Activision Blizzard Announces Better-Than-Expected Third Quarter 2014 Financial Results

Destiny® and World of Warcraft® Drive Record Third Quarter Non-GAAP Net Revenue and EPS

Company Increases CY 2014 Full-Year Revenue and Non-GAAP EPS Outlook

SANTA MONICA, Calif.--()--Activision Blizzard, Inc. (Nasdaq: ATVI) today announced better-than-expected financial results for the third quarter of 2014.

  Third Quarter

(in millions, except EPS)
  2014     Prior

Outlook*

  2013

GAAP

   
Net Revenues $ 753 $ 650 $ 691
EPS   $ (0.03 )   $ (0.07 )   $ 0.05

Non-GAAP

Net Revenues $ 1,170 $ 975 $ 657
EPS   $ 0.23     $ 0.11     $ 0.08

*Prior outlook was provided by the company on August 5, 2014 in its earnings release

For the quarter ended September 30, 2014, Activision Blizzard’s GAAP net revenues were $753 million, as compared with $691 million for the third quarter of 2013. On a non-GAAP basis, the company’s net revenues were a record $1.17 billion, as compared with $657 million for the third quarter of 2013. For the third quarter of 2014, GAAP net revenues from digital channels represented a record 67% of the company’s total revenues. On a non-GAAP basis, net revenues from digital channels represented 43% of the company’s total revenues.

For the quarter ended September 30, 2014, Activision Blizzard’s GAAP loss per diluted share was ($0.03), as compared with GAAP earnings per diluted share of $0.05 for the third quarter of 2013. On a non-GAAP basis, the company’s earnings per diluted share were a record $0.23 for the third quarter of 2014, as compared with $0.08 for the third quarter of 2013.

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 record third-quarter results were driven by Destiny®, the biggest new videogame franchise launch of all time, as well as strong sales from Blizzard Entertainment’s Diablo® III: Reaper of Souls™ - Ultimate Evil Edition™, Hearthstone®: Heroes of Warcraft™, which now has over 20 million registered players¹, and World of Warcraft®, which saw a quarterly increase in subscribers to 7.4¹ million in anticipation of the upcoming Warlords of Draenor™ release. We are raising our full-year non-GAAP outlook and we expect to deliver double-digit non-GAAP revenue growth year-over-year and record non-GAAP earnings per share.”

Kotick added, ”In addition to new content releases of Skylanders® Trap Team and Call of Duty®: Advanced Warfare, next week Blizzard Entertainment plans to launch World of Warcraft: Warlords of Draenor. Today, we have some of the most important franchises in entertainment and we expect to continue growing our product portfolio in 2015 with two additional franchises -- Call of Duty Online, which we expect will enter an unlimited beta test, including virtual item sales, in China during the first quarter, and Blizzard Entertainment’s Heroes of the Storm™. Looking ahead, we have more opportunities than ever before to fuel our growth by creating great content using new platforms and business models while also expanding into new geographies. We are embracing all of these growth opportunities with the same commitment to excellence that we have demonstrated over the past 23 years.”

Selected Business Highlights:

  • For the third quarter, Activision Publishing’s Destiny was the largest new franchise launch in videogame history and ranks among the top 10 largest videogame launches of all time in the U.S.² To date, Destiny has more than 9.5 million registered users and our active players are playing the game an average of more than three hours per day.¹
  • Blizzard Entertainment’s World of Warcraft remains the #1 subscription-based MMORPG, with more than 7.4 million subscribers as of September 30, 2014, ahead of the upcoming World of Warcraft: Warlords of Draenor release.¹
  • During the quarter, Blizzard Entertainment’s newest franchise, Hearthstone: Heroes of Warcraft, exceeded 20 million registered users life to date.¹
  • In North America and Europe combined, for the third quarter, Blizzard Entertainment’s Diablo III: Reaper of Souls - Ultimate Evil Edition was the #4 best-selling console title², and year to date, Diablo III: Reaper of Souls remained the #2 PC game in dollars.³
  • In North America and Europe combined, for the first nine months of 2014, Activision Publishing’s Skylanders SWAP Force™ was the #4 best-selling console and handheld game overall in dollars, and in North America and Europe, Skylanders toys outsold the #1 action figure line.⁴
  • On November 7 and 8, 2014, Blizzard Entertainment will host its eighth BlizzCon® gaming convention at the Anaheim Convention Center. For new product announcements and information please visit www.blizzcon.com.

Company Outlook:

On October 5, 2014, Activision Publishing launched Skylanders Trap Team and yesterday the company released Call of Duty: Advanced Warfare, which brings a new vision to the Call of Duty franchise.

On November 13, 2014, Blizzard Entertainment expects to release World of Warcraft: Warlords of Draenor, the newest expansion in the epic franchise.

Additionally, on December 9, 2014, Activision Publishing plans to release The Dark Below™, the first expansion to Destiny, for Sony’s PlayStation®4 and PlayStation®3 and Microsoft’s Xbox One and Xbox 360®.

Based on its third quarter results, Activision Blizzard is raising its full year net revenue and non-GAAP earnings per share outlook. The company’s fourth-quarter and full-year net revenue and earnings per share outlook are as follows:

(in millions, except EPS)

  GAAP Outlook   Prior*

GAAP Outlook

  Non-GAAP Outlook   Prior*

Non-GAAP Outlook

CY 2014

Net Revenues $ 4,325 $ 4,240 $ 4,800 $ 4,700
EPS $ 0.91 $ 0.91 $ 1.35 $ 1.29
Fully Diluted Shares** 745 750 745 750
 

Q4 2014

Net Revenues $ 1,492 n/a $ 2,200 n/a
EPS $ 0.28 n/a $ 0.86 n/a
Fully Diluted Shares** 748 n/a 748 n/a
* Prior outlook was provided by the company on August 5, 2014 in its earnings release

**Fully diluted weighted average shares include participating securities and dilutive options on a weighted average basis.

 

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, 2014 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 877-681-3367 in the U.S. with passcode 5237379.

About Activision Blizzard

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

Headquartered in Santa Monica, California, Activision Blizzard maintains operations throughout the United States, Europe, and Asia. It 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 Activision Blizzard internal estimates
²According to The NPD Group, GfK Chart-Track and Activision Blizzard internal estimates
³According to The NPD Group and GfK Chart-Track
⁴According to the NPD Group and Gfk Chart-Track and Activision Blizzard internal estimates, including toys and accessories

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 (including legal fees, costs, expenses and accruals) 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 the $4.75 billion debt financings related thereto; 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 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 relating to product releases; and (3) statements of future financial or operating performance.

Activision Blizzard 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 risk, reflect management’s current expectations, estimates and projections about our business, and are inherently uncertain and difficult to predict. Activision Blizzard’s actual future results could differ materially from those expressed in the forward-looking statements set forth in this release. Risks and uncertainties that may affect our future results 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, massively multiplayer online and “toys to life” 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, financing providers, licensees, licensors, vendors, and third-party developers, including the ability to attract, retain and develop key personnel and developers that can create high quality 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 transactions involving the repurchase of shares from Vivendi S.A. 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 “Risk Factors” included in Part I, Item 1A of Activision Blizzard’s most recent annual report on Form 10-K. 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.

(Tables to Follow)

 
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,
  2014     2013 2014     2013
 
Net revenues:
Product sales $ 337 $ 332 $ 1,693 $ 2,049
Subscription, licensing and other revenues 1   416   359   1,140   1,016
Total net revenues   753   691   2,833   3,065
 
Costs and expenses:
Cost of sales - product costs 156 111 568 551
Cost of sales - online 56 43 170 154
Cost of sales - software royalties and amortization 34 16 136 116
Cost of sales - intellectual property licenses 7 5 20 56
Product development 131 140 387 387
Sales and marketing 221 144 465 367
General and administrative   140   162   342   347
Total costs and expenses   745   621   2,088   1,978
Operating income 8 70 745 1,087
Interest and other investment income (expense), net   (51)   (4)   (152)   (1)
Income (loss) before income tax expense (benefit) (43) 66 593 1,086
Income tax expense (benefit)   (20)   10   119   249
Net income (loss) $ (23) $ 56 $ 474 $ 837
                 
Basic earnings (loss) per common share 2 $ (0.03) $ 0.05 $ 0.65 $ 0.73
Weighted average common shares outstanding   718   1,122   714   1,118
                 
Diluted earnings (loss) per common share 2 $ (0.03) $ 0.05 $ 0.64 $ 0.73
Weighted average common shares outstanding assuming dilution   718   1,134   725   1,127
 
 
1 Subscription, licensing and other revenues represents revenues from World of Warcraft subscriptions, 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 14 million and 16 million for the three and nine months ended September 30, 2014, respectively. 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. Net income (loss) attributable to Activision Blizzard Inc. common shareholders used to calculate earnings per common share assuming dilution was $(23) million and $462 million for the three and nine months ended September 30, 2014 as compared to the total net income (loss) of $(23) million and $474 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 $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.
 
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in millions)
 
    September 30,     December 31,
  2014 2013
ASSETS        
Current assets:
Cash and cash equivalents $ 3,805 $ 4,410
Short-term investments 23 33
Accounts receivable, net 689 510
Inventories, net 222 171
Software development 445 367
Intellectual property licenses 2 11
Deferred income taxes, net 394 321
Other current assets   377   418
Total current assets   5,957   6,241
Long-term investments 9 9
Software development 78 21
Property and equipment, net 162 138
Other assets 90 35
Intangible assets, net 38 43
Trademark and trade names 433 433
Goodwill   7,088   7,092
Total assets $ 13,855 $ 14,012
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current liabilities:
Accounts payable $ 266 $ 355
Deferred revenues 1,305 1,389
Accrued expenses and other liabilities 541 636
Current portion of long-term debt   ---   25
Total current liabilities   2,112   2,405
Long-term debt, net 4,322 4,668
Deferred income taxes, net 82 66
Other liabilities   347   251
Total liabilities   6,863   7,390
Shareholders’ equity:
Common stock --- ---
Additional paid-in capital 9,900 9,682
Treasury stock (5,764) (5,814)
Retained earnings 3,013 2,686
Accumulated other comprehensive income (loss)   (157)   68
Total shareholders’ equity   6,992   6,622
Total liabilities and shareholders’ equity $ 13,855 $ 14,012
 
 
 
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, 2014  

Net Revenues

 

Cost of Sales -
Product Costs

 

Cost of Sales -
Online

 

Cost of Sales -
Software Royalties
and Amortization

 

Cost of Sales -
Intellectual
Property Licenses

 

Product
Development

 

Sales and
Marketing

 

General and
Administrative

 

Total Costs and
Expenses

GAAP Measurement $ 753 $ 156 $ 56 $ 34 $ 7 $ 131 $ 221 $ 140 $ 745
Less: Net effect from deferral of net revenues and related cost of sales (a) 417 80 - 157 - - - - 237
Less: Stock-based compensation (b) - - - (1) - (5) (3) (13) (22)
Less: Amortization of intangible assets (c) - - - - (2) - - - (2)
Less: Fees and other expenses related to the Purchase Transaction and related debt financings (d)   -   -   -   -   -   -   -   (48)   (48)
Non-GAAP Measurement   $ 1,170 $ 236 $ 56 $ 190 $ 5 $ 126 $ 218 $ 79 $ 910
 
 
Three Months Ended September 30, 2014

Operating
Income

Net Income
(Loss)

Basic Earnings
(Loss) per
Share

Diluted Earnings
(Loss) per Share

GAAP Measurement $ 8 $ (23) $ (0.03) $ (0.03)
Less: Net effect from deferral of net revenues and related cost of sales (a) 180 133 0.18 0.18
Less: Stock-based compensation (b) 22 14 0.02 0.02
Less: Amortization of intangible assets (c) 2 1 - -
Less: Fees and other expenses related to the Purchase Transaction and related debt financings (d)   48   48   0.07   0.07
Non-GAAP Measurement   $ 260 $ 173 $ 0.24 $ 0.23
 
 
Nine Months Ended September 30, 2014  

Net Revenues

 

Cost of Sales -
Product Costs

 

Cost of Sales -
Online

 

Cost of Sales -
Software Royalties
and Amortization

 

Cost of Sales -
Intellectual
Property Licenses

 

Product
Development

 

Sales and
Marketing

 

General and
Administrative

 

Total Costs and
Expenses

GAAP Measurement $ 2,833 $ 568 $ 170 $ 136 $ 20 $ 387 $ 465 $ 342 $ 2,088
Less: Net effect from deferral of net revenues and related cost of sales (a) (233) (83) - 109 1 - - - 27
Less: Stock-based compensation (b) - - - (12) - (17) (6) (41) (76)
Less: Amortization of intangible assets (c) - - - - (4) - - - (4)
Less: Fees and other expenses related to the Purchase Transaction and related debt financings (d)   -   -   -   -   -   -   -   (48)   (48)
Non-GAAP Measurement   $ 2,600 $ 485 $ 170 $ 233 $ 17 $ 370 $ 459 $ 253 $ 1,987
 
 
Nine Months Ended September 30, 2014

Operating
Income

Net Income

Basic Earnings
per Share

Diluted Earnings
per Share

GAAP Measurement $ 745 $ 474 $ 0.65 $ 0.64
Less: Net effect from deferral of net revenues and related cost of sales (a) (260) (212) (0.29) (0.29)
Less: Stock-based compensation (b) 76 46 0.06 0.06
Less: Amortization of intangible assets (c) 4 3 - -
Less: Fees and other expenses related to the Purchase Transaction and related debt financings (d)   48   48   0.07   0.07
Non-GAAP Measurement   $ 613 $ 359 $ 0.49 $ 0.48
 
 
  (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 (including legal fees, costs, expenses and accruals) 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 $170 million and $350 million for the three and nine months ended September 30, 2014 as compared to total non-GAAP net income of $173 million and $359 million for the same periods, respectively.

 
For purpose of calculation of earnings per share, we had, on a weighted-average basis, common shares outstanding of 718 million, participating securities of approximately 14 million, and dilutive shares of 10 million during the three months ended September 30, 2014.
 
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, 2013   Net Revenues  

Cost of Sales -
Product Costs

 

Cost of Sales -
Online

 

Cost of Sales -
Software Royalties
and Amortization

 

Cost of Sales -
Intellectual
Property Licenses

 

Product
Development

 

Sales and
Marketing

 

General and
Administrative

 

Total Costs and
Expenses

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

Operating
Income

Net Income

Basic Earnings
per Share

Diluted Earnings
per 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
- Online

 

Cost of Sales -
Software Royalties
and Amortization

 

Cost of Sales -
Intellectual
Property Licenses

 

Product
Development

 

Sales and
Marketing

 

General and
Administrative

 

Total Costs and
Expenses

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

Operating
Income

Net Income

Basic Earnings
per Share

Diluted Earnings
per 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 (including legal fees, costs, expenses and accruals) 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 Inc. 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 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
FINANCIAL INFORMATION
For the Three And Nine Months Ended September 30, 2014 and 2013
(Amounts in millions)
                           
Three Months Ended
September 30, 2014 September 30, 2013 $ Increase % Increase
Amount % of Total4 Amount % of Total4 (Decrease) (Decrease)
GAAP Net Revenues by Distribution Channel
Retail channels $ 171 23 % $ 226 33 % $ (55) (24) %
Digital online channels1   504 67   409 59   95 23
Total Activision and Blizzard 675 90 635 92 40 6
 
Distribution   78 10   56 8   22 39
Total consolidated GAAP net revenues   753 100   691 100   62 9
 
Change in Deferred Revenues2
Retail channels 416 (24)
Digital online channels1   1   (10)
Total changes in deferred revenues   417   (34)
 
Non-GAAP Net Revenues by Distribution Channel
Retail channels 587 50 202 31 385 191
Digital online channels1   505 43   399 61   106 27
Total Activision and Blizzard 1,092 93 601 91 491 82
 
Distribution   78 7   56 9   22 39
Total non-GAAP net revenues3 $ 1,170 100 % $ 657 100 % $ 513 78 %
 
 
Nine Months Ended
September 30, 2014 September 30, 2013 $ Increase % Increase
Amount % of Total4 Amount % of Total4 (Decrease) (Decrease)
GAAP Net Revenues by Distribution Channel
Retail channels $ 1,257 44 % $ 1,748 57 % $ (491) (28) %
Digital online channels1   1,358 48   1,174 38   184 16
Total Activision and Blizzard 2,615 92 2,922 95 (307) (11)
 
Distribution   218 8   143 5   75 52
Total consolidated GAAP net revenues   2,833 100   3,065 100   (232) (8)
 
Change in Deferred Revenues2
Retail channels (388) (1,033)
Digital online channels1   155   38
Total changes in deferred revenues   (233)   (995)
 
Non-GAAP Net Revenues by Distribution Channel
Retail channels 869 33 715 35 154 22
Digital online channels1   1,513 58   1,212 59   301 25
Total Activision and Blizzard 2,382 92 1,927 93 455 24
 
Distribution   218 8   143 7   75 52
Total non-GAAP net revenues3 $ 2,600 100 % $ 2,070 100 % $ 530 26 %
 
1 Net revenues from digital online channels represent revenues from subscriptions, 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, 2014 and 2013
(Amounts in millions)
   
Three Months Ended
September 30, 2014     September 30, 2013     $ Increase     % Increase
Amount     % of Total6 Amount     % of Total6 (Decrease) (Decrease)
GAAP Net Revenues by Segment/Platform Mix
Activision and Blizzard:
Online1

$

205

27

%

$

205

30

%

$

---

--- %
PC 165 22 79 11 86 109
 
Next-generation (PS4, Xbox One, Wii U) 109 14 3 --- 106 NM
Current-generation (PS3, Xbox 360, Wii)   161   21     293   42     (132 ) (45 )
Total console2   270   36     296   43     (26 ) (9 )
 
Mobile and other5 35 5 55 8 (20 ) (36 )
         
Total Activision and Blizzard   675   90     635   92     40   6
 
Distribution:
Total Distribution   78   10     56   8     22   39
Total consolidated GAAP net revenues   753   100     691   100     62   9
 
Change in Deferred Revenues3
Activision and Blizzard:
Online1 4 (24 )
PC (69 ) (38 )
 
Next-generation (PS4, Xbox One, Wii U) 359 (2 )
Current-generation (PS3, Xbox 360, Wii)   123     30  
Total console2   482     28  
   
Total changes in deferred revenues   417     (34 )
 
Non-GAAP Net Revenues by Segment/Platform Mix
Activision and Blizzard:
Online1 209 18 181 28 28 15
PC 96 8 41 6 55 134
 
Next-generation (PS4, Xbox One, Wii U) 468 40 1 --- 467 NM
Current-generation (PS3, Xbox 360, Wii)   284   24     323   49     (39 ) (12 )
Total console2   752   64     324   49     428   132
 
Mobile and other5 35 3 55 8 (20 ) (36 )
         
Total Activision and Blizzard   1,092   93     601   91     491   82
 
Distribution:
Total Distribution   78   7     56   9     22   39
Total consolidated non-GAAP net revenues4

$

1,170   100

%

$

657   100

%

$

513   78 %
 
1 Revenues from online consists of revenues from all World of Warcraft products, including subscriptions, boxed products, expansion packs, licensing royalties, and value-added services.
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 mobile and 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, 2014 and 2013
(Amounts in millions)
   
Nine Months Ended
September 30, 2014     September 30, 2013     $ Increase     % Increase
Amount     % of Total6 Amount     % of Total6 (Decrease) (Decrease)
GAAP Net Revenues by Segment/Platform Mix
Activision and Blizzard:
Online1

$

601

21

%

$

714

23

%

$

(113

)

(16 ) %
PC 447 16 274 9 173 63
 
Next-generation (PS4, Xbox One, Wii U) 353 12 14 --- 339 NM
Current-generation (PS3, Xbox 360, Wii)   1,049   37     1,620   53     (571 ) (35 )
Total console2   1,402   49     1,634   53     (232 ) (14 )
 
Mobile and other5 165 6 300 10 (135 ) (45 )
         
Total Activision and Blizzard   2,615   92     2,922   95     (307 ) (11 )
 
Distribution:
Total Distribution   218   8     143   5     75   52
Total consolidated GAAP net revenues   2,833   100     3,065   100     (232 ) (8 )
 
Change in Deferred Revenues3
Activision and Blizzard:
Online1 36 (110 )
PC 18 (67 )
 
Next-generation (PS4, Xbox One, Wii U) 214 (10 )
Current-generation (PS3, Xbox 360, Wii)   (513 )   (808 )
Total console2   (299 )   (818 )
 
Mobile and other5   12     ---  
Total changes in deferred revenues   (233 )   (995 )
 
Non-GAAP Net Revenues by Segment/Platform Mix
Activision and Blizzard:
Online1 637 25 604 29 33 5
PC 465 18 207 10 258 125
 
Next-generation (PS4, Xbox One, Wii U) 567 22 4 --- 563 NM
Current-generation (PS3, Xbox 360, Wii)   536   21     812   39     (276 ) (34 )
Total console2   1,103   42     816   39     287   35
 
Mobile and other5 177 7 300 14 (123 ) (41 )
         
Total Activision and Blizzard   2,382   92     1,927   93     455   24
 
Distribution:
Total Distribution   218   8     143   7     75   52
Total consolidated non-GAAP net revenues4

$

2,600   100

%

$

2,070   100

%

$

530   26 %
 
1 Revenues from online consists of revenues from all World of Warcraft products, including subscriptions, boxed products, expansion packs, licensing royalties, and value-added services.
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 mobile and 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, 2014 and 2013
(Amounts in millions)
                                   
Three Months Ended
September 30, 2014 September 30, 2013 $ Increase % Increase
Amount % of Total3 Amount % of Total3 (Decrease) (Decrease)
GAAP Net Revenues by Geographic Region
North America $ 350 46 % $ 344 50 % $ 6 2 %
Europe 316 42 290 42 26 9
Asia Pacific   87   12   57   8   30   53
Total consolidated GAAP net revenues   753   100   691   100   62   9
 
Change in Deferred Revenues1
North America 274 (2 )
Europe 135 (24 )
Asia Pacific   8     (8 )
Total changes in net revenues   417     (34 )
 
Non-GAAP Net Revenues by Geographic Region
North America 624 53 342 52 282 82
Europe 451 39 266 40 185 70
Asia Pacific   95   8   49   7   46   94
Total non-GAAP net revenues2 $ 1,170   100 % $ 657   100 % $ 513   78 %
 
 
  Nine Months Ended
September 30, 2014 September 30, 2013 $ Increase % Increase
Amount % of Total3 Amount % of Total3 (Decrease) (Decrease)
GAAP Net Revenues by Geographic Region
North America $ 1,384 49 % $ 1,643 54 % $ (259 ) (16 ) %
Europe 1,172 41 1,180 38 (8 ) (1 )
Asia Pacific   277   10   242   8   35   14
Total consolidated GAAP net revenues   2,833   100   3,065   100   (232 ) (8 )
 
Change in Deferred Revenues1
North America (136 ) (564 )
Europe (102 ) (355 )
Asia Pacific   5     (76 )
Total changes in net revenues   (233 )   (995 )
 
Non-GAAP Net Revenues by Geographic Region
North America 1,248 48 1,079 52 169 16
Europe 1,070 41 825 40 245 30
Asia Pacific   282   11   166   8   116   70
Total non-GAAP net revenues2 $ 2,600   100 % $ 2,070   100 % $ 530   26 %
 
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, 2014 and 2013
(Amounts in millions)
 
    Three Months Ended
September 30, 2014     September 30, 2013     $ Increase     % Increase
Amount     % of Total5 Amount     % of Total5 (Decrease) (Decrease)
Segment net revenues:
Activision1 $ 704 60 % $ 319 49 % $ 385 121 %
Blizzard2 388 33 282 43 106 38
Distribution3   78   7   56   9   22   39
Operating segment total 1,170 100 % 657 100 % 513 78
 
Reconciliation to consolidated net revenues:
Net effect from deferral of net revenues   (417 )   34  
Consolidated net revenues $ 753   $ 691   $ 62 9 %
 
Segment income (loss) from operations:
Activision1 $ 95 $ 41 $ 54 132 %
Blizzard2 164 88 76 86
Distribution3   1     (1 )   2   ---
Operating segment total 260 128 132 103
 

Reconciliation to consolidated operating income and
consolidated income (loss) before income tax expense (benefit):

Net effect from deferral of net revenues and related cost of sales (180 ) 32
Stock-based compensation expense (22 ) (25 )
Amortization of intangible assets (2 ) (3 )
Fees and other expenses related to the Purchase Transaction and related debt financings4   (48 )   (62 )
Consolidated operating income 8 70 (62 ) (89 )
Interest and other investment income (expense), net   (51 )   (4 )
Consolidated (loss) income before income tax expense (benefit) $ (43 ) $ 66   $ (109 ) (165 ) %
 
Operating margin from total operating segments 22.2 % 19.5 %
 
 
Nine Months Ended
September 30, 2014 September 30, 2013 $ Increase % Increase
Amount % of Total5 Amount % of Total5 (Decrease) (Decrease)
Segment net revenues:
Activision1 $ 1,193 46 % $ 1,090 53 % $ 103 9 %
Blizzard2 1,189 46 837 40 352 42
Distribution3   218   8   143   7   75   52
Operating segment total 2,600 100 % 2,070 100 % 530 26
 
Reconciliation to consolidated net revenues:
Net effect from deferral of net revenues   233     995  
Consolidated net revenues $ 2,833   $ 3,065   $ (232 ) (8 ) %
 
Segment income (loss) from operations:
Activision1 $ 66 $ 214 $ (148 ) (69 ) %
Blizzard2 548 282 266 94
Distribution3   (1 )   (1 )   ---   ---
Operating segment total 613 495 118 24
 

Reconciliation to consolidated operating income and
consolidated income before income tax expense:

 

Net effect from deferral of net revenues and related cost of sales 260 738
Stock-based compensation expense (76 ) (76 )
Amortization of intangible assets (4 ) (8 )
Fees and other expenses related to the Purchase Transaction and related debt financings4   (48 )   (62 )
Consolidated operating income 745 1,087 (342 ) (31 )
Interest and other investment income (expense), net   (152 )   (1 )
Consolidated income before income tax expense $ 593   $ 1,086   $ (493 ) (45 ) %
 
Operating margin from total operating segments 23.6 % 23.9 %
 
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 (including legal fees, costs, expenses and accruals) 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, 2014
EBITDA and Adjusted EBITDA
(Amounts in millions)
                   
 
Trailing Twelve
Months Ending
December 31, 2013 March 31, 2014 June 30, 2014 September 30, 2014 September 30, 2014
 
GAAP Net Income (Loss) $ 174 $ 293 $ 204 $ (23 ) $ 648
Interest (Income) / Expense, net 52 51 50 51 204
Provision (Benefit) for income taxes 59 83 56 (20 ) 178
Depreciation and amortization   40   19     19     22     100
EBITDA 325 446 329 30 1,130
 
Deferral of net revenues and related cost of sales (a) 509 (219 ) (220 ) 180 250
Stock-based compensation expense (b) 34 30 22 22 108
Fees and other expenses related to the Purchase
Transaction and related debt financings (c)   18   ---     ---     48     66

Adjusted EBITDA

$ 886 $ 257   $ 131   $ 280   $ 1,554
 

(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 (including legal fees, costs, expenses and accruals) 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.

 
Trailing twelve months amounts are presented as calculated. Therefore, the sum of the four quarters, as presented, may differ due to the impact of rounding.
 
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
Outlook for the Quarter and Year Ending December 31, 2014
GAAP to Non-GAAP Reconciliation
(Amounts in millions, except per share data)
        Outlook for       Outlook for
Quarter Ending Year Ending
December 31, 2014 December 31, 2014
 
Net Revenues (GAAP) $ 1,492 $ 4,325
 

Excluding the impact of:

Change in deferred net revenues (a)   708   475
 
Net Revenues (Non-GAAP) $ 2,200 $ 4,800
 
 

Earnings Per Diluted Share (GAAP)

$ 0.28 $ 0.91
 

Excluding the impact of:

Net effect from deferral in net revenues and related cost of sales (b)

0.54

0.25
Stock-based compensation (c) 0.03 0.09
Amortization of intangible assets (d) 0.01 0.01
Fees and other expenses related to the Purchase Transaction and
related debt financings (e) 0.01 0.08
       
Earnings Per Diluted Share (Non-GAAP) $ 0.86 $

1.35

 

(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 (including legal fees, costs, expenses and accruals) 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 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.

Contacts

Activision Blizzard, Inc.
Kristin Southey
SVP, Investor Relations
(310) 255-2635
ksouthey@activision.com
or
Mary Osako
SVP, Global Communications
(424) 322-5166
mary.osako@activision.com

Release Summary

Activision Blizzard Announces Q3 2014 Financial Results

Contacts

Activision Blizzard, Inc.
Kristin Southey
SVP, Investor Relations
(310) 255-2635
ksouthey@activision.com
or
Mary Osako
SVP, Global Communications
(424) 322-5166
mary.osako@activision.com