Activision Blizzard Announces Better-Than-Expected Third Quarter 2010 Financial Results

Third Quarter Net Revenues and EPS Exceed Prior Outlook and Prior Year. Company Increases 2010 Net Revenue and EPS Outlook.

SANTA MONICA, Calif. , Nov. 4, 2010 — Activision Blizzard, Inc. (Nasdaq: ATVI) today announced better-than-expected financial results for the third quarter of 2010.  

For the quarter ended September 30, 2010 , Activision Blizzard ‘s GAAP net revenues were $745 million , as compared to its prior third-quarter outlook of $600 million .  On a non-GAAP basis, the company’s net revenues were $857 million , as compared to its prior third-quarter outlook of $725 million .  

For the quarter ended September 30, 2010 , Activision Blizzard ‘s GAAP earnings per diluted share were $0.04 , as compared to its prior third-quarter outlook of break even GAAP earnings per share.  On a non-GAAP basis, the company’s earnings per diluted share were $0.12 , as compared to its prior third-quarter outlook of $0.08 .  

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 , CEO of Activision Blizzard , stated, “For the third quarter, we exceeded our net revenues and earnings per share outlook and delivered strong year-over-year growth.  Our better-than-expected results are due to our leadership in online entertainment, including strong performance from Activision Publishing’s Call of Duty® franchise, and Blizzard Entertainment’s World of Warcraft® and StarCraft® II: Wings of Liberty™.  For the nine months ending September 30, 2010 , our digital offerings contributed close to half of our total non-GAAP net revenues and our digital revenues have increased more than 15% over the prior year.  Most importantly, we continue to deliver some of the world’s best games.”

 

Kotick continued, ” Activision Publishing is about to introduce what is likely to be the biggest entertainment launch of the year with Call of Duty®: Black Ops, followed by Blizzard Entertainment’s World of Warcraft: Cataclysm, which we believe will deliver an incredible breadth of new content to the world’s largest massively multiplayer online role playing game (MMORPG) community.  As a result of our over-performance, we are raising our calendar year 2010 net revenue and earnings outlook.  We expect to deliver the most profitable year in our history with record operating margins.”

Business Highlights

For the first nine months of the calendar year, Activision Publishing’s Call of Duty was the #1 third-party franchise in the U.S. and Europe , and Blizzard Entertainment’s StarCraft II: Wings of Liberty was the #1 PC title overall, according to The NPD Group , Charttrack and Gfk.  Additionally, for the third quarter of the calendar year, Activision Blizzard was the #1 PC publisher in the U.S. and Europe , according to The NPD Group , Charttrack and Gfk.  

Other highlights are as follows:

  • During the third quarter of 2010, Call of Duty remained a top-10 franchise overall in the U.S. and Europe , according to The NPD Group , Charttrack and Gfk.
  • On August 3 , Blizzard Entertainment announced that StarCraft II: Wings of Liberty sold more than one million copies within the first 24 hours of its release, instantly making it the best-selling PC game of 2010, and more than 1.5 million copies within the first 48 hours of its release, making it the fastest-selling strategy game of all time.
  • On August 31 , Blizzard Entertainment and NetEase.com Inc. launched World of Warcraft: Wrath of
    the Lich King
    ™, the second expansion for Blizzard Entertainment’s award-winning subscription-based MMORPG, in mainland China .
  • On September 1 , Blizzard Entertainment announced that StarCraft II: Wings of Liberty sold more than three million copies worldwide in the first month of its release.
  • On October 4 , Blizzard Entertainment announced that World of Warcraft: Cataclysm, the highly anticipated third expansion for the world’s most popular subscription-based MMORPG, will be released on December 7 .
  • On October 5 , Activision
    Publishing announced that Treyarch’s Call of Duty: Black Ops will be playable in stereoscopic 3D when the game launches at retail outlets worldwide on November 9 .
  • On October 7 ,  Blizzard Entertainment announced that the subscriber base for World of Warcraft has exceeded 12 million players worldwide.
  • As of September 30 , Activision Blizzard had purchased approximately 55 million shares of its common stock, for approximately $600 million , under the $1 billion stock repurchase program authorized by its Board of Directors on February 10 .


Additionally, on September 7 , advertising industry veteran Eric Hirshberg joined Activision Publishing as Chief Executive Officer, to oversee operational management of the publishing division’s studio, product development and consumer marketing functions.  

Company Outlook

In the fourth quarter of 2010, Activision Publishing expects to release six new titles including Bakugan: Defenders of the Core, a highly anticipated kids title based on the award-winning toy line and television show;  DJ Hero 2®, which delivers an exciting social multiplayer music experience where two virtual DJs can mix together while a vocalist sings along to lyrics from today’s biggest hits; Goldeneye 007™, which was designed to make full use of the Nintendo Wii’sunique interactive capabilities and allows players to channel Daniel Craig ‘s lethal and gritty James Bond in a new take on the legendary Bond adventure;   James
Bond
007
: Bloodstone, a cinematic action game that allows players to experience the brutal and dangerous style of Daniel Craig ‘s Bond as they engage in hand-to-hand fighting, cover-based shooting, and aggressive driving through dynamic environments; and Tony Hawk®: SHRED, which lets kids “ GO BIG ” and feel the exhilaration of skate and snowboarding like the pros using the game’s motion-sensing board controller.

Activision Publishing also plans to release Treyarch’s highly anticipated first-person action game Call of Duty: Black Ops globally on November 9 .  The company expects the title will be one of the top entertainment properties of the holiday season and we expect that pre-orders for the game will set an industry record.  

Additionally, on December 7 , Blizzard Entertainment expects to release World of Warcraft: Cataclysm, the highly anticipated third expansion for the world’s most popular subscription-based MMORPG, World of Warcraft.  

Activision Blizzard ‘s outlook is based on assumptions about sell through rates for its products and the launch timing, success and pricing of its new slate of products which are subject to significant risks and uncertainties, including possible declines in the overall demand for video games and in the demand for the company’s products, the dependence in the interactive software industry and by the company on an increasingly limited number of popular franchises for a disproportionately high percentage of revenues and profits, the company’s ability to predict shifts in consumer preferences among genres, such as music and casual games, and competition.  Current macroeconomic conditions and market conditions within the video game industry increase those risks and uncertainties.  

The company’s outlook is also subject to other risks and uncertainties,  including litigation and associated costs, fluctuations in foreign exchange and tax rates, counterparty risks relating to customers, licensees, licensors and manufacturers.  As a result of these and other factors, actual results may deviate materially from the outlook presented below.

For the full year 2010, Activision Blizzard is raising its outlook for GAAP net revenues to $4.28 billion and GAAP earnings per diluted share to $0.51 , as compared to its prior GAAP outlook of $4.18 billion in net revenues and $0.49 in earnings per diluted share.  On a non-GAAP basis, the company now expects net revenues of $4.45 billion and $0.74 earnings per diluted share, as compared to its prior non-GAAP net revenue outlook of $4.4 billion and $0.72 in earnings per diluted
share.

For the fourth quarter of 2010, Activision Blizzard expects GAAP net revenues of $1.26 billion , and a GAAP loss per share of $0.01 . On a non-GAAP basis, the company expects net revenues of $2.2 billion and $0.47 earnings per diluted share for the fourth quarter.

Conference Call

Today at 4:30 p.m. EDT , Activision Blizzard ‘s management will host a conference call and Webcast to discuss the company’s results for the quarter ended September 30, 2010 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 877-397-0297 in the U.S. with the passcode 5382478.

Non-GAAP Financial Measures

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) the following items: the impact of the change in deferred net revenues and related cost of sales with respect to certain of the company’s online-enabled games; expenses related to share-based payments; Activision Blizzard ‘s non-core exit operations (which are the operating results of products and operations of the historical Vivendi Games, Inc. businesses that the company has exited or substantially wound down); costs related to the business combination between Activision, Inc. and Vivendi Games, Inc. (including transaction costs, integration costs, and
restructuring activities); the amortization of intangibles and impairment of intangible assets; and the associated tax benefits.

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 because they facilitate comparison of operating performance between periods and help investors to better understand the operating results of Activision Blizzard . Internally, management uses these non-GAAP financial measures in assessing the company’s operating results, as well as in planning and forecasting.

Non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP.  Activision Blizzard recognizes that there are limitations associated with the use of these non-GAAP financial measures.

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, in this release, 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.

About Activision Blizzard

Headquartered in Santa Monica, California , Activision Blizzard, Inc. is a worldwide online, PC, console, handheld and mobile game publisher with leading positions across every major category of the rapidly growing 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.

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,” “would,” “might,” “remains,” “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 and market conditions within the video game industry, the seasonal and cyclical nature of the interactive game market, Activision Blizzard ‘s ability to predict consumer preferences among competing hardware platforms, possible declines in software pricing, product returns and price protection, product delays, retail acceptance of Activision Blizzard ‘s products,  adoption rate and availability of new hardware (including
peripherals) and related software, industry competition including from used games and other forms of entertainment, litigation risks and associated costs, rapid changes in technology, industry standards, business models including online and used games, and consumer preferences including interest in specific genres such as music, first-person action and massively multiplayer online games, 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, and the identification of
suitable future acquisition opportunities and potential challenges associated with geographic expansion, and the other  factors  identified in the risk factors sections 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,

2010

2009

2010

2009

Net revenues:

Product sales

$

397

$

411

$

2,025

$

1,848

Subscription, licensing and other revenues

348

292

994

874

    Total net revenues

745

703

3,019

2,722

Costs and expenses:

Cost of sales – product
costs

194

185

765

762

Cost of sales – software royalties and amortization

61

54

211

212

Cost of sales – intellectual property licenses

33

45

105

163

Cost of sales – massively multi-player online role playing game (“MMORPG”)

61

55

168

158

Product development

119

122

366

362

Sales and marketing

111

128

294

329

General and administrative

111

106

245

301

Restructuring

(1)

29

    Total costs and expenses

690

694

2,154

2,316

Operating income

55

9

865

406

Investment and other income, net

14

11

15

21

Income before income tax expense

69

20

880

427

Income tax expense

18

5

229

28

Net income

$

51

$

15

$

651

$

399

Basic earnings per common share

$

0.04

$

0.01

$

0.53

$

0.31

Weighted average common shares outstanding

1,212

1,271

1,230

1,289

Diluted earnings per common share

$

0.04

$

0.01

$

0.52

$

0.30

Weighted average common shares outstanding assuming dilution

1,227

1,297

1,245

1,320

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in millions)

September 30,

December 31,

2010

2009

ASSETS

Current assets:

Cash and cash equivalents

$

2,123

$

2,768

Short-term investments

726

477

Accounts receivable, net

246

739

Inventories

258

241

Software development

248

224

Intellectual property licenses

26

55

Deferred income taxes, net

419

498

Other current assets

102

327

    Total current assets

4,148

5,329

Long-term investments

23

23

Software development

37

10

Intellectual property licenses

36

28

Property and equipment, net

169

138

Other assets

14

9

Intangible assets, net

566

618

Trademark and trade names

433

433

Goodwill

7,144

7,154

Total assets

$

12,570

$

13,742

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current
liabilities:

Accounts payable

$

238

$

302

Deferred revenues

622

1,426

Accrued expenses and other liabilities

533

779

     Total current liabilities

1,393

2,507

Deferred income taxes, net

231

270

Other liabilities

200

209

Total liabilities

1,824

2,986

Shareholders’ equity:

Common stock

Additional paid-in capital

12,313

12,376

Treasury stock

(1,848)

(1,235)

Retained earnings (accumulated deficit)

290

(361)

Accumulated other comprehensive loss

(9)

(24)

     Total shareholders’ equity

10,746

10,756

         Total liabilities and shareholders’ equity

$

12,570

$

13,742

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, 2010

Net Revenues

Cost of Sales –
Product Costs

Cost of Sales – Software
Royalties and
Amortization

Cost of Sales –
Intellectual Property
Licenses

Cost of Sales –
MMORPG

Product
Development

Sales and
Marketing

General and
Administrative

Total Costs and
Expenses

GAAP Measurement

$

745

$

194

$

61

$

33

$

61

$

119

$

111

$

111

$

690

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

(a)

112

3

8

4

15

Less:  Stock-based compensation

(b)

(11)

(6)

(2)

(15)

(34)

Less:  Amortization of intangible assets and purchase price accounting related adjustments

(d)

(1)

(5)

(12)

(18)

Non-GAAP Measurement

$

857

$

196

$

53

$

25

$

61

$

113

$

109

$

96

$

653

Three Months Ended September 30, 2010

Operating Income

Net Income

Basic Earnings

per Share

Diluted Earnings
per Share

GAAP Measurement

$

55

$

51

$

0.04

$

0.04

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

(a)

97

81

0.07

0.07

Less:  Stock-based compensation

(b)

34

21

0.02

0.02

Less:  Amortization of intangible assets and purchase price accounting related adjustments

(d)

18

(5)

Non-GAAP Measurement

$

204

$

148

$

0.12

$

0.12

Nine Months Ended September 30, 2010

Net Revenues

Cost of Sales –
Product Costs

Cost of Sales – Software
Royalties and
Amortization

Cost of Sales –
Intellectual Property
Licenses

Cost of Sales –
MMORPG

Product
Development

Sales and
Marketing

General and
Administrative

Total Costs and
Expenses

GAAP Measurement

$

3,019

$

765

$

211

$

105

$

168

$

366

$

294

$

245

$

2,154

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

(a)

(765)

(198)

(16)

(12)

(226)

Less:  Stock-based compensation

(b)

(51)

(4)

(6)

(33)

(94)

Less:  Restructuring (included in general and administrative)

(c)

(3)

(3)

Less:  Amortization of intangible assets and purchase price accounting related adjustments

(d)

(3)

(10)

(33)

(1)

(47)

Non-GAAP Measurement

$

2,254

$

564

$

134

$

60

$

168

$

362

$

288

$

208

$

1,784

Nine Months Ended September 30, 2010

Operating Income

Net Income

Basic Earnings

per Share

Diluted Earnings
per Share

GAAP Measurement

$

865

$

651

$

0.53

$

0.52

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

(a)

(539)

(392)

(0.32)

(0.31)

Less:  Stock-based compensation

(b)

94

64

0.05

0.05

Less:  Restructuring (included in general and administrative)

(c)

3

2

0.00

0.00

Less:  Amortization of intangible assets and purchase price accounting related adjustments

(d)

47

12

0.01

0.01

Non-GAAP Measurement

$

470

$

337

$

0.27

$

0.27

(a) Reflects the net change in deferred net revenues and related cost of sales.

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

(c) Reflects restructuring related to the Business Combination with Vivendi Games. Restructuring activities includes severance costs, facility exit costs and balance sheet write down and exit costs from the cancellation of projects.

(d) Reflects amortization of intangible assets, and the change in the fair value of assets and liabilities from purchase price accounting related adjustments.

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, 2009

Net Revenues

Cost of Sales –
Product Costs

Cost of Sales –
Software
Royalties and
Amortization

Cost of Sales – Intellectual Property Licenses

Cost of Sales –
MMORPG

Product
Development

Sales and
Marketing

General and
Administrative

Restructuring

Total Costs
and Expenses

GAAP Measurement

$

703

$

185

$

54

$

45

$

55

$

122

$

128

$

106

$

(1)

$

694

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

(a)

52

20

31

5

5

61

Less:  Stock-based compensation

(b)

(3)

(11)

(2)

(20)

(36)

Less:  Costs related to the Business Combination, integration and restructuring

(d)

(7)

1

(6)

Less:  Amortization of intangible assets and purchase price accounting related adjustments

(e)

(1)

(8)

(24)

(33)

Non-GAAP Measurement

$

755

$

204

$

74

$

26

$

55

$

111

$

131

$

79

$

$

680

Three Months Ended September 30, 2009

Operating
Income

Net Income

Basic Earnings
per Share

Diluted
Earnings per
Share

GAAP Measurement

$

9

$

15

$

0.01

$

0.01

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

(a)

(9)

5

0.00

0.00

Less:  Stock-based compensation

(b)

36

23

0.02

0.02

Less:  Costs related to the Business Combination, integration and restructuring

(d)

6

3

0.00

0.00

Less:  Amortization of intangible assets and purchase price accounting related adjustments

(e)

33

9

0.01

0.01

Non-GAAP Measurement

$

75

$

55

$

0.04

$

0.04

Nine Months Ended September 30, 2009

Net Revenues

Cost of Sales –
Product Costs

Cost of Sales –
Software
Royalties and
Amortization

Cost of Sales – Intellectual Property Licenses

Cost of Sales –
MMORPG

Product
Development

Sales and
Marketing

General and
Administrative

Restructuring

Total Costs
and Expenses

GAAP Measurement

$

2,722

$

762

$

212

$

163

$

158

$

362

$

329

$

301

$

29

$

2,316

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

(a)

(441)

(79)

(20)

(6)

5

(100)

Less:  Stock-based compensation

(b)

(19)

(28)

(9)

(51)

(107)

Less:  Results of Activision Blizzard’s non-core exit operations

(c)

(1)

4

(3)

(10)

(9)

Less:  Costs related to the Business Combination, integration and restructuring

(d)

(24)

(29)

(53)

Less:  Amortization of intangible assets and purchase price accounting related adjustments

(e)

(4)

(36)

(75)

(2)

(117)

Non-GAAP Measurement

$

2,280

$

679

$

137

$

82

$

158

$

338

$

322

$

214

$

$

1,930

Nine Months Ended September 30, 2009

Operating
Income

Net Income

Basic Earnings
per Share

Diluted
Earnings
per Share

GAAP Measurement

$

406

$

399

$

0.31

$

0.30

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

(a)

(341)

(274)

(0.21)

(0.21)

Less:  Stock-based compensation

(b)

107

67

0.05

0.05

Less:  Results of Activision Blizzard’s non-core exit operations

(c)

8

5

0.00

0.00

Less:  Costs related to the Business Combination, integration and restructuring

(d)

53

32

0.02

0.02

Less:  Amortization of intangible assets and purchase price accounting related adjustments

(e)

117

49

0.05

0.05

Non-GAAP Measurement

$

350

$

278

$

0.21

$

0.21

(a) Reflects the net change in deferred net revenues and related cost of sales.

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

(c) Reflects the results of products and operations from the historical Vivendi Games businesses that the company has exited, divested or wound down.

(d) Reflects costs related to the Business Combination with Vivendi Games (including transaction costs, integration costs and restructuring activities). Restructuring activities includes severance costs, facility exit costs and balance sheet write down and exit costs from the cancellation of projects.

(e) Reflects amortization of intangible assets, and the change in the fair value of assets and liabilities from purchase price accounting related adjustments.

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 Months Ended September 30, 2010 and 2009

(Amounts in millions)

Three Months Ended

September 30, 2010

September 30, 2009

$Increase

% Increase

Amount

% of Total

Amount

% of Total

(Decrease)

(Decrease)

GAAP Net Revenues by Segment/Platform Mix

Activision and Blizzard:

MMORPG

$

289

39

%

$

306

44

%

$

(17)

(6)

%

PC and other

73

10

27

4

46

170

Sony PlayStation  3

109

15

73

10

36

49

Sony PlayStation  2

6

1

37

5

(31)

(84)

Microsoft Xbox 360

127

16

104

15

23

22

Nintendo Wii

56

8

72

10

(16)

(22)

Total console

298

40

286

40

12

4

Sony PlayStation Portable

3

9

1

(6)

(67)

Nintendo Dual Screen

20

3

21

3

(1)

(5)

Total handheld

23

3

30

4

(7)

(23)

Total Activision and Blizzard

683

92

649

92

34

5

Distribution:

Total Distribution

62

8

54

8

8

15

Total consolidated GAAP net revenues

745

100

703

100

42

6

Change in Deferred Net Revenues(1)

Activision and Blizzard:

MMORPG

(7)

(31)

PC and other

141

3

Sony PlayStation  3

(5)

34

Microsoft Xbox 360

(26)

38

Nintendo Wii

9

8

Total console

(22)

80

Total changes in deferred net revenues

112

52

Non-GAAP Net Revenues by Segment/Platform Mix

Activision and Blizzard:

MMORPG

282

33

275

36

7

3

PC and other

214

25

30

4

184

NM

Sony PlayStation  3

104

12

107

14

(3)

(3)

Sony PlayStation  2

6

1

37

5

(31)

(84)

Microsoft Xbox 360

101

12

142

19

(41)

(29)

Nintendo Wii

65

8

80

11

(15)

(19)

Total console

276

33

366

49

(90)

(25)

Sony PlayStation Portable

3

9

1

(6)

(67)

Nintendo Dual Screen

20

2

21

3

(1)

(5)

Total handheld

23

2

30

4

(7)

(23)

Total Activision and Blizzard

795

93

701

93

94

13

Total Distribution

62

7

54

7

8

15

Total non-GAAP net revenues(2)

$

857

100

%

$

755

100

%

$

102

14

%

(1)  We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred net revenues.

(2)  Total non-GAAP net revenues presented also represents our total operating segment net revenues.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

FINANCIAL INFORMATION

For the Nine Months Ended September 30, 2010 and 2009

(Amounts in millions)

Nine Months Ended

September 30, 2010

September 30, 2009

$Increase

% Increase

Amount

% of Total

Amount

% of Total

(Decrease)

(Decrease)

GAAP Net Revenues by Segment/Platform Mix

Activision and Blizzard:

MMORPG

$

890

29

%

$

952

35

%

$

(62)

(7)

%

PC and other

201

7

106

4

95

90

Sony PlayStation  3

595

20

356

13

239

67

Sony PlayStation  2

29

1

121

4

(92)

(76)

Microsoft Xbox 360

751

25

533

20

218

41

Nintendo Wii

267

9

324

12

(57)

(18)

Total console

1,642

55

1,334

49

308

23

Sony PlayStation Portable

11

32

1

(21)

(66)

Nintendo Dual Screen

90

3

95

4

(5)

(5)

Total handheld

101

3

127

5

(26)

(20)

Total Activision and Blizzard

2,834

94

2,519

93

315

13

Distribution:

Total Distribution

185

6

202

7

(17)

(8)

Total platform mix net revenues

3,019

100

2,721

100

298

11

Other(1)

1

(1)

NM

Total consolidated GAAP net revenues

3,019

100

2,722

100

297

11

Change in Deferred Net Revenues(1)

Activision and Blizzard:

MMORPG

(13)

(106)

PC and other

81

(26)

Sony PlayStation  3

(317)

(84)

Microsoft Xbox 360

(425)

(145)

Nintendo Wii

(91)

(80)

Total console

(833)

(309)

Total changes in deferred net revenues

(765)

(441)

Other(1)

(1)

Non-GAAP Net Revenues by Segment/Platform Mix

Activision and Blizzard:

MMORPG

877

39

846

37

31

4

PC and other

282

13

80

4

202

NM

Sony PlayStation  3

278

12

272

12

6

2

Sony PlayStation  2

29

1

121

5

(92)

(76)

Microsoft Xbox 360

326

14

388

17

(62)

(16)

Nintendo Wii

176

8

244

11

(68)

(28)

Total console

809

35

1,025

45

(216)

(21)

Sony PlayStation Portable

11

1

32

1

(21)

(66)

Nintendo Dual Screen

90

4

95

4

(5)

(5)

Total handheld

101

5

127

5

(26)

(20)

Total Activision and Blizzard

2,069

92

2,078

91

(9)

Total Distribution

185

8

202

9

(17)

(8)

Total non-GAAP net revenues(2)

$

2,254

100

%

$

2,280

100

%

$

(26)

(1)

%

(1)  We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred net revenues and other.

(2)  Total non-GAAP net revenues presented also represents our total operating segment net revenues.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

FINANCIAL INFORMATION

For the Three And Nine Months Ended September 30, 2010 and 2009

(Amounts in millions)

Three Months Ended

September 30, 2010

September 30, 2009

$Increase

% Increase

Amount

% of Total

Amount

% of Total

(Decrease)

(Decrease)

GAAP Net Revenues by Geographic Region

North America

$

406

54

%

$

378

54

%

$

28

7

%

Europe

281

38

287

41

(6)

(2)

Asia Pacific

58

8

38

5

20

53

Total consolidated GAAP net revenues

745

100

703

100

42

6

Change in Deferred Net Revenues(1)

North America

41

26

Europe

53

22

Asia Pacific

18

4

Total changes in net revenues

112

52

Non-GAAP Net Revenues by Geographic Region

North America

447

52

404

54

43

11

Europe

334

39

309

41

25

8

Asia Pacific

76

9

42

5

34

81

Total non-GAAP net revenues(2)

$

857

100

%

$

755

100

%

$

102

14

%

Nine Months Ended

September 30, 2010

September 30, 2009

$Increase

% Increase

Amount

% of Total

Amount

% of Total

(Decrease)

(Decrease)

GAAP Net Revenues by Geographic Region

North America

$

1,675

55

%

$

1,458

54

%

$

217

15

%

Europe

1,142

38

1,088

40

54

5

Asia Pacific

202

7

175

6

27

15

Total geographic region net revenues

3,019

100

2,721

100

298

11

Other(1)

1

(1)

NM

Total consolidated GAAP net revenues

3,019

100

2,722

100

297

11

Change in Deferred Net Revenues(1)

North America

(462)

(287)

Europe

(280)

(147)

Asia Pacific

(23)

(7)

Total changes in net revenues

(765)

(441)

Other(1)

(1)

Non-GAAP Net Revenues by Geographic Region

North America

1,213

54

1,171

52

42

4

Europe

862

38

941

41

(79)

(8)

Asia Pacific

179

8

168

7

11

7

Total non-GAAP net revenues(2)

$

2,254

100

%

$

2,280

100

%

$

(26)

(1)

%

(1)  We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred net revenues.

(2)  Total non-GAAP net revenues presented also represents our total operating segment net revenues.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

SEGMENT INFORMATION

For the Three And Nine Months Ended September 30, 2010 and 2009

(Amounts in millions)

Three Months Ended

September 30, 2010

September 30, 2009

$Increase

% Increase

Amount

% of Total

Amount

% of Total

(Decrease)

(Decrease)

Segment net revenues:

Activision(i)

$

314

42

%

$

415

59

%

$

(101)

(24)

%

Blizzard(ii)

481

65

286

40

195

68

Distribution(iii)

62

8

54

8

8

15

Operating segment total

857

115

755

107

102

14

Reconciliation to consolidated net revenues:

Net effect from deferral of net revenues

(112)

(15)

(52)

(7)

Consolidated net revenues

$

745

100

%

$

703

100

%

42

6

Segment income (loss) from operations:

Activision(i)

$

(43)

$

(43)

NM

Blizzard(ii)

246

116

130

112

Distribution(iii)

1

2

(1)

NM

Operating segment total

204

75

129

172

Reconciliation to consolidated operating income:

Net effect from deferral of net revenues and related cost of sales

(97)

9

Stock-based compensation expense

(34)

(36)

Restructuring

1

Amortization of intangible assets and purchase price accounting related adjustments

(18)

(33)

Integration and transactions costs

(7)

Consolidated operating income

$

55

$

9

$

46

NM

Operating margin from total operating segments

24%

10%

Nine Months Ended

September 30, 2010

September 30, 2009

$Increase

% Increase

Amount

% of Total

Amount

% of Total

(Decrease)

(Decrease)

Segment net revenues:

Activision(i)

$

983

33

%

$

1,211

44

%

$

(228)

(19)

%

Blizzard(ii)

1,086

36

867

33

219

25

Distribution(iii)

185

6

202

7

(17)

(8)

Operating segment total

2,254

75

2,280

84

(26)

(1)

Reconciliation to consolidated net revenues:

Net effect from deferral of net revenues

765

25

441

16

Other(iv)

1

Consolidated net revenues

$

3,019

100

%

$

2,722

100

%

297

11

Segment income (loss) from operations:

Activision(i)

$

(88)

$

(49)

(39)

NM

Blizzard(ii)

559

393

166

42

Distribution(iii)

(1)

6

(7)

NM

Operating segment total

470

350

120

34

Reconciliation to consolidated operating income:

Net effect from deferral of net revenues and related cost of sales

539

341

Stock-based compensation expense

(94)

(107)

Restructuring

(3)

(29)

Amortization of intangible assets and purchase price accounting

related adjustments

(47)

(117)

Integration and transactions costs

(24)

Other(iv)

(8)

Consolidated operating income

$

865

$

406

$

459

113

%

Operating margin from total operating segments

21%

15%

(i) Activision Publishing (“Activision”) –  publishes interactive entertainment software and peripherals.

(ii) Blizzard –  Blizzard Entertainment, Inc. and its subsidiaries (“Blizzard”) publishes games and online subscription-based games in the MMORPG category.

(iii) Activision Blizzard Distribution (“Distribution”) – distributes interactive entertainment software and hardware products.

(iv) Other represents Non-Core activities, which are legacy Vivendi Games’ divisions or business units that we have exited, divested or wound down as part of our restructuring and integration efforts as a result of the Business Combination. Prior to July 1, 2009, Non-Core activities were managed as a stand alone operating segment; however, in light of the minimal activities and insignificance of Non-Core activities, as of that date we ceased their management as a separate operating segment and consequently, we are no longer providing separate operating segment disclosure.  

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
OUTLOOK

For the Quarter Ending December 31, 2010 and

Year Ending December 31, 2010

GAAP to Non-GAAP Reconciliation

(Amounts in millions, except per share data)

Outlook for

Outlook for

Three Months Ending

Year Ending

December 31, 2010

December 31, 2010

Net Revenues (GAAP)

$

1,260

$

4,280

Excluding the impact of:

Change in deferred net revenues

(a)

940

170

Non-GAAP Net Revenues

$

2,200

$

4,450

(Loss)/Earnings Per Diluted Share (GAAP)

$

(0.01)

$

0.51

Excluding the impact of:

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

(b)

0.44

0.12

Stock-based compensation

(c)

0.01

0.06

Amortization of intangible assets

(d)

0.03

0.05

Non-GAAP Earnings Per Diluted Share

$

0.47

$

0.74

(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.

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.

Full Transcript of Blizzard Games 2010 Plans from Activision Blizzard 2009 Q4 Conference

The Activision Blizzard 2009 Fourth Quarter Earnings Conference Call held yesterday revealed to fans all around the world the exciting news that Starcraft II Closed Beta will launch in global scale this month of February and their plans for Blizzard games in 2010. Mike Morhaime also revealed their plans to launch Starcraft II: Wings of Liberty for sale on mid-2010, this Summer.

I told you Mike Morhaime would say the sweet words on February 10 during this conference, and he didn’t disappoint us.

We have gathered the transcript of yesterday’s conference to inform you of what’s cooking:

Mike Morhaime: I’d like to begin by recapping the successful year that we had at Blizzard, with some discussion about our performance in 2009, as well as our fourth quarter’s result. I will also touch on our situation in China and outline the exciting plans that we have for 2010.

Overall, we are very pleased with our performance over the past year. Our non-GAPP net revenue for the year 2009 was about $ 1.2 Billion dollars with an operating margin of more than 46%. To the fourth quarter of 2009, our non-GAPP net revenue was $329 million dollars with an operating margin of 49%.

The fact that we have been able to maintain revenue and operating margin at this level is remarkable giving the current state of the economy, and how it has affected the industry, and the fact that we didn’t ship a new game in 2009.

The stability of our World of Warcraft business has obviously played a big role and we currently have an 11.5 million World of Warcraft subscribers. That subscribership is on par with the last time we announced subscriber figures.

Our ability to maintain subscribership at this level in a downed economy could be contributed to a number of factors:

First, we acknowledge the tremendous entertainment value that World of Warcraft offers. We believe our players recognize the huge value they get from World of Warcraft. Especially when they compare our subscription against the rising cost of Cable television and the finite amount of entertainment they could get from other options such as movies or concert tickets.

Equally important is the commitment of our developer team to continue enhancing the game with fresh new content for players to enjoy. We also benefited from successful outreach marketing efforts in the fourth quarter with the new TV commercial featuring Mr. T driving record file and high visibility at online and retail.

And last but not least, we introduced an important added bonus services in the past year which we believe has contributed towards player retention.

At this point I’d like to provide an update in the current situation with respect to World of Warcraft in China. I want to emphasize that NetEase is operating World of Warcraft normally in China right now as they have been since the launch in September 19, 2009.

I mentioned on the last call, that World of Warcraft in China hit an all time peak concurrency after the relaunch. We are still gaining strength in the region with the game as popular as ever. In celebration of the upcoming Chinese New Year holidays NetEase is running a spring festival giveback campaign. As part of this campagin, NetEase has temporarily suspended new account creation for one week and is rewarding our existing players with a 21 hours of free-game time. Three hours per day.

We continue to work hard with our local partner to bring new content to our chinese players. Wrath of the Lich King is currently under review by the relevant chinese government authorities, and NetEase has been cooperating with their very requests so that we can launch Wrath of the Lich King as soon as possible.

Meanwhile, NetEase has resubmited the Burning Crusade to the GAPP for their approval. Now I’ll like to discuss the plans we have for 2010, which promises to be the most exciting year in Blizzard’s history. We have two huge product releases planned: Starcraft II: Wings of Liberty and the Cataclysm expansion to World of Warcraft.

This will be the first time in twelve years that Blizzard has slated to ship two major products in the same calendar year. And on top of that, we will also be releasing the revamp of the Battle.net service, which will be the platform for all future Blizzard games.

I do have an exciting news regarding Starcraft II. We are slated to be in close beta testing later this month. The beta test will be conducted in a global scale, including thousands of testers in North America, Europe, Korea, Taiwan, Australia, and New Zealand.

We expect a tremendous response from our players, and we are eager to begin this phase of development as we enter the final stretch before release.

Aside from gathering feedback from our players, which is a key step of the developing cycle, the beta test will help generate new excitement for Starcraft II, building on a momentum from 2009, when Starcraft II won Game of the Show in Europe from GamesCon.

Starcraft II has also shown up on several Most Anticipated Lists for 2010, including publications like the Wall Street Journal, PCGamer and Europe Gamer. With Starcraft II continuing to receive wide acclaim and recognition in publications and shows around the world, we are very optimistic about our prospect for the game.

We are still tracking toward our goal of a mid-2010 release. In addition to helping our team balancing Starcraft II, our upcoming Beta Test is also important to our development of Battle.net, as we are building Battle.net to be the home of all Blizzard games going forward, this phase of testing will be key for preparing the service for launch.

We are designing Battle.net to be the primary destination for online gaming. When the servers launch, Starcraft II will offer several advanced communication features including the ability for players to chat between Starcraft II and World of Warcraft, or between World of Warcraft realms.

Future games like Diablo III will plug right into that massive communications network. This is significant because the friends network that players have already built with World of Warcraft and add to in Starcraft II will carry forward for all Blizzard games into the future.

The new iteration of Battle.net will help us effectively grow the community of players as each new game release will build on the momentum created by previous games. Keeping players connected to their friends at all times, no matter what games they are playing, will make the online experience more enjoyable extending the life of our games.

Separately, we have news about World of Warcraft: Cataclysm, which we announced at this past year BlizzCon. Today I would like to delve into one of the aspects of the expansion that makes it especially intriguing as it grows driver momentum for the business.

Like previous expansions, Cataclysm will introduce some great content such as new races, new dungeons, and new areas for players to explore. For a feature that will make this particular expansion stand out is that we are completely overhauling much of the existing content in the game, and bringing it up to our constantly rising design starndards.

Let me just take a moment to explain why this is important. Over the past five years since World of Warcraft initially launched, our development team has become much more skilled at creating compelling new content for the game.

The issue is that much of the low level content in World of Warcraft today, remains the same as it was when we launched in 2004. New players to the game, do not in large part, experience the game’s best content and design until they reach the end-game.

Our research shows that trial players who play World of Warcraft past level 10 are much more likely to stick with the game for a long time. Currently only about 30% of our trial players make it past this threshold. So anything we can do to improve the new players’ experience is a huge opportunity for us.

With Cataclysm, we will be overhauling the early gaming experience for players, bring all the content in World of Warcraft to our current design standards and ensuring that even new players to the game will experience the best work of our development team. This will also provide additional replayability for our veteran players as well.

We hope that this effort will capture most players and drive community growth. Development on Cataclysm is proceeding smoothly and we are making great progress to a release in the back half of 2010. In parallel with the development of Cataclysm, we are continuing to create additional value added services for our players.

One of the new services we are looking forward to introducing soon is the ability for players to access the in-game Auction House from outside of the game.

Currently in World of Warcraft, players can use an in-game eBay-like service to buy virtual items for in-game currency. This is the Auction House, and its been part of World of Warcraft since launch. Soon, we will be introducing a mechanism for players to use the Auction House remotely using the web or mobile devices like the iPhone.

Some aspects of this service will be free to use. Some will be premium. We haven’t finalized pricing just yet, so we will be discussing those details at a later date. We are also expanding on the World of Warcraft Pet Store that we introduced last quarter. Just this morning we announced two new virtual pets the Wind Rider Cub and the Gryphon Hatchling, which players will be able to purchase in the store in the coming weeks.

What is unique about these new pets is that players will also receive plush stuffed animal version of their virtual pet.

As I close out the Blizzard portion of the call, I want to summarize the huge year we have ahead of us. Not only are we going to ship two major products: Starcraft II and Cataclysm; but we will be launching Battle.net to be the home of all Blizzard games going forward. This platform is the cornerstone for the future of Blizzard Entertainment and we are very excited to take the first steps toward the future with the beta test of Starcraft II and Battle.net.

With Starcraft II and Cataclysm plans for this year and Diablo III around the corner our product outline has never looked stronger. Thanks.

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