from digital online channel represent revenues from subscriptions and memberships, licensing royalties, value-added services, downloadable content, digitally distributed products, and wireless devices.
2 We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred revenues.
3 Total non-GAAP net revenues presented also represents our total operating segment net revenues.
4 The percentages of total are presented as calculated. Therefore the sum of these percentages, as presented, may differ due to the impact of rounding.
 
 
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
For the Three Months Ended September 30, 2013 and 2012
(Amounts in millions)
     
Three Months Ended
September 30, 2013     September 30, 2012     $ Increase     % Increase
Amount     % of Total6 Amount     % of Total6 (Decrease) (Decrease)
GAAP Net Revenues by Segment/Platform Mix
Activision and Blizzard:
Online subscriptions1 $ 205 30 % $ 226 27 % $ (21) (9) %
PC 79 11 272 32 (193) (71)
Sony PlayStation 3 119 17 81 10 38 47
Microsoft Xbox 360 160 23 121 14 39 32
Nintendo Wii and Wii U   17 2   25 3   (8) (32)
Total console2   296 43   227 27   69 30
Other5   55 8   62 7   (7) (11)
Total Activision and Blizzard   635 92   787 94   (152) (19)
 
Distribution:
Total Distribution   56 8   54 6   2 4
Total consolidated GAAP net revenues   691 100   841 100   (150) (18)
 
Change in Deferred Revenues3
Activision and Blizzard:
Online subscriptions1 (24) 119
PC (38) (165)
Sony PlayStation 3 15 (12)
Microsoft Xbox 360 16 (30)
Nintendo Wii and Wii U   (3)   (2)
Total console2   28   (44)
Other5   ---   ---
Total changes in deferred revenues   (34)   (90)
 
Non-GAAP Net Revenues by Segment/Platform Mix
Activision and Blizzard:
Online subscriptions1 181 28 345 46 (164) (48)
PC 41 6 107 14 (66) (62)
Sony PlayStation 3 134 20 69 9 65 94
Microsoft Xbox 360 176 27 91 12 85 93
Nintendo Wii and Wii U   14 2   23 3   (9) (39)
Total console2   324 49   183 24   141 77
Other5   55 8   62 8   (7) (11)
Total Activision and Blizzard   601 91   697 93   (96) (14)
 
Distribution:
Total Distribution   56 9   54 7   2 4
Total non-GAAP net revenues4 $ 657 100 % $ 751 100 % $ (94) (13) %
 
1 Revenues from online subscriptions consists of revenues from all World of Warcraft products, including subscriptions, boxed products, expansion packs, licensing royalties, and value-added services. It also includes revenues from Call of Duty Elite memberships.
2 Downloadable content and their related revenues are included in each respective console platforms and total console.
3 We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred net revenues.
4 Total non-GAAP net revenues presented also represents our total operating segment net revenues.
5 Revenues from other includes revenues from handheld and mobile devices, as well as non-platform specific game related revenues such as standalone sales of toys and accessories products from the Skylanders franchise and other physical merchandise and accessories.
6 The percentages of total are presented as calculated. Therefore the sum of these percentages, as presented, may differ due to the impact of rounding.
 
 
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
For the Nine Months Ended September 30, 2013 and 2012
(Amounts in millions)
     
Nine Months Ended
September 30, 2013     September 30, 2012     $ Increase     % Increase
Amount     % of Total6 Amount     % of Total6 (Decrease) (Decrease)
GAAP Net Revenues by Segment/Platform Mix
Activision and Blizzard:
Online subscriptions1 $ 714 23 % $ 701 23 % $ 13 2 %
PC 274 9 471 15 (197) (42)
Sony PlayStation 3 727 24 617 20 110 18
Microsoft Xbox 360 849 28 705 23 144 20
Nintendo Wii and Wii U   58 2   108 3   (50) (46)
Total console2   1,634 53   1,430 46   204 14
Other5   300 10   320 10   (20) (6)
Total Activision and Blizzard   2,922 95   2,922 95   --- ---
 
Distribution:
Total Distribution   143 5   166 5   (23) (14)
Total consolidated GAAP net revenues   3,065 100   3,088 100   (23) (1)
 
Change in Deferred Revenues3
Activision and Blizzard:
Online subscriptions1 (110) 92
PC (67) 126
Sony PlayStation 3 (400) (412)
Microsoft Xbox 360 (405) (469)
Nintendo Wii and Wii U   (13)   (27)
Total console2   (818)   (908)
Other5   ---   (5)
Total changes in deferred revenues   (995)   (695)
 
Non-GAAP Net Revenues by Segment/Platform Mix
Activision and Blizzard:
Online subscriptions1 604 29 793 33 (189) (24)
PC 207 10 597 25 (390) (65)
Sony PlayStation 3 327 16 205 9 122 60
Microsoft Xbox 360 444 21 236 10 208 88
Nintendo Wii and Wii U   45 2   81 3   (36) (44)
Total console2   816 39   522 22   294 56
Other5   300 14   315 13   (15) (5)
Total Activision and Blizzard   1,927 93   2,227 93   (300) (13)
 
Distribution:
Total Distribution   143 7   166 7   (23) (14)
Total non-GAAP net revenues4 $ 2,070 100 % $ 2,393 100 % $ (323) (13) %
 
1 Revenue from online subscriptions consists of revenue from all World of Warcraft products, including subscriptions, boxed products, expansion packs, licensing royalties, and value-added services. It also includes revenues from Call of Duty Elite memberships.
2 Downloadable content and their related revenues are included in each respective console platforms and total console.
3 We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred net revenues.
4 Total non-GAAP net revenues presented also represents our total operating segment net revenues.
5 Revenue from other includes revenues from handheld and mobile devices, as well as non-platform specific game related revenues such as standalone sales of toys and accessories products from the Skylanders franchise and other physical merchandise and accessories.
6 The percentages of total are presented as calculated. Therefore the sum of these percentages, as presented, may differ due to the impact of rounding.
 
 
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
For the Three and Nine Months Ended September 30, 2013 and 2012
(Amounts in millions)
                         
Three Months Ended
  September 30, 2013   September 30, 2012 $ Increase % Increase
Amount % of Total3 Amount % of Total3 (Decrease) (Decrease)
GAAP Net Revenues by Geographic Region
North America $ 344 50 % $ 403 48 % $ (59) (15) %
Europe 290 42 333 40 (43) (13)
Asia Pacific   57 8   105 12   (48) (46)
Total consolidated GAAP net revenues   691 100   841 100   (150) (18)
 
Change in Deferred Revenues1
North America (2) (49)
Europe (24) (9)
Asia Pacific   (8)   (32)
Total changes in net revenues   (34)   (90)
 
Non-GAAP Net Revenues by Geographic Region
North America 342 52 354 47 (12) (3)
Europe 266 40 324 43 (58) (18)
Asia Pacific   49 7   73 10   (24) (33)
Total non-GAAP net revenues2 $ 657 100 % $ 751 100 % $ (94) (13) %
 
 
  Nine Months Ended
  September 30, 2013   September 30, 2012 $ Increase % Increase
  Amount % of Total3   Amount % of Total3   (Decrease) (Decrease)
GAAP Net Revenues by Geographic Region
North America $ 1,643 54 % $ 1,567 51 % $ 76 5 %
Europe 1,180 38 1,220 40 (40) (3)
Asia Pacific   242   8   301   10   (59) (20)
Total consolidated GAAP net revenues   3,065   100   3,088   100   (23) (1)
 
Change in Deferred Revenues1
North America (564) (459)
Europe (355) (243)
Asia Pacific   (76)   7
Total changes in net revenues   (995)   (695)
 
Non-GAAP Net Revenues by Geographic Region
North America 1,079 52 1,108 46 (29) (3)
Europe 825 40 977 41 (152) (16)
Asia Pacific   166 8   308 13   (142) (46)
Total non-GAAP net revenues2 $ 2,070 100 % $ 2,393 100 % $ (323) (13) %
 
1 We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred revenues.
2 Total non-GAAP net revenues presented also represents our total operating segment net revenues.
3 The percentages of total are presented as calculated. Therefore the sum of these percentages, as presented, may differ due to the impact of rounding.
 
 
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
SEGMENT INFORMATION
For the Three And Nine Months Ended September 30, 2013 and 2012
(Amounts in millions)
                           
Three Months Ended
September 30, 2013 September 30, 2012 $ Increase % Increase
Amount % of Total5 Amount % of Total5 (Decrease) (Decrease)
Segment net revenues:
Activision1 $ 319 46 % $ 283 34 % $ 36 13 %
Blizzard2 282 41 414 49 (132) (32)
Distribution3   56 8   54 6   2 4
Operating segment total 657 95 751 89 (94) (13)
 
Reconciliation to consolidated net revenues:
Net effect from deferral of net revenues   34 5   90 11
Consolidated net revenues $ 691 100 % $ 841 100 % $ (150) (18) %
 
Segment income from operations:
Activision1 $ 41 $ (14) $ 55 NM %
Blizzard2 88 168 (80) (48)
Distribution3   (1)   ---   (1) ---
Operating segment total 128 154 (26) (17)
 
Reconciliation to consolidated operating income and
consolidated income before income tax expense:
Net effect from deferral of net revenues and related cost of sales 32 110
Stock-based compensation expense (25) (34)
Amortization of intangible assets (3) (3)
Fees and other expenses related to the Purchase Transaction and related debt financings4   (62)   ---
Consolidated operating income 70 227 (157) (69)
Interest and other investment income (expense), net   (4)   1
Consolidated income before income tax expense $ 66 $ 228 $ (162) (71) %
 
Operating margin from total operating segments 19% 21%
 
 
Nine Months Ended
September 30, 2013 September 30, 2012 $ Increase % Increase
Amount % of Total5 Amount % of Total5 (Decrease) (Decrease)
Segment net revenues:
Activision1 $ 1,090 36 % $ 928 30 % $ 162 17 %
Blizzard2 837 27 1,299 42 (462) (36)
Distribution3   143 5   166 5   (23) (14)
Operating segment total 2,070 68 2,393 77 (323) (13)
 
Reconciliation to consolidated net revenues:
Net effect from deferral of net revenues   995 32   695 23
Consolidated net revenues $ 3,065 100 % $ 3,088 100 % $ (23) (1) %
 
Segment income from operations:
Activision1 $ 214 $ (84) $ 298 NM %
Blizzard2 282 629 (347) (55)
Distribution3   (1)   ---   (1) ---
Operating segment total 495 545 (50) (9)
 
Reconciliation to consolidated operating income and
consolidated income before income tax expense:
Net effect from deferral of net revenues and related cost of sales 738 514
Stock-based compensation expense (76) (85)
Amortization of intangible assets (8) (7)
Fees and other expenses related to the Purchase Transaction and related debt financings4   (62)   ---
Consolidated operating income 1,087 967 120 12
Interest and other investment income (expense), net   (1)   4
Consolidated income before income tax expense $ 1,086 $ 971 $ 115 12 %
 
Operating margin from total operating segments 24% 23%
 
1 Activision Publishing (“Activision”) — publishes interactive entertainment products and contents.
2 Blizzard — Blizzard Entertainment, Inc. and its subsidiaries (“Blizzard”) publishes PC games and online subscription-based games in the MMORPG category.
3 Activision Blizzard Distribution (“Distribution”) — distributes interactive entertainment software and hardware products.
4 Reflects fees and other expenses related to the repurchase of 429 million shares of our common stock from Vivendi (the "Purchase Transaction") completed on October 11, 2013 and related debt financings.
5 The percentages of total are presented as calculated. Therefore the sum of these percentages, as presented, may differ due to the impact of rounding.
 
 
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
For the Trailing Twelve Months Ending September 30, 2013
EBITDA
(Amounts in millions)
                     
Trailing Twelve
Months Ending
December 31, 2012 March 31, 2013 June 30, 2013 September 30, 2013 September 30, 2013
 
GAAP Net Income (Loss) $ 354 $ 456 $ 324 $ 56 $ 1,190
Interest (Income) / Expense, net (1) (2) --- 4 1
Provision (Benefit) for income taxes 133 133 106 10 382
Depreciation and amortization   51   24   23   21   119
EBITDA 537 611 453 91 1,692
 
Deferral of net revenues and related cost of sales (a) 607 (369) (338) (32) (132)
Stock-based compensation expense (b) 40 26 24 25 115
Fees and other expenses related to the Purchase
Transaction and related debt financings (c) --- --- --- 62 62
Other (d)   (1)   ---   ---   ---   (1)
Adjusted EBITDA $ 1,183 $ 268 $ 139 $ 146 $ 1,736
 
(a) Reflects the net change in deferred net revenues and related cost of sales.
(b) Includes expense related to stock-based compensation.

(c) Reflects fees and other expenses related to the repurchase of 429 million shares of our common stock from Vivendi (the "Purchase Transaction") completed on October 11, 2013 and related debt financings.
(d) Includes other income and expense related to the currency derivative contracts and changes in fair value of a financial liability.
 
 
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
Outlook for the Quarter and Year Ending December 31, 2013
On a Post-transaction, as reported 1 and Pro-forma 2 Basis
GAAP to Non-GAAP Reconciliation
(Amounts in millions, except per share data)
    Post-transaction, as reported 1    
Outlook for     Outlook for Pro-forma 2 for
Three Months Ending Year Ending Year Ending
December 31, 2013 December 31, 2013 December 31, 2013
 
Net Revenues (GAAP) $

1,255
$

4,320
$

4,320
 

Excluding the impact of:
Change in deferred net revenues (a)  

960
 

(35

)
 

(35

)
 
Non-GAAP Net Revenues $

2,215
$

4,285
$

4,285
 
Earnings Per Diluted Share (GAAP) $

0.05
$

0.83
$

1.06
 

Excluding the impact of:
Net effect from deferral in net revenues and related cost of sales (b)

0.61

(0.07

)

(0.10

)
Stock-based compensation (c)

0.03

0.07

0.10
Amortization of intangible assets (d)

0.01

0.02

0.02
Fees and other expenses related to the Purchase Transaction and
related debt financings (e)  

0.01
 

0.05
   

0.07
 
 
Non-GAAP Earnings Per Diluted Share $

0.72
$

0.89
$

1.16
 
Fully Diluted Weighted Average Shares (in millions) 3 785 1,060

727
 
 
(a) Reflects the net change in deferred net revenues.
(b) Reflects the net change in deferred net revenues and related cost of sales.
(c) Reflects expense related to stock-based compensation.
(d) Reflects amortization of intangible assets from purchase price accounting.

(e) Reflects fees and other expenses related to the repurchase of 429 million shares of our common stock from Vivendi (the "Purchase Transaction") completed on October 11, 2013 and related debt financings.

 
1 Post-transaction, as reported, presents the transaction and its related financial impact (including interest expense from debt, associated fees and expenses, and lower weighted average share count as a result of the share repurchase) commencing on October 11, 2013.
2 Pro-forma assumes the transaction and its related financial impact (including interest expense from debt, associated fees and expenses, and lower

weighted average share count as a result of the share repurchase) commencing on January 1, 2013.
3 Fully diluted weighted average shares include participating securities and dilutive options on a weighted average basis.
 
The per share adjustments are presented as calculated, and the GAAP and non-GAAP earnings (loss) per share information is also presented as calculated. The sum of these measures, as presented, may differ due to the impact of rounding.
 

Copyright Business Wire 2010

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