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Activision Blizzard Announces Better-Than-Expected Third Quarter 2012 Financial Results

Nov 07, 2012 (03:11 PM EST)
URL: http://www.techweb.com/show-press-release/X932376/activision-blizzard-announces-better-than-expected-third-quarter-2012-financial-results.html

Company Had Three of the Top Four Best-Selling Games in North America and Europe for the First Nine Months of 2012ยน

Company Raises 2012 Net Revenues and EPS Outlook

SANTA MONICA, Calif., Nov. 7, 2012 /PRNewswire/ -- Activision Blizzard, Inc. (Nasdaq: ATVI) today announced better-than-expected financial results for the third quarter of 2012. 


Third Quarter 


Nine Months


(in millions, except EPS)

2012


 Prior

Outlook*


2011


2012


2011

GAAP
 Net Revenues

$

841


$

740


$

754

 

$

 

3,088

 

$

 

3,348

 EPS

$

0.20


$

0.06


$

0.13

$

0.70

$

0.84

Non-GAAP
 Net Revenues

$

751


$

690


$

627

 

$

 

2,393

 

$

 

2,080

 EPS

$

0.15


$

0.07


$

0.07

$

0.40

$

0.31


*Prior Outlook was provided by the company in its August 2, 2012 earnings release

For the quarter ended September 30, 2012, the company delivered record GAAP net revenues of $841 million, as compared with $754 million for the third quarter of 2011.   On a non-GAAP basis, the company's net revenues were $751 million, as compared with $627 million for the third quarter of 2011.  For the third-quarter, GAAP net revenues from digital channels were $430 million and represented 51% of the company's total net revenues.  On a non-GAAP basis, net revenues from digital channels were $427 million and represented 57% of the quarter's total net revenues. 

For the quarter ended September 30, 2012, Activision Blizzard delivered record GAAP earnings per diluted share of $0.20, as compared with $0.13 for the third quarter of 2011.  On a non-GAAP basis, the company also delivered record earnings per diluted share of $0.15, as compared with $0.07 for the third quarter of 2011.  Both GAAP and non-GAAP earnings include a one-time tax benefit of $46 million, or $0.04 per diluted share, resulting from the closure of an IRS audit related to pre-merger net operating losses from Vivendi Games.

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.

Robert Kotick, Chief Executive Officer, Activision Blizzard, said, "Our unyielding commitment to excellence, the strength of our employees around the globe and our focus on creating great entertainment experiences have enabled us to once again deliver better-than-expected financial results.  We have, for the third straight year, generated over $1 billion of operating cash flow for the trailing twelve month period ending September 30. Our performance was driven by the launch of Blizzard Entertainment's World of Warcraft®: Mists of Pandaria™ and continued sales of its top-selling PC game, Diablo® III™, as well as Activision Publishing's new entertainment property, Skylanders Spyro's Adventure®, and sales of titles in the Call of Duty® franchise.  Based on our strong third-quarter performance and increased visibility into the remainder of the year, we are raising our full-year financial outlook and expect to deliver record non-GAAP operating margins and the highest non-GAAP earnings per share in our company's history.  We now expect non-GAAP earnings per share will increase more than 18% year over year."

Kotick added, "Skylanders Giants is off to a great start and next week the company will release Call of Duty®: Black Ops II, which we believe will be one of the most successful launches of any form of entertainment in history."

Kotick continued, "As we look to 2013, we are cautious about business prospects given a continuingly challenged global economy, the ongoing console transition and very difficult year-over-year comparables due to Blizzard's record-shattering Diablo III sales in 2012.  We expect that over the long-term, we will maintain our leadership position as the world's leading interactive entertainment company and continue to provide strong returns to our shareholders by delivering great games to audiences around the world."

Selected Business Highlights

  • Activision Publishing's Skylanders Spyro's Adventure has been the #1 best-selling console and handheld game overall in dollars, including accessory packs and figures, in North America and Europe for the first nine months of 2012.¹  Additionally, Skylanders Spyro's Adventure was the #1 action-figure line in the U.S., outselling all other action–figure lines for the first nine months of 2012.²
  • For the first nine months, Activision Blizzard was the #1 PC publisher in the U.S. and Europe.  Additionally, for the third quarter, Blizzard Entertainment had two of the top five PC games with Diablo IIIand World of Warcraft: Mists of Pandaria
  • Since its release in May 2012, Blizzard Entertainment's Diablo III was the #1 best-selling game in dollars and units on the PC in the U.S. and Europe.¹ 
  • On September 25, 2012, Blizzard Entertainment released World of Warcraft: Mists of Pandaria™, and sold through approximately 2.7 million copies of the game as of its first week of release.³ Additionally, on October, 2, 2012, World of Warcraft: Mists of Pandaria was released in China, marking what the company believes to be the first time any game has officially released in China as part of a global launch.
  • As of September 30, 2012, Blizzard Entertainment's World of Warcraft remains the #1 subscription-based MMORPG, with more than 10 million subscribers.³

Company Outlook

During October, Activision Publishing released several new titles including:  007™ Legends on October 16, 2012; Skylanders Giants on October 22, 2012; Cabela's Dangerous Hunts 2013 and Cabela's Hunting Expeditions on October 23, 2012; and Transformers Primeon October 30, 2012.  

On November 13, 2012, Activision Publishing expects to release its highly anticipated game, Call of Duty: Black Ops II, the most ambitious Call of Duty game ever.  Additionally, Activision Publishing expects to release Wipeout 3 on November 18, 2012 and Family Guy: Back to the Multiverse on November 20, 2012.

Based on better-than-expected third-quarter results, Activision Blizzard is raising its outlook for calendar year 2012 from the estimates it provided on August 2, 2012, as follows:



GAAP
Outlook


Prior*

GAAP
Outlook


Non-GAAP
Outlook


Prior*

Non-GAAP
Outlook

CY 2012
  Net Revenues

   (in millions)


$

4,574


$

4,330


$

4,805


$

4,630

  EPS


$

0.88


$

0.69


$

1.10


$

0.99

Q4 2012
  Net Revenues

   (in millions)


$

1,485


$

 n/a


$

2,412


$

 n/a

  EPS


$

0.19


$

 n/a


$

0.70


$

 n/a















*Prior outlook was provided by the company in its August 2, 2012 earnings release.

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, 2012 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 888-455-2265 in the U.S. with passcode 7041557.

About Activision Blizzard

Headquartered in Santa Monica, California, Activision Blizzard, Inc. is a worldwide online, PC, console, handheld and mobile device game publisher with leading positions across the major categories of the interactive entertainment software industry.

Activision Blizzard maintains operations in the U.S., Canada, the United Kingdom, France, Germany, Ireland, Italy, Sweden, Spain, the Netherlands, Australia, South Korea and China.  More information about Activision Blizzard and its products can be found on the company's website, www.activisionblizzard.com.

Subscriber Definition:  Consistent with past practice, 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. The non-GAAP financial measures exclude the following items, as applicable in any given reporting period:

  • the change in deferred net revenue and related cost of sales with respect to certain of the company's online-enabled games;
  • expenses related to stock-based compensation;
  • expenses related to restructuring;
  • the amortization of intangibles, and impairment of intangible assets and goodwill; 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, 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, and non-GAAP operating margin 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 net revenue 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 revenue 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 net revenue 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 net revenue 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, the impact of the current macroeconomic environment and market conditions within the video game industry, increasing concentration of titles, shifts in consumer spending trends, Activision Blizzard's ability to predict consumer preferences, including interest in specific genres such as first-person action and massively multiplayer online games and preferences among competing hardware platforms, 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, the seasonal and cyclical nature of the interactive entertainment 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, rapid changes in technology and industry standards, litigation risks and associated costs, protection of proprietary rights, 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, potential challenges associated with geographic expansion, and the other  factors  identified in the risk factors section of Activision Blizzard's most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission.  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.

¹According to The NPD Group, Chart-Track and GfK
²According to The NPD Group
³According to Activision Blizzard internal estimates

(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,



2012

2011

2012

2011










Net revenues:









Product sales

$   536

$   369

$   2,208

$   2,197


Subscription, licensing and other revenues 1

305

385

880

1,151


     Total net revenues

841

754

3,088

3,348







Costs and expenses:






Cost of sales - product costs

146

138

633

650


Cost of sales - online subscriptions

56

59

178

181


Cost of sales - software royalties and amortization

19

24

107

133


Cost of sales - intellectual property licenses

10

16

37

69


Product development

131

133

407

390


Sales and marketing

131

115

346

264


General and administrative

121

104

413

333


Restructuring

-

3

-

24


     Total costs and expenses

614

592

2,121

2,044

Operating income

227

162

967

1,304

Investment and other income (expense), net

1

3

4

7

Income before income tax expense

228

165

971

1,311

Income tax expense

2

17

176

325

Net income

$   226

$   148

$   795

$   986













Basic earnings per common share

$   0.20

$   0.13

$   0.70

$   0.84

Weighted average common shares outstanding

1,109

1,140

1,113

1,151













Diluted earnings per common share 2

$   0.20

$   0.13

$   0.70

$   0.84

Weighted average common shares outstanding assuming dilution

1,114

1,148

1,118

1,160





















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 27 million and 23 million for the three and nine months ended September 30, 2012, respectively, and we had, on a weighted-average basis, participating securities of approximately 17 million for the three and nine months ended September 30, 2011. 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 the total net income of $226 million and $795 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 $146 million and $972 million for the three and nine months ended September 30, 2011, as compared to total net income of $148 million and $986 million for the same periods, respectively.


 

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in millions)




September 30,

December 31,




2012

2011

ASSETS




Current assets:





Cash and cash equivalents

$    2,909

$    3,165



Short-term investments

455

360



Accounts receivable, net

200

649



Inventories, net

291

144



Software development

164

137



Intellectual property licenses

13

22



Deferred income taxes, net

497

507



Other current assets

173

396



     Total current assets

4,702

5,380


Long-term investments

19

16


Software development

156

62


Intellectual property licenses

4

12


Property and equipment, net

148

163


Other assets

12

12


Intangible assets, net

80

88


Trademark and trade names

433

433


Goodwill

7,107

7,111



Total assets

$   12,661

$   13,277






LIABILITIES AND SHAREHOLDERS' EQUITY




Current liabilities:





Accounts payable

$      253

$      390



Deferred revenues

847

1,472



Accrued expenses and other liabilities

455

694



      Total current liabilities

1,555

2,556



Deferred income taxes, net

60

55



Other liabilities

163

174



Total liabilities

1,778

2,785







Shareholders' equity:





Common stock

---

---



Additional paid-in capital

9,418

9,616



Retained earnings

1,539

948



Accumulated other comprehensive income (loss)

(74)

(72)



      Total shareholders' equity

10,883

10,492



          Total liabilities and shareholders' equity

$   12,661

$   13,277









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 - Online Subscriptions

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


$   841

$   146

$    56

$    19

$    10

$   131

$   131

$   121

$   614


Less:  Net effect from deferral in 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

$    56

$    41

$     9

$   126

$   129

$    95

$   597
































































Three months ended September 30, 2012


Operating Income

Net Income

Basic Earnings per Share

Diluted Earnings per Share











GAAP Measurement


$   227

$   226

$  0.20

$  0.20












Less:  Net effect from deferral in 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 Royalties and Amortization

Cost of Sales - Intellectual Property Licenses

Product Development

Sales and Marketing

General and Administrative

Total Costs and Expenses

GAAP Measurement


$   3,088

$     633

$     178

$     107

$      37

$     407

$     346

$     413

$   2,121


Less:  Net effect from deferral in 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

$     178

$     106

$      30

$     393

$     341

$     353

$   1,848
































































Nine months ended September 30, 2012


Operating Income

Net Income

Basic Earnings per Share

Diluted Earnings per Share











GAAP Measurement


$     967

$     795

$    0.70

$    0.70












Less:  Net effect from deferral in 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 net revenues and related cost of sales.



(b) Includes expense related to stock-based compensation.



(c) Reflects amortization of intangible assets.



























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 $164 million and $449 million for the three and nine months ended September 30, 2012 as compared to the 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

RECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES

(Amounts in millions, except earnings per share data)
























Three months ended September 30, 2011

Net Revenues

Cost of Sales - Product Costs

Cost of Sales - Online Subscriptions

Cost of Sales - Software Royalties and Amortization

Cost of Sales - Intellectual Property Licenses

Product Development

Sales and Marketing

General and Administrative

Restructuring

Total Costs and Expenses

GAAP Measurement


$   754

$   138

$    59

$    24

$    16

$   133

$   115

$   104

$     3

$   592


Less:  Net effect from deferral in net revenues and related cost of sales

(a)


(127)


(10)


-


(10)


(2)


-


-


-


-


(22)


Less:  Stock-based compensation

(b)


-


-


-


-


-


(5)


(2)


(11)


-


(18)


Less:  Restructuring

(c)


-


-


-


-


-


-


-


-


(3)


(3)


Less:  Amortization of intangible assets

(d)


-


-


-


-


(7)


-


-


-


-


(7)

Non-GAAP Measurement


$   627

$   128

$    59

$    14

$     7

$   128

$   113

$    93

$     -

$   542






































































Three months ended September 30, 2011

Operating Income

Net Income

Basic Earnings per Share

Diluted Earnings per Share













GAAP Measurement


$   162

$   148

$  0.13

$  0.13














Less:  Net effect from deferral in net revenues and related cost of sales

(a)


(105)


(81)


(0.07)


(0.07)














Less:  Stock-based compensation

(b)


18


13


0.01


0.01














Less:  Restructuring

(c)


3


2


-


-














 Less:  Amortization of intangible assets

(d)


7


5


-


-













Non-GAAP Measurement


$    85

$    87

$  0.07

$  0.07














































































Nine months ended September 30, 2011

Net Revenues

Cost of Sales - Product Costs

Cost of Sales - Online Subscriptions

Cost of Sales - Software Royalties and Amortization

Cost of Sales - Intellectual Property Licenses

Product Development

Sales and Marketing

General and Administrative

Restructuring

Total Costs and Expenses

GAAP Measurement


$  3,348

$    650

$    181

$    133

$     69

$    390

$    264

$    333

$     24

$  2,044


Less:  Net effect from deferral in net revenues and related cost of sales

(a)


(1,268)


(220)


-


(84)


(21)


-


-


-


-


(325)


Less:  Stock-based compensation

(b)


-


-


-


(8)


-


(15)


(4)


(34)


-


(61)


Less:  Restructuring

(c)


-


-


-


-


-


-


-


-


(24)


(24)


 Less:  Amortization of intangible assets

(d)


-


-


-


(1)


(21)


-


-


-


-


(22)

Non-GAAP Measurement


$  2,080

$    430

$    181

$     40

$     27

$    375

$    260

$    299

$     -

$  1,612






































































Nine months ended September 30, 2011

Operating Income

Net Income

Basic Earnings per Share

Diluted Earnings per Share













GAAP Measurement


$  1,304

$    986

$   0.84

$   0.84














Less:  Net effect from deferral in net revenues and related cost of sales

(a)


(943)


(699)


(0.60)


(0.59)














Less:  Stock-based compensation

(b)


61


43


0.04


0.04














Less:  Restructuring

(c)


24


18