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

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

*Prior outlook was provided by the company on May 6, 2014 in its earnings release

For the quarter ended June 30, 2014, Activision Blizzard’s GAAP net revenues were $970 million, as compared with $1.05 billion for the second quarter of 2013. On a non-GAAP basis, the company’s net revenues were $658 million, as compared with $608 million for the second quarter of 2013. For the second quarter of 2014, GAAP net revenues from digital channels represented 49% of the company’s total revenues. On a non-GAAP basis, net revenues from digital channels represented a record 73% of the company’s total revenues.

For the quarters ended June 30, 2014 and 2013, Activision Blizzard’s GAAP earnings per diluted share were $0.28. On a non-GAAP basis, the company’s earnings per diluted share were $0.06 for the second quarter of 2014, as compared with $0.08 for the second quarter of 2013.

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

Bobby Kotick, Chief Executive Officer of Activision Blizzard, said, “Our better-than expected performance was driven by continued strong digital sales from Blizzard Entertainment’s World of Warcraft®, Diablo® III: Reaper of Souls™ and Blizzard Entertainment’s newest franchise, Hearthstone®: Heroes of Warcraft™, which recently launched on the iPad and continues to be well received by audiences around the world, as well as digital sales from Activision Publishing’s Call of Duty®. Based on our results, we are raising our full-year outlook and we expect to grow our non-GAAP revenues year-over-year and deliver record non-GAAP earnings per share for the full year.”

Kotick added, ”Over the next few months we expect to release some of the very best games in our company’s history. Blizzard Entertainment plans to launch World of Warcraft: Warlords of Draenor™, the newest expansion in the epic franchise, which more than 1.5 million Western subscribers have already pre-purchased and Activision Publishing expects to release Destiny™, which we believe will be the largest new intellectual property launch in videogame history, as well as Skylanders Trap Team™ and Call of Duty: Advanced Warfare.

Kotick continued, “Today, we have more opportunities to create great content using new platforms and business models while also expanding into new geographies, and are embracing all of these growth opportunities with the same commitment to excellence that we have demonstrated over the past 23 years. As the world’s largest and most profitable independent interactive entertainment company, we remain focused on creating the most compelling, engaging games for our dedicated audiences and providing superior returns for our shareholders.”

Selected Business Highlights:

• Life to date, Activision Publishing’s Call of Duty: Ghosts remained the #1 best-selling game on the next-generation consoles in North America and Europe combined.¹
• In North America and Europe combined, for the first six months of 2014, Activision Publishing’s Skylanders SWAP Force™ was the #2 best-selling console and handheld game overall in dollars, and in North America, Skylanders SWAP Force outsold the #1 action figure line.²
• As of June 30, 2014, Blizzard Entertainment’s Diablo III: Reaper of Souls remained the #1 PC game in dollars in both North America and Europe and, including its expansion and digital sales, Diablo III has sold more than 20 million copies worldwide across all platforms since its release in 2012.³
• As of June 30, 2014, Blizzard Entertainment’s World of Warcraft remains the #1 subscription-based MMORPG, with approximately 6.8 million subscribers.⁴ There was a decline in subscribers quarter over quarter, which was disproportionately concentrated in the East and was similar to the seasonal decline experienced during the second quarter of 2012, prior to the launch of the most recent expansion later that year.
• On July 15, 2014, Blizzard Entertainment and NetEase, Inc. jointly announced an agreement to license Blizzard Entertainment's award-winning action role-playing game, Diablo III, to a NetEase, Inc. affiliate in mainland China.
• During the quarter, Activision Blizzard paid its highest dividend ever of $0.20 per common share, totaling $147 million.

Company Outlook:

Today, Activision Publishing released Call of Duty: Ghosts Nemesis, a downloadable content pack exclusively on Xbox Live for both Xbox One and Xbox 360®. The company expects to release Call of Duty: Ghosts Nemesis on other platforms later in the third quarter of 2014.

Additionally, on September 9, 2014, Activision Publishing plans to release Bungie’s highly anticipated game, Destiny, for Sony’s PlayStation®4 and PlayStation®3 and Microsoft’s Xbox One and Xbox 360. Preorders for the game are tracking towards an industry record for a new intellectual property.

Earlier this quarter, Blizzard Entertainment released Curse of Naxxramas™: A Hearthstone Adventure for Windows, Mac and iPad. On August 19, 2014, Blizzard Entertainment also expects to release Diablo III: Reaper of Souls - Ultimate Evil Edition™ for Sony’s PlayStation 4 and PlayStation 3 and Microsoft’s Xbox One and Xbox 360.

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

* Prior outlook was provided by the company on May 6, 2014 in its earnings release
**Fully diluted weighted average shares include participating securities and dilutive options on a weighted average basis. With expected GAAP net losses for Q3 2014, basic weighted average shares are used in the losses per share calculation.

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 June 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 888-329-8889 in the U.S. with passcode 9595797.

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, Skylanders, World of Warcraft, StarCraft® and Diablo.

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 The NPD Group and GfK Chart-Track

2According to The NPD Group and GfK Chart-Track and Activision Blizzard internal estimates, including toys and accessories

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

4According to Activision Blizzard internal estimates

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

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

Activision Blizzard provides net revenues, net income (loss), earnings (loss) per share and operating margin data and guidance both including (in accordance with GAAP) and excluding (non-GAAP) certain items. In addition, Activision Blizzard provides EBITDA (defined as GAAP net income (loss) before interest (income) expense, income taxes, depreciation and amortization) and adjusted EBITDA (defined as non-GAAP operating margin (see non-GAAP financial measure below) before depreciation). The non-GAAP financial measures exclude the following items, as applicable in any given reporting period:

• the change in deferred revenues and related cost of sales with respect to certain of the company’s online-enabled games;
• expenses related to stock-based compensation;
• the amortization of intangibles from purchase price accounting;
• fees and other expenses related to the acquisition of 429 million shares of our common stock on October 11, 2013 from Vivendi, pursuant to the stock purchase agreement dated July 25, 2013 and 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; (3) statements of future financial or operating performance; (4) statements about the impact of the transactions involving the repurchase of shares from Vivendi, S.A., and the debt financing related thereto; and (5) statements of assumptions underlying such statements. 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.