UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended March 31, 2010 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-15839
ACTIVISION BLIZZARD, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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95-4803544 |
(State or other jurisdiction of |
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(I.R.S. Employer Identification No.) |
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3100 Ocean Park Boulevard, Santa Monica, CA |
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90405 |
(Address of principal executive offices) |
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(Zip Code) |
(310) 255-2000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer x |
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Accelerated Filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrants Common Stock outstanding at April 30, 2010 was 1,243,905,768.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
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Condensed Consolidated Balance Sheets at March 31, 2010 and December 31, 2009 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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29 |
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CERTIFICATIONS |
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This Quarterly Report on Form 10-Q contains, or incorporates by reference, certain 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 fact 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 economic performance; and (4) statements of assumptions underlying such statements. We generally use words such as anticipate, believe, could, estimate, expect, forecast, future, intend, may, outlook, plan, positioned, potential, project, remain, scheduled, set to, subject to, to be, upcoming, will, and other similar expressions to help identify forward-looking statements. Forward-looking statements are subject to business and economic risk, reflect managements current expectations, estimates and projections about our business, and are inherently uncertain and difficult to predict. Our actual results could differ materially. The forward-looking statements contained herein speak only at the date on which this Form 10-Q was first filed. Risks and uncertainties that may affect our future results include, but are not limited to, sales levels of Activision Blizzards titles, shifts in consumer spending trends, the impact of the current macroeconomic environment, the seasonal and cyclical nature of the interactive game market, any further difficulties related to World of Warcraft in China, Activision Blizzards ability to predict consumer preferences among competing hardware platforms, declines in software pricing, product returns and price protection, product delays, retail acceptance of Activision Blizzards products, adoption rate and availability of new hardware (including peripherals) and related software, industry competition, including from used games, and from 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 Risk Factors included in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2009. The forward-looking statements contained herein are based upon information available to us as of the date of this Quarterly Report on Form 10-Q and we assume no obligation to update any such forward-looking statements. Forward-looking statements believed to be true when made may ultimately prove to be incorrect. These statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and may cause actual results to differ materially from current expectations.
Activision Blizzards names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or trade names of Activision Blizzard.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in millions, except share data)
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At March 31, |
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At December 31, |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
2,695 |
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$ |
2,768 |
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Short-term investments |
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647 |
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477 |
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Accounts receivable, net of allowances of $225 million and $317 million at March 31, 2010 and December 31, 2009, respectively |
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134 |
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739 |
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Inventories |
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194 |
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241 |
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Software development |
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217 |
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224 |
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Intellectual property licenses |
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40 |
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55 |
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Deferred income taxes, net |
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395 |
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498 |
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Other current assets |
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164 |
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327 |
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Total current assets |
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4,486 |
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5,329 |
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Long-term investments |
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23 |
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23 |
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Software development |
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4 |
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10 |
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Intellectual property licenses |
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29 |
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28 |
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Property and equipment, net |
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131 |
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138 |
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Other assets |
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11 |
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9 |
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Intangible assets, net |
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599 |
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618 |
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Trademark and trade names |
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433 |
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433 |
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Goodwill |
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7,150 |
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7,154 |
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Total assets |
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$ |
12,866 |
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$ |
13,742 |
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Liabilities and Shareholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
147 |
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$ |
302 |
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Deferred revenues |
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772 |
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1,426 |
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Accrued expenses and other liabilities |
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623 |
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779 |
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Total current liabilities |
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1,542 |
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2,507 |
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Deferred income taxes, net |
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254 |
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270 |
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Other liabilities |
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202 |
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209 |
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Total liabilities |
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1,998 |
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2,986 |
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Commitments and contingencies (Note 13) |
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Shareholders equity: |
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Common stock, $.000001 par value, 2,400,000,000 shares authorized, 1,366,914,039 and 1,364,117,675 shares issued at March 31, 2010 and December 31, 2009, respectively |
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Additional paid-in capital |
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12,234 |
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12,376 |
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Less: Treasury stock, at cost, 123,506,345 and 113,686,498 at March 31, 2010 and December 31, 2009, respectively |
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(1,342 |
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(1,235 |
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Retained earnings (accumulated deficit) |
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20 |
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(361 |
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Accumulated other comprehensive loss |
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(44 |
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(24 |
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Total shareholders equity |
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10,868 |
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10,756 |
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Total liabilities and shareholders equity |
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$ |
12,866 |
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$ |
13,742 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in millions, except per share data)
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For the three months ended |
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2010 |
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2009 |
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Net revenues |
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Product sales |
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$ |
986 |
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$ |
690 |
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Subscription, licensing, and other revenues |
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322 |
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291 |
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Total net revenues |
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1,308 |
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981 |
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Costs and expenses |
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Cost of sales product costs |
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337 |
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296 |
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Cost of sales software royalties and amortization |
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99 |
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72 |
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Cost of sales intellectual property licenses |
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43 |
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64 |
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Cost of sales massively multi-player online role-playing game (MMORPG) |
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54 |
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52 |
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Product development |
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143 |
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117 |
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Sales and marketing |
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56 |
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83 |
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General and administrative |
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65 |
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103 |
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Restructuring |
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15 |
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Total costs and expenses |
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797 |
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802 |
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Operating income |
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511 |
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179 |
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Investment and other income, net |
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10 |
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Income before income tax expense |
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511 |
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189 |
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Income tax expense |
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130 |
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Net income |
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$ |
381 |
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$ |
189 |
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Earnings per common share |
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Basic |
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$ |
0.30 |
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$ |
0.14 |
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Diluted |
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$ |
0.30 |
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$ |
0.14 |
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Weighted average number of shares outstanding |
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Basic |
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1,248 |
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1,308 |
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Diluted |
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1,264 |
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1,359 |
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Dividends declared per common share |
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$ |
0.15 |
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$ |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in millions)
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For the three months ended |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net income |
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$ |
381 |
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$ |
189 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Deferred income taxes |
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90 |
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56 |
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Depreciation and amortization |
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33 |
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69 |
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Unrealized gain on auction rate securities classified as trading securities |
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(3 |
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Unrealized loss on ARS rights from UBS |
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3 |
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Amortization and write-off of capitalized software development costs and intellectual property licenses (1) |
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88 |
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68 |
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Stock-based compensation expense (2) |
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44 |
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30 |
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Excess tax benefits from stock option exercises |
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(4 |
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(17 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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593 |
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794 |
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Inventories |
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40 |
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32 |
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Software development and intellectual property licenses |
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(80 |
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(75 |
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Other assets |
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162 |
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(5 |
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Deferred revenues |
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(637 |
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(276 |
) |
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Accounts payable |
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(146 |
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(160 |
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Accrued expenses and other liabilities |
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(337 |
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(378 |
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Net cash provided by operating activities |
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227 |
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327 |
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Cash flows from investing activities: |
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Capital expenditures |
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(12 |
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(10 |
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Proceeds from maturities of investments |
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17 |
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1 |
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Proceeds from sale of available-for-sale investments |
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2 |
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Payment of contingent consideration |
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(2 |
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Purchases of short-term investments |
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(187 |
) |
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Net cash used in investing activities |
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(184 |
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(7 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock to employees |
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16 |
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7 |
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Repurchase of common stock |
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(107 |
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(313 |
) |
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Excess tax benefits from stock option exercises |
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4 |
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17 |
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Net cash used in financing activities |
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(87 |
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(289 |
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Effect of foreign exchange rate changes on cash and cash equivalents |
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(29 |
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(1 |
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Net (decrease) increase in cash and cash equivalents |
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(73 |
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30 |
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Cash and cash equivalents at beginning of period |
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2,768 |
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2,958 |
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Cash and cash equivalents at end of period |
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$ |
2,695 |
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$ |
2,988 |
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(1) Excludes deferral and amortization of stock-based compensation expense.
(2) Includes the net effects of capitalization, deferral, and amortization of stock-based compensation expense.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
For the Three Months ended March 31, 2010
(Unaudited)
(Amounts in millions)
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Retained |
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Accumulated |
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Additional |
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Earnings |
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Other |
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Total |
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Common Stock |
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Paid-In |
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Treasury Stock |
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(Accumulated |
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Comprehensive |
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Shareholders |
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Shares |
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Amount |
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Capital |
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Shares |
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Amount |
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Deficit) |
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Loss |
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Equity |
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Balance at December 31, 2009 |
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1,364 |
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$ |
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$ |
12,376 |
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(114 |
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$ |
(1,235 |
) |
$ |
(361 |
) |
$ |
(24 |
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$ |
10,756 |
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Components of comprehensive income: |
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Net income |
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381 |
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381 |
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Foreign currency translation adjustment |
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(20 |
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(20 |
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Total comprehensive income |
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361 |
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Issuance of common stock pursuant to employee stock options and restricted stock rights |
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3 |
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16 |
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16 |
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Stock-based compensation expense related to employee stock options and restricted stock rights |
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31 |
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31 |
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Dividends declared ($0.15 per common share) |
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(189 |
) |
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(189 |
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Shares repurchased |
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(10 |
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(107 |
) |
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(107 |
) |
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Balance at March 31, 2010 |
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1,367 |
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$ |
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$ |
12,234 |
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(124 |
) |
$ |
(1,342 |
) |
$ |
20 |
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$ |
(44 |
) |
$ |
10,868 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Description of Business and Business Combination
Description of Business
Activision Blizzard, Inc. is a worldwide online, personal computer (PC), console and handheld game publisher. The terms Activision Blizzard, the Company, we, us, and our are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries.
In 2008, a business combination (the Business Combination) by and among Activision, Inc., Sego Merger Corporation, a wholly-owned subsidiary of Activision, Inc., Vivendi S.A. (Vivendi), VGAC LLC, a wholly-owned subsidiary of Vivendi, and Vivendi Games, Inc. (Vivendi Games), a wholly-owned subsidiary of VGAC LLC was consummated. As a result of the consummation of the Business Combination, Activision, Inc. was renamed Activision Blizzard, Inc. (Activision Blizzard).
The common stock of Activision Blizzard is traded on NASDAQ under the ticker symbol ATVI. Vivendi owned approximately 58% of Activision Blizzards outstanding common stock at March 31, 2010.
We maintain significant operations in the United States, Canada, the United Kingdom (U.K.), France, Germany, Italy, Spain, Australia, Sweden, South Korea, Norway, Denmark, China, and the Netherlands.
Basis of Consolidation and Presentation
Activision Blizzard prepared the accompanying unaudited condensed consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission for interim reporting. As permitted under those rules and regulations, certain notes or other information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted if they substantially duplicate the disclosures contained in the annual audited consolidated financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation of our financial position and results of operations in accordance with U.S. GAAP have been included.
The accompanying unaudited condensed consolidated financial statements include the accounts and operations of Activision Blizzard. All intercompany accounts and transactions have been eliminated. The condensed consolidated financial statements have been prepared in conformity with U.S. GAAP. The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates and assumptions.
The prior year condensed consolidated statement of cash flows for the period ended March 31, 2009 has been adjusted to correct immaterial errors related to the elimination of intercompany receivables and payables in the consolidated balance sheets at March 31, 2009 and December 31, 2008 (not included herein). The corrections reduced the accounts receivable and accounts payable line items in the March 31, 2009 consolidated balance sheet by $4 million and reduced the accounts receivable and accounts payable line items in the December 31, 2008 consolidated balance sheet by $236 million. These corrections correspondingly impacted the change in accounts receivable and accounts payable in the condensed consolidated statement of cash flows for the period ended March 31, 2009 by $232 million. These corrections had no impact on net income, earnings (loss) per share or net cash provided by operating, investing and financing activities.
Certain reclassifications have been made to prior year amounts to conform to the current period presentation.
The Company considers events or transactions that occur after the balance sheet date, but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures.
2. Inventories
Our inventories consist of the following (amounts in millions):
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At March 31, 2010 |
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At December 31, 2009 |
|
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Finished goods |
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$ |
161 |
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$ |
201 |
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Purchased parts and components |
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33 |
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40 |
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$ |
194 |
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$ |
241 |
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3. Intangible assets, net
Intangible assets, net consist of the following (amounts in millions):
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At March 31, 2010 |
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Estimated |
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Gross |
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Accumulated |
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Net carrying |
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Acquired definite-lived intangible assets: |
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|
|
|
|
|||
License agreements |
|
3 - 10 years |
|
$ |
173 |
|
$ |
(68 |
) |
$ |
105 |
|
Game engines |
|
2 - 5 years |
|
61 |
|
(37 |
) |
24 |
|
|||
Internally developed franchises |
|
11 - 12 years |
|
574 |
|
(111 |
) |
463 |
|
|||
Favorable leases |
|
1 - 4 years |
|
5 |
|
(4 |
) |
1 |
|
|||
Distribution agreements |
|
4 years |
|
18 |
|
(12 |
) |
6 |
|
|||
Acquired indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|||
Activision trademark |
|
Indefinite |
|
386 |
|
|
|
386 |
|
|||
Acquired trade names |
|
Indefinite |
|
47 |
|
|
|
47 |
|
|||
Total |
|
|
|
$ |
1,264 |
|
$ |
(232 |
) |
$ |
1,032 |
|
|
|
At December 31, 2009 |
|
|||||||||
|
|
Estimated |
|
Gross |
|
Accumulated |
|
Net carrying |
|
|||
Acquired definite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|||
License agreements |
|
3 - 10 years |
|
$ |
173 |
|
$ |
(65 |
) |
$ |
108 |
|
Developed software |
|
1 - 2 years |
|
288 |
|
(288 |
) |
|
|
|||
Game engines |
|
2 - 5 years |
|
61 |
|
(33 |
) |
28 |
|
|||
Internally developed franchises |
|
11 - 12 years |
|
574 |
|
(101 |
) |
473 |
|
|||
Favorable leases |
|
1 - 4 years |
|
5 |
|
(4 |
) |
1 |
|
|||
Distribution agreements |
|
4 years |
|
18 |
|
(10 |
) |
8 |
|
|||
Other intangibles |
|
0 - 2 years |
|
5 |
|
(5 |
) |
|
|
|||
Acquired indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|||
Activision trademark |
|
Indefinite |
|
386 |
|
|
|
386 |
|
|||
Acquired trade names |
|
Indefinite |
|
47 |
|
|
|
47 |
|
|||
Total |
|
|
|
$ |
1,557 |
|
$ |
(506 |
) |
$ |
1,051 |
|
Amortization expense of intangible assets was $18 million and $49 million for the three months ended March 31, 2010 and 2009, respectively.
The gross carrying amount as of March 31, 2010 and December 31, 2009 in the tables above reflect a new cost basis for license agreements, game engines and internally developed franchises due to impairment charges taken for the year ended December 31, 2009. The new cost basis includes the original gross carrying amount, less accumulated amortization and impairment charges of the impaired assets as of December 31, 2009.
At March 31, 2010, future amortization of definite-lived intangible assets is estimated as follows (amounts in millions):
2010 (remaining nine months) |
|
$ |
101 |
|
2011 |
|
96 |
|
|
2012 |
|
87 |
|
|
2013 |
|
62 |
|
|
2014 |
|
54 |
|
|
Thereafter |
|
199 |
|
|
|
|
|
|
|
Total |
|
$ |
599 |
|
4. Income taxes
The income tax expense of $130 million for the three months ended March 31, 2010 reflects an effective tax rate of 25%. The effective tax rate of 25% for the three months ended March 31, 2010 differs from the statutory rate of 35% primarily due to foreign income taxes provided at lower rates, geographic mix in profitability, recognition of California research and development credits and IRC 199 domestic production deductions. We did not record a tax benefit for federal research credits during the quarter ended March 31, 2010 since as of March 31, 2010, unlike in past years, the federal research credit extension had not yet been signed into law.
For the three months ended March 31, 2010, the tax rate is based on our projected annual effective tax rate for 2010, and also includes certain discrete tax items recorded during the period. Our tax expense of $130 million for the three months ended March 31, 2010 reflects an effective tax rate of 25% which differs from the effective tax rate of 0% for the three months ended March 31, 2009 primarily due to tax benefits recorded during the prior period related to the release of valuation allowances on foreign net operating losses and the impact of changes to California tax laws.
5. Software development and intellectual property licenses
The following table summarizes the components of our software development and intellectual property licenses (amounts in millions):
|
|
At |
|
At |
|
||
|
|
2010 |
|
2009 |
|
||
Internally developed software costs |
|
$ |
160 |
|
$ |
182 |
|
Payments made to third-party software developers |
|
61 |
|
52 |
|
||
Total software development costs |
|
$ |
221 |
|
$ |
234 |
|
|
|
|
|
|
|
||
Intellectual property licenses |
|
$ |
69 |
|
$ |
83 |
|
Amortization, write-offs and impairments are comprised of the following (amounts in millions):
|
|
Three months ended March 31, |
|
||||
|
|
2010 |
|
2009 |
|
||
Amortization of capitalized software development costs and intellectual property licenses |
|
$ |
101 |
|
$ |
72 |
|
Write-offs and impairments |
|
15 |
|
|
|
||
6. Comprehensive income and accumulated other comprehensive loss
Comprehensive Income
The components of comprehensive income for the three months ended March 31, 2010 and 2009 were as follows (amounts in millions):
|
|
Three months ended March 31, |
|
||||
|
|
2010 |
|
2009 |
|
||
|
|
|
|
|
|
||
Net income |
|
$ |
381 |
|
$ |
189 |
|
|
|
|
|
|
|
||
Other comprehensive loss: |
|
|
|
|
|
||
Foreign currency translation adjustment |
|
(20 |
) |
(2 |
) |
||
Unrealized depreciation on investments, net of taxes |
|
|
|
(1 |
) |
||
|
|
|
|
|
|
||
Other comprehensive loss |
|
(20 |
) |
(3 |
) |
||
|
|
|
|
|
|
||
Comprehensive income |
|
$ |
361 |
|
$ |
186 |
|
The components of accumulated other comprehensive loss at March 31, 2010 and December 31, 2009 were as follows (amounts in millions):
|
|
At March 31, |
|
At December 31, |
|
||
|
|
2010 |
|
2009 |
|
||
Foreign currency translation adjustment |
|
$ |
(42 |
) |
$ |
(22 |
) |
Unrealized depreciation on investments, net of deferred income taxes of $(2) for March 31, 2010 and December 31, 2009 |
|
(2 |
) |
(2 |
) |
||
Accumulated other comprehensive loss |
|
$ |
(44 |
) |
$ |
(24 |
) |
Income taxes were not provided for foreign currency translation items as these are considered indefinite investments in non-U.S. subsidiaries.
7. Cash and Cash Equivalents
Cash and cash equivalents primarily consist of deposits held at major banks and money market funds with original maturities of three months or less at the date of purchase.
The following table summarizes the components of our cash and cash equivalents (amounts in millions):
|
|
At March 31, |
|
At December 31, |
|
||
|
|
2010 |
|
2009 |
|
||
Cash and time deposits |
|
$ |
294 |
|
$ |
464 |
|
Securities with original maturities of three months or less |
|
40 |
|
|
|
||
Money market funds |
|
2,361 |
|
2,304 |
|
||
Total cash and cash equivalents |
|
$ |
2,695 |
|
$ |
2,768 |
|
8. Fair value measurements
Fair Value Measurements on a Recurring Basis
FASB literature regarding fair value measurements for financial and non-financial assets and liabilities establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
· Level 1Quoted prices in active markets for identical assets or liabilities.
· Level 2Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data.
· Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The table below segregates all assets and liabilities that are measured at fair value on a recurring basis (which means they are so measured at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date (amounts in millions):
|
|
|
|
Fair Value Measurements at |
|
|
|
||||||||
|
|
As of |
|
Quoted |
|
Significant |
|
Significant |
|
Balance Sheet |
|
||||
|
|
2010 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Classification |
|
||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
2,361 |
|
$ |
2,361 |
|
$ |
|
|
$ |
|
|
Cash and cash equivalents |
|
Securities with original maturities of three months or less |
|
40 |
|
40 |
|
|
|
|
|
Cash and cash equivalents |
|
||||
Mortgage backed securities |
|
1 |
|
|
|
1 |
|
|
|
Short-term investments |
|
||||
Auction rate securities held through UBS |
|
54 |
|
|
|
|
|
54 |
|
Short-term investments |
|
||||
U.S. government agency securities |
|
560 |
|
560 |
|
|
|
|
|
Short-term investments |
|
||||
Auction rate securities held through Morgan Stanley Smith Barney LLC |
|
23 |
|
|
|
|
|
23 |
|
Long-term investments |
|
||||
ARS rights from UBS(a) |
|
7 |
|
|
|
|
|
7 |
|
Other assetscurrent |
|
||||
Total financial assets at fair value |
|
$ |
3,046 |
|
$ |
2,961 |
|
$ |
1 |
|
$ |
84 |
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
||||
Other financial liability |
|
$ |
(23 |
) |
$ |
|
|
$ |
|
|
$ |
(23 |
) |
Other liabilitiescurrent |
|
Total financial liabilities at fair value |
|
$ |
(23 |
) |
$ |
|
|
$ |
|
|
$ |
(23 |
) |
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
||||||||
|
|
As of |
|
Quoted |
|
Significant |
|
Significant |
|
Balance Sheet |
|
||||
|
|
2009 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Classification |
|
||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
2,304 |
|
$ |
2,304 |
|
$ |
|
|
$ |
|
|
Cash and cash equivalents |
|
Mortgage backed securities |
|
2 |
|
|
|
2 |
|
|
|
Short-term investments |
|
||||
Auction rate securities held through UBS |
|
54 |
|
|
|
|
|
54 |
|
Short-term investments |
|
||||
U.S. government agency securities |
|
389 |
|
389 |
|
|
|
|
|
Short-term investments |
|
||||
Auction rate securities held through Morgan Stanley Smith Barney LLC |
|
23 |
|
|
|
|
|
23 |
|
Long-term investments |
|
||||
ARS rights from UBS(a) |
|
7 |
|
|
|
|
|
7 |
|
Other assetscurrent |
|
||||
Total financial assets at fair value |
|
$ |
2,779 |
|
$ |
2,693 |
|
$ |
2 |
|
$ |
84 |
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
||||
Other financial liability |
|
$ |
(23 |
) |
$ |
|
|
$ |
|
|
$ |
(23 |
) |
Other liabilitiescurrent |
|
Total financial liabilities at fair value |
|
$ |
(23 |
) |
$ |
|
|
$ |
|
|
$ |
(23 |
) |
|
|
(a) ARS rights from UBS represent an offer from UBS providing us with the right to require UBS to purchase our ARS held through UBS at par value. To value the ARS rights, we considered the intrinsic value, time value of money, and our assessment of the credit worthiness of UBS.
Other financial liability represents the earn-out liability from a previous acquisition. The earn-out liability was recorded at fair value at the date of the Business Combination as it will be settled by a variable number of shares of our common stock based on the average closing price for the five business days immediately preceding issuance of the shares. When estimating the fair value, we considered our projection of revenues from the related titles under the earn-out provisions.
There were no changes in the Level 3 table balances as of March 31, 2010 and as a result, no updated Level 3 table is required. The following table provides a reconciliation of the beginning and ending balances of our financial assets and financial liabilities classified as Level 3 by major categories (amounts in millions) at March 31, 2009:
|
|
Level 3 |
|
||||||||||
|
|
Auction rate |
|
ARS rights |
|
Total |
|
Other financial |
|
||||
Balance at January 1, 2009 |
|
$ |
78 |
|
$ |
10 |
|
$ |
88 |
|
$ |
(31 |
) |
Total gains or (losses) (realized/unrealized) |
|
|
|
|
|
|
|
|
|
||||
Included in earnings |
|
2 |
|
(3 |
) |
(1 |
) |
|
|
||||
Included in other comprehensive loss |
|
(1 |
) |
|
|
(1 |
) |
|
|
||||
Balance at March 31, 2009 |
|
$ |
79 |
|
$ |
7 |
|
$ |
86 |
|
$ |
(31 |
) |
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2009 |
|
$ |
2 |
|
$ |
(3 |
) |
$ |
(1 |
) |
$ |
|
|
(a) Liquidity for these auction rate securities is typically provided by an auction process which allows holders to sell their notes and resets the applicable interest rate at pre-determined intervals, usually every 7 to 35 days. On an industry-wide basis, many auctions have failed, and there is, as yet, no meaningful secondary market for these instruments. Each of the auction rate securities in our investment portfolio at March 31, 2010 has experienced a failed auction and there is no assurance that future auctions for these securities will succeed. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers. In the event that there is a failed auction, the indenture governing the security requires the issuer to pay interest at a contractually defined rate that is generally above market rates for other types of similar instruments. The securities for which auctions have failed will continue to earn interest at the contractual rate and be auctioned every 7 to 35 days until the auction succeeds, the issuer calls the securities or they mature. As a result, our ability to liquidate and fully recover the carrying value of our auction rate securities in the near term may be limited or non-existent.
Consequently, fair value measurements have been estimated using an income-approach model (discounted cash-flow analysis). When estimating the fair value, we consider both observable market data and non-observable factors, including credit quality, duration, insurance wraps, collateral composition, maximum rate formulas, comparable trading instruments, and likelihood of redemption. Significant assumptions used in the analysis include estimates for interest rates, spreads, cash flow timing and amounts, and holding periods of the securities. Assets measured at fair value using significant unobservable inputs (Level 3) represent 3% of our financial assets measured at fair value on a recurring basis.
(b) ARS rights from UBS represent an offer from UBS providing us with the right to require UBS to purchase our ARS held through UBS at par value. To value the ARS rights, we considered the intrinsic value, time value of money, and our assessment of the credit worthiness of UBS.
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses is reasonable approximation of fair value due to their short-term nature. Our U.S. government agency securities and mortgage-backed securities are carried at fair value with fair values estimated based on quoted market prices or estimated based on quoted market prices of financial instruments with similar characteristics. Both short-term and long-term ARS are carried at fair value with fair values estimated using an income-approach model (specifically, a discounted cash-flow analysis). We carry derivative instruments, including foreign exchange contracts, on the balance sheet as other assets or liabilities at their fair value. The fair value of foreign currency contracts is estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period.
Fair Value Measurements on a Non-Recurring Basis
We measure the fair value of certain assets on a non-recurring basis, generally annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. For the three month period ended March 31, 2010, there were no impairment charges related to assets that are measured on a non-recurring basis.
The table below presents an intangible asset that is not subject to recurring fair value measurement at December 31, 2009 (amounts in millions):
|
|
|
|
Fair Value Measurements at |
|
|
|
|||||||||
|
|
As of |
|
Quoted |
|
Significant |
|
Significant |
|
|
|
|||||
|
|
2009 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total Losses |
|
|||||
Non-financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Intangible assets, net |
|
$ |
278 |
|
$ |
|
|
$ |
|
|
$ |
278 |
|
$ |
409 |
|
Total non-financial assets at fair value |
|
$ |
278 |
|
$ |
|
|
$ |
|
|
$ |
278 |
|
$ |
409 |
|
In the fourth quarter of fiscal year ending 2009, with the franchise and industry results of the holiday season, our outlook for the console platforms was significantly revised. With the continued economic downturn within our industry in 2009 and the change in the buying habits of casual consumers, we reassessed our overall expectations as of December 31, 2009. We considered these economic changes during our 2010 planning process conducted during the months of November and December, which resulted in a strategy change to focus on fewer title releases in the casual and music genres. As we consider this a triggering event, we updated our future projected revenues streams for certain franchises in the casual games and music genres. We performed recoverability and, where applicable, impairment tests on the related intangible assets in accordance with ASC Subtopic 360-10.
Determining whether impairment has occurred requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the estimated remaining useful life over which cash flows will occur, the amount of these cash flows and the assets residual value, if any. For intangible assets that did not pass the recoverability test, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. Considering the characteristics of the assets being valued and the availability of information, the Company used the income approach, which presumes that the value of an asset can be estimated by the net economic benefit to be received over the estimated remaining useful life of the asset, discounted to present value. We derived the required cash flow estimates from our historical experience and our internal business plans and applied an appropriate discount rate. Based on this analysis, we recorded impairment charges of $24 million, $12 million and $373 million to license agreements, game engines and internally developed franchises intangible assets, respectively, for the year ended December 31, 2009 within our Activision operating segment.
9. Operating segments and geographic region
Our operating segments are consistent with our internal organizational structure, the manner in which our operations are reviewed and managed by our Chief Executive Officer, our Chief Operating Decision Maker (CODM), the manner in which operating performance is assessed and resources are allocated, and the availability of separate financial information. We do not aggregate operating segments.
Currently, we operate under three operating segments:
Activision Publishing, Inc.
Activision Publishing, Inc. (Activision) is a leading international publisher of interactive software products and peripherals. Activision develops and publishes video games on various consoles, handheld platforms and the PC platform through internally developed franchises and license agreements. Activision currently offers games that operate on the Sony Computer Entertainment, Inc. (Sony) PlayStation 2 (PS2), Sony PlayStation 3 (PS3), Nintendo Co. Ltd. (Nintendo) Wii (Wii), and Microsoft Corporation (Microsoft) Xbox 360 (Xbox 360) console systems; the Sony PlayStation Portable (PSP)
and Nintendo Dual Screen (NDS) handheld devices; the PC; the Apple iPhone; and the handheld game system Nintendo DSi. Our Activision business involves the development, marketing, and sale of products directly, by license, or through our affiliate label program with certain third-party publishers. Activisions products cover diverse game categories including action/adventure, action sports, racing, role-playing, simulation, first-person action, music, and strategy. Activisions target customer base ranges from casual players to core gamers, and children to adults.
Blizzard Entertainment, Inc.
Blizzard Entertainment, Inc. (Blizzard) is a leader in terms of subscriber base and revenues generated in the subscription-based massively multi-player online role-playing game (MMORPG) category. Blizzard internally develops and publishes PC-based computer games and maintains its proprietary online-game related service, Battle.net. Our Blizzard business involves the development, marketing, sales and support of role playing action and strategy games. Blizzard also develops, hosts, and supports its online subscription-based games in the MMORPG category. Blizzard is the development studio and publisher best known as the creator of World of Warcraft and the multiple award winning Diablo, StarCraft, and World of Warcraft franchises. Blizzard distributes its products and generates revenues worldwide through various means, including: subscription revenues (which consist of fees from individuals playing World of Warcraft, prepaid cards and other value added service revenues); retail sales of physical boxed products; electronic download sales of PC products; and licensing of software to third-party, or related party companies that distribute World of Warcraft in Russia, China, and Taiwan.
Activision Blizzard Distribution
Activision Blizzard Distribution (Distribution) consists of operations in Europe that provide warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.
The CODM reviews segment performance exclusive of the impact of the deferred net revenues and related cost of sales, stock-based compensation expense, restructuring expense, amortization of intangible assets and purchase price accounting related adjustments, and integration and transaction costs. Information on the operating segments and reconciliations of total net revenues and total segment income (loss) from operations to consolidated net revenues and operating income (loss) for the three months ended March 31, 2010 and 2009 are presented below (amounts in millions):
|
|
Three months ended March 31, |
|
||||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
|
Net revenues |
|
Income (loss) from |
|
||||||||
Activision |
|
$ |
337 |
|
$ |
348 |
|
$ |
7 |
|
$ |
(27 |
) |
Blizzard |
|
306 |
|
291 |
|
158 |
|
143 |
|
||||
Distribution |
|
71 |
|
85 |
|
|
|
3 |
|
||||
Operating segments total |
|
714 |
|
724 |
|
165 |
|
119 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Reconciliation to consolidated net revenues / operating income: |
|
|
|
|
|
|
|
|
|
||||
Net effect from deferral of net revenues and related cost of sales |
|
594 |
|
256 |
|
410 |
|
167 |
|
||||
Stock-based compensation expense |
|
|
|
|
|
(44 |
) |
(28 |
) |
||||
Restructuring |
|
|
|
|
|
(3 |
) |
(15 |
) |
||||
Amortization of intangible assets and purchase price accounting related adjustments |
|
|
|
|
|
(17 |
) |
(46 |
) |
||||
Integration and transaction costs |
|
|
|
|
|
|
|
(14 |
) |
||||
Other* |
|
|
|
1 |
|
|
|
(4 |
) |
||||
Consolidated net revenues / operating income |
|
$ |
1,308 |
|
$ |
981 |
|
$ |
511 |
|
$ |
179 |
|
Geographic information for the three months ended March 31, 2010 and 2009 is based on the location of the selling entity. Net revenues from external customers by geographic region were as follows (amounts in millions):
|
|
Three months ended March 31, |
|
||||
|
|
2010 |
|
2009 |
|
||
Net revenues by geographic region: |
|
|
|
|
|
||
North America |
|
$ |
703 |
|
$ |
524 |
|
Europe |
|
524 |
|
392 |
|
||
Asia Pacific |
|
81 |
|
64 |
|
||
Total geographic region net revenues |
|
1,308 |
|
980 |
|
||
Other* |
|
|
|
1 |
|
||
Total consolidated net revenues |
|
$ |
1,308 |
|
$ |
981 |
|
Net revenues by platform were as follows (amounts in millions):
|
|
Three months ended March 31, |
|
||||
|
|
2010 |
|
2009 |
|
||
Net revenues by platform: |
|
|
|
|
|
||
MMORPG |
|
$ |
306 |
|
$ |
314 |
|
Console |
|
839 |
|
503 |
|
||
Hand-held |
|
39 |
|
32 |
|
||
PC and other |
|
53 |
|
46 |
|
||
Total platform net revenues |
|
1,237 |
|
895 |
|
||
Distribution |
|
71 |
|
85 |
|
||
Other* |
|
|
|
1 |
|
||
Total consolidated net revenues |
|
$ |
1,308 |
|
$ |
981 |
|
*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 and have reclassified our prior periods segment presentation so that it conforms to the current periods presentation.
We did not have any single external customer that accounted for 10% or more of consolidated net revenues for the three month periods ended March 31, 2010 or 2009.
10. Goodwill
The changes in the carrying amount of goodwill by operating segment for the three months ended March 31, 2010 are as follows (amounts in millions):
|
|
Activision |
|
Blizzard |
|
Distribution |
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Balance at December 31, 2009 |
|
$ |
6,964 |
|
$ |
178 |
|
$ |
12 |
|
$ |
7,154 |
|
Tax benefit credited to goodwill |
|
(4 |
) |
|
|
|
|
(4 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Balance at March 31, 2010 |
|
$ |
6,960 |
|
$ |
178 |
|
$ |
12 |
|
$ |
7,150 |
|
The tax benefit credited to goodwill represents the tax deduction resulting from the exercise of stock options that were outstanding and vested at the consummation of the Business Combination and included in the purchase price of Activision, Inc. to the extent that the tax deduction did not exceed the fair value of those options. Conversely, to the extent that the tax deduction did exceed the fair value of those options, the tax benefit is credited to additional paid in capital.
11. Computation of basic/diluted earnings per common share
The following table sets forth the computation of basic and diluted earnings per common share (amounts in millions, except per share data):
|
|
Three months ended March 31, |
|
||||
|
|
2010 |
|
2009 |
|
||
|
|
|
|
|
|
||
Numerator: |
|
|
|
|
|
||
Consolidated net income |
|
$ |
381 |
|
$ |
189 |
|
Less: Distributed earnings to common shareholders |
|
(187 |
) |
|
|
||
Less: Distributed earnings to unvested share-based awards that participate in earnings |
|
(2 |
) |
|
|
||
Undistributed earnings |
|
192 |
|
189 |
|
||
Less: Undistributed earnings allocated to unvested share-based awards that participate in earnings |
|
(1 |
) |
(1 |
) |
||
Undistributed earnings allocated to common shareholders |
|
191 |
|
188 |
|
||
Add back: Distributed earnings to common shareholders |
|
187 |
|
|
|
||
Numerator for basic and diluted earnings per common share - income available to common shareholders |
|
378 |
|
188 |
|
||
|
|
|
|
|
|
||
Denominator: |
|
|
|
|
|
||
Denominator for basic earnings per common share - weighted-average common shares outstanding |
|
1,248 |
|
1,308 |
|
||
|
|
|
|
|
|
||
Effect of potential dilutive common shares under the treasury stock method: |
|
|
|
|
|
||
Employee stock options |
|
16 |
|
51 |
|
||
Denominator for diluted earnings per common share - weighted-average common shares outstanding plus dilutive effect of employee stock options |
|
1,264 |
|
1,359 |
|
||
|
|
|
|
|
|
||
Basic earnings per common share |
|
$ |
0.30 |
|
$ |
0.14 |
|
|
|
|
|
|
|
||
Diluted earnings per common share |
|
$ |
0.30 |
|
$ |
0.14 |
|
Our unvested restricted stock rights (including restricted stock units, restricted stock awards, and performance shares) are considered participating securities since these securities have non-forfeitable rights to dividends or dividend equivalents during the contractual period of the award. Since the unvested restricted stock rights are considered participating securities, we are required to use the two-class method in our computation of basic and diluted earnings per common share. For the three months ended March 31, 2010 and 2009, we had outstanding unvested restricted stock rights of 11 million and 10 million shares of common stock on a weighted-average basis, respectively.
Potential common shares are not included in the denominator of the diluted earnings per common share calculation when inclusion of such shares would be anti-dilutive. Therefore, options to acquire 23 million shares of common stock were not included in the calculation of diluted earnings per common share for the three months ended March 31, 2010 and 2009, as the effect of their inclusion would be anti-dilutive.
12. Capital transactions
Repurchase Program
On November 5, 2008, we announced that our Board of Directors authorized a stock repurchase program under which we were able to repurchase up to $1 billion of our common stock. On July 31, 2009, our Board of Directors authorized an increase of $250 million to the stock repurchase program bringing the total authorization to $1.25 billion. On February 10, 2010, we announced that our Board of Directors authorized a new stock repurchase program under which we may repurchase up to $1 billion of our common stock until the earlier of December 31, 2010 or our Board of Directors determines to discontinue the repurchase program.
In January 2010, we settled a $15 million purchase of 1.3 million shares of our common stock that we had agreed to repurchase in December 2009 pursuant to the $1.25 billion stock repurchase program, completing that program. The remaining purchases of 8.5 million shares of our common stock for $92 million were made pursuant to the new $1 billion stock repurchase program.
On February 10, 2010 Activision Blizzards Board of Directors declared a cash dividend of $0.15 per common share payable on April 2, 2010 to shareholders of record at the close of business on February 22, 2010.
13. Commitments and contingencies
At March 31, 2010, we did not have any significant changes to our commitments since December 31, 2009. See Note 18 of the Notes to Consolidated Financial Statements included in Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2009 for more information regarding our commitments.
Legal Proceedings
On February 8, 2008, the Wayne County Employees Retirement System filed a lawsuit challenging the Business Combination in the Delaware Court of Chancery. The suit is a putative class action filed against the parties to the Business Combination Agreement as well as certain current and former members of our Board of Directors. The plaintiff alleged, among other things, that our current and former directors named therein failed to fulfill their fiduciary duties with regard to the Business Combination by surrendering the negotiating process to conflicted management, that those breaches were aided and abetted by Vivendi and those of its subsidiaries named in the complaint, and that the preliminary proxy statement filed by the Company on January 31, 2008 contains certain statements that the plaintiff alleges are false and misleading. The plaintiff sought an order from the court that, among other things, certifies the case as a class action, enjoins the Business Combination, requires the defendants to disclose all material information, declares that the Business Combination is in breach of the directors fiduciary duties and therefore unlawful and unenforceable, awards the plaintiff and the putative class damages for all profits and special benefits obtained by the defendant in connection with the Business Combination and tender offer, and awards the plaintiff its cost and expense, including attorneys fees.
After various initial motions were filed and ruled upon, on May 8, 2008, the plaintiff filed an amended complaint that, among other things, added allegations relating to a revised preliminary proxy statement filed by the Company on April 30, 2008. Additional motions were then filed, including a motion for preliminary injunction filed by the plaintiff and a motion to dismiss filed by Vivendi and its subsidiaries. On June 14, 2008, the plaintiff filed a motion for leave to file a second amended complaint. On June 30, 2008, the court granted Vivendi and its subsidiaries motion to dismiss, pursuant to a stipulation with the plaintiff, and on July 1, 2008, denied the plaintiffs motion for preliminary injunction.
On December 23, 2008, the plaintiff filed an amended motion for leave to file a second amended complaint. The court granted the motion on January 14, 2009 and the second amended complaint was deemed filed on the same date. The second amended complaint asserts claims similar to the ones made in the original complaint, challenging Activisions Board of Directors actions in connection with the negotiation and approval of the Business Combination, as well as disclosures made to our stockholders and certain amendments made to our certificate of incorporation in connection therewith. In addition, the second amended complaint asserts that Activisions Board of Directors breached its fiduciary duties in approving and recommending those amendments to the certificate of incorporation. Among other things, the plaintiff seeks certification of the action as a class action, a declaration that amendments made to the certificate of incorporation are invalid and unenforceable, a declaration that our directors breached their fiduciary duties, rescission of the Business Combination and related transactions, and damages, interest, fees and costs. On July 24, 2009, the court granted the Companys motion to dismiss the complaint for failure to state a claim.
On August 21, 2009, the plaintiff filed a notice of appeal of the courts dismissal. Appellate briefing has been completed and a hearing on the appeal occurred before a panel of the Delaware Supreme Court on January 13, 2010. The court then scheduled an additional hearing before the entire court, which occurred on March 31, 2010. We are awaiting the ruling. No amounts have been recorded in the statements of operations for this matter as losses are not probable.
After concluding an internal human resources inquiry into breaches of contract and insubordination by two senior employees at Infinity Ward, the Company terminated its employment of Jason West and Vince Zampella on March 1, 2010. On March 3, 2010, West and Zampella filed a complaint against the Company in Los Angeles Superior Court for breach of contract and wrongful termination, among other claims. West and Zampella are seeking damages, including punitive damages, in excess
of $36 million and declaratory relief. On April 9, 2010, the Company filed a cross complaint against West and Zampella, asserting claims for breach of contract and fiduciary duty, among other claims. The Company is seeking damages and declaratory relief. The Company has accrued and will continue to accrue appropriate amounts related to bonuses and other monies allegedly owed in connection with this matter. At present, the Company does not expect this lawsuit to have a material impact on the Company.
In addition, 38 current and former employees of Infinity Ward filed a complaint against the Company in Los Angeles Superior Court on April 27, 2010. The plaintiffs have asserted claims for breach of contract, violation of the Labor Code of the State of California, conversion and other claims. The plaintiffs claim that the Company failed to pay them bonuses and other compensation allegedly owed to them in an amount at least between $75 and $125 million, plus punitive damages. The Company has not yet responded to the complaint. The Company has accrued and will continue to accrue appropriate amounts related to bonuses and other monies allegedly owed in connection with this matter. The Company does not expect this lawsuit to have a material impact on the Company. During the quarter ended March 31, 2010 and during the period through May 5, 2010, approximately 35 employees of Infinity Ward resigned from the Company. Additional resignations are likely to occur.
In addition, we are party to other routine claims and suits brought by us and against us in the ordinary course of business, including disputes arising over the ownership of intellectual property rights, contractual claims, employment laws, regulations and relationships, and collection matters. In the opinion of management, after consultation with legal counsel, the outcome of such routine claims and lawsuits will not have a material adverse effect on our business, financial condition, results of operations, or liquidity.
14. Related party transactions
Treasury
Our foreign currency risk management program seeks to reduce risks arising from foreign currency fluctuations. We use derivative financial instruments, primarily currency forward contracts and swaps, with Vivendi as our principal counterparty. The gross notional amount of outstanding foreign exchange swaps was $321 million at March 31, 2010. The gross notional amount of outstanding foreign exchange swaps was $120 million at December 31, 2009. A pre-tax net unrealized loss of less than a million and loss of $4 million for the three months ended March 31, 2010 and 2009, respectively, resulted from the foreign exchange contracts and swaps with Vivendi and were recognized in the condensed consolidated statements of operations.
Other
Activision Blizzard has entered into various transactions and agreements, including cash management services, investor agreement, credit facilities arrangement and music royalty agreements with Vivendi and its subsidiaries and affiliates. None of these services, transactions and agreements with Vivendi and its subsidiaries and affiliates are material either individually or in the aggregate to the condensed consolidated financial statements as a whole.
15. Recently issued accounting pronouncements
In October 2009, the FASB issued an update to Revenue RecognitionMultiple-Deliverable Revenue Arrangements. This update establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities. This update provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. The amendments in this update also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendors multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in this update are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating the impact, if any, of this new accounting update on our consolidated financial statements.
In October 2009, the FASB issued an update to SoftwareCertain Revenue Arrangements That Include Software Elements. This update changes the accounting model for revenue arrangements that include both tangible products and software elements that are essential to the functionality, and excludes these products from the scope of current software revenue guidance. The
new guidance will include factors to help companies determine which software elements are considered essential to the functionality. The amendments will now subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple- deliverables. The amendments in this update are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010 although early adoption is permitted. We are currently evaluating the impact, if any, of this new accounting update on our consolidated financial statements.
Business Overview
Activision Blizzard, Inc. is a worldwide online, personal computer (PC), console, and handheld game publisher. The terms Activision Blizzard, the Company, we, us, and our are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries. We conduct our business through three operating segments: Activision, Blizzard, and Distribution. The current status of significant factors impacting our business environment in 2010 is discussed below. For additional discussion refer to the Business Overview section in the Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009.
Business Highlights
According to The NPD Group with respect to the U.S. market, Charttrack and Gfk, for the European market, during the three months ended March 31, 2010:
· Call of Duty: Modern Warfare 2 was the #1 best selling title in the U.S. and Europe;
· Call of Duty: Modern Warfare 2 became the #1 best selling third party video game of all time in the U.S. and Europe;
· Call of Duty was the #1 best selling third-party franchise in the U.S. and Europe;
· Call of Duty: Modern Warfare 2 Stimulus Package (the first map pack to Call of Duty: Modern Warfare 2) broke Microsoft Xbox LIVE records as more than one million gamers worldwide downloaded the new digital map pack in the first 24 hours alone;
· Activision Blizzard was the #1 third-party publisher for the Nintendo Wii and Nintendo DS in the U.S.;
· Activisions Band Hero and Cabelas Big Game Hunter 2010 were top-10 titles on the Nintendo Wii in the U.S.; and
· Activisions Call of Duty: Modern Warfare 2 and Blizzards, World of Warcraft: Wrath of the Lich King continue to be in the top-10 best selling PC titles in the U.S.
Additional Highlights
The Company announced on February 10, 2010 a new stock repurchase program under which the Company can repurchase up to $1 billion of the Companys common stock. The Board of Directors also declared on February 10, 2010 a cash dividend of $0.15 per common share payable on April 2, 2010 to shareholders of record at the close of business on February 22, 2010.
In addition to Call of Duty: Modern Warfare 2 Stimulus Package, we released How to Train Your Dragon, and a selection of casual titles including Cabelas Monster Buck Hunter during the first quarter of 2010.
Blizzard Entertainment announced that its highly anticipated real-time strategy game, StarCraft II: Wings of Liberty, will arrive in stores starting on July 27, 2010.
On April 29, 2010 Bungie, the developer of blockbuster game franchises, and Activision announced an exclusive 10-year alliance to bring Bungies next big action game universe to market.
Activision Publishing Second Quarter 2010 Scheduled Product Releases
For the second quarter of 2010, Activision Publishing expects to release its new racing title Blur, Shrek Forever After, Transformers: War For Cybertron, and Singularity.
Consolidated Statements of Operations Data
The following table sets forth consolidated statements of operations data for the periods indicated in dollars and as a percentage of total net revenues (amounts in millions):
|
|
Three months ended March 31, |
|
||||||||
|
|
2010 |
|
2009 |
|
||||||
|
|
|
|
|
|
|
|
|
|
||
Net revenues: |
|
|
|
|
|
|
|
|
|
||
Product sales |
|
$ |
986 |
|
75 |
% |
$ |
690 |
|
70 |
% |
Subscription, licensing, and other revenues |
|
322 |
|
25 |
|
291 |
|
30 |
|
||
Total net revenues |
|
1,308 |
|
100 |
|
981 |
|
100 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
||
Cost of sales product costs |
|
337 |
|
26 |
|
296 |
|
30 |
|
||
Cost of sales software royalties and amortization |
|
99 |
|
8 |
|
72 |
|
7 |
|
||
Cost of sales intellectual property licenses |
|
43 |
|
3 |
|
64 |
|
7 |
|
||
Cost of sales MMORPG |
|
54 |
|
4 |
|
52 |
|
5 |
|
||
Product development |
|
143 |
|
11 |
|
117 |
|
12 |
|
||
Sales and marketing |
|
56 |
|
4 |
|
83 |
|
8 |
|
||
General and administrative |
|
65 |
|
5 |
|
103 |
|
11 |
|
||
Restructuring costs |
|
|
|
|
|
15 |
|
2 |
|
||
Total costs and expenses |
|
797 |
|
61 |
|
802 |
|
82 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Operating income |
|
511 |
|
39 |
|
179 |
|
18 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Investment income, net |
|
|
|
|
|
10 |
|
1 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Income before income tax expense |
|
511 |
|
39 |
|
189 |
|
19 |
|
||
|
|
|
|
|
|
|
|
|
|
||
Income tax expense |
|
130 |
|
10 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
Net income |
|
$ |
381 |
|
29 |
% |
$ |
189 |
|
19 |
% |
Operating Segment Results
Our operating segments have been determined in accordance with our internal organizational structure, the manner in which our operations are reviewed and managed by our Chief Executive Officer, who is our Chief Operating Decision Maker (CODM), the manner in which operating performance is assessed and resources are allocated, and the availability of separate financial information. We do not aggregate operating segments.
The CODM reviews segment performance exclusive of the impact of the change in deferred net revenues and related cost of sales with respect to certain of the Companys online-enabled games, stock-based compensation expense, restructuring expense, amortization of intangible assets and purchase price accounting related adjustments, integration and transaction costs, and other. Information on the operating segments and reconciliations of total net revenues and total segment income (loss) from operations to consolidated net revenues and operating income (loss) for the three months ended March 31, 2010 and 2009 are presented below (amounts in millions):
|
|
Three months ended March 31, |
|
|||||||
|
|
|
|
|
|
Increase |
|
|||
|
|
2010 |
|
2009 |
|
(Decrease) |
|
|||
Segment net revenues: |
|
|
|
|
|
|
|
|||
Activision |
|
$ |
337 |
|
$ |
348 |
|
$ |
(11 |
) |
Blizzard |
|
306 |
|
291 |
|
15 |
|
|||
Distribution |
|
71 |
|
85 |
|
(14 |
) |
|||
Operating segment net revenue total |
|
714 |
|
724 |
|
(10 |
) |
|||
|
|
|
|
|
|
|
|
|||
Reconciliation to consolidated net revenues: |
|
|
|
|
|
|
|
|||
Net effect from deferral of net revenues |
|
594 |
|
256 |
|
|
|
|||
Other* |
|
|
|
1 |
|
|
|
|||
Consolidated net revenues |
|
$ |
1,308 |
|
$ |
981 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Segment income (loss) from operations: |
|
|
|
|
|
|
|
|||
Activision |
|
$ |
7 |
|
$ |
(27 |
) |
$ |
34 |
|
Blizzard |
|
158 |
|
143 |
|
15 |
|
|||
Distribution |
|
|
|
3 |
|
(3 |
) |
|||
Operating segment income from operations total |
|
165 |
|
119 |
|
46 |
|
|||
|
|
|
|
|
|
|
|
|||
Reconciliation to consolidated operating income: |
|
|
|
|
|
|
|
|||
Net effect from deferral of net revenues and related cost of sales |
|
410 |
|
167 |
|
|
|
|||
Stock-based compensation expense |
|
(44 |
) |
(28 |
) |
|
|
|||
Restructuring |
|
(3 |
) |
(15 |
) |
|
|
|||
Amortization of intangible assets and purchase price accounting related adjustments |
|
(17 |
) |
(46 |
) |
|
|
|||
Integration and transaction costs |
|
|
|
(14 |
) |
|
|
|||
Other* |
|
|
|
(4 |
) |
|
|
|||
|
|
|
|
|
|
|
|
|||
Total consolidated operating income |
|
$ |
511 |
|
$ |
179 |
|
|
|
* 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 and have reclassified our prior periods segment presentation so that it conforms to the current periods presentation.
Segment Net Revenues
Activision
Activisions net revenues decreased for the three months ended March 31, 2010 as compared to the same period in 2009 primarily due to the stronger performance of the Guitar Hero franchise and intellectual property franchise titles in 2009 versus 2010, partially offset by the continued exceptional performance from Call of Duty: Modern Warfare 2 and the launch of Call of Duty: Modern Warfare 2 Stimulus Package on Microsoft Xbox LIVE (the first map pack to Call of Duty: Modern Warfare 2).
Blizzard
Blizzards net revenues increased for the three months ended March 31, 2010 as compared to the same period in 2009 primarily due to value added services related to World of Warcraft. Value added services consist of transactions such as realm transfers, faction changes, and other character customizations within the World of Warcraft game play.
Distribution
Distributions net revenues decreased for the three months ended March 31, 2010 as compared to the same period in 2009 primarily due to lower sales as a result of current market conditions and a smaller slate of titles released by the supported third-party publishers.
Segment Income (Loss) from Operations Highlights
Activision
Activisions operating income increased for the three months ended March 31, 2010 as compared to the same period in 2009 primarily due to the strong performance of Call of Duty: Modern Warfare 2 and the launch of Call of Duty: Modern Warfare 2 Stimulus Package on Microsoft Xbox LIVE (the first map pack to Call of Duty: Modern Warfare 2), a change in business mix with lower cost of sales resulting from proportionately more software sales versus hardware peripheral sales, lower professional fees, and a decrease in sales and marketing based on timing of product releases. The increase in operating income was partially offset by higher product development costs on our future titles.
Blizzard
Blizzards operating income increased for the three months ended March 31, 2010 as compared to the same period in 2009 primarily as a result of the increase in value added service revenues.
Consolidated Results
Net Revenues by Geographic Region
The following table details our consolidated net revenues by geographic region for the three months ended March 31, 2010 and 2009 (amounts in millions):
|
|
Three months ended March 31, |
|
Increase |
|
|||||
|
|
2010 |
|
2009 |
|
(Decrease) |
|
|||
Geographic region net revenues: |
|
|
|
|
|
|
|
|||
North America |
|
$ |
703 |
|
$ |
524 |
|
$ |
179 |
|
Europe |
|
524 |
|
392 |
|
132 |
|
|||
Asia Pacific |
|
81 |
|
64 |
|
17 |
|
|||
Total geographic region net revenues |
|
1,308 |
|
980 |
|
328 |
|
|||
Other |
|
|
|
1 |
|
(1 |
) |
|||
|
|
|
|
|
|
|
|
|||
Consolidated net revenues |
|
$ |
1,308 |
|
$ |
981 |
|
$ |
327 |
|
The change in deferred revenues by geographic region for the three months ended March 31, 2010 and 2009 was as follows (amounts in millions):
|
|
Three months ended March 31, |
|
Increase |
|
|||||
|
|
2010 |
|
2009 |
|
(Decrease) |
|
|||
Change in deferred revenues by geographic region: |
|
|
|
|
|
|
|
|||
North America |
|
$ |
312 |
|
$ |
150 |
|
$ |
162 |
|
Europe |
|
254 |
|
99 |
|
155 |
|
|||
Asia Pacific |
|
28 |
|
7 |
|
21 |
|
|||
Total change in deferred revenues by geographic region |
|
594 |
|
256 |
|
338 |
|
|||
Other |
|
|
|
1 |
|
(1 |
) |
|||
|
|
|
|
|
|
|
|
|||
Total impact on consolidated net revenues |
|
$ |
594 |
|
$ |
257 |
|
$ |
337 |
|
Consolidated net revenues increased in all regions for the three months ended March 31, 2010 as compared to the same period in 2009 primarily due to the continued success of the Call of Duty franchise, in particular Call of Duty: Modern
Warfare 2, which was released in the fourth quarter of 2009. This is also the primary reason that we recognized more deferred revenue from prior quarters during the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. The increase was partially offset by the impact of the weaker sales of games in the music and casual game genres.
Foreign Exchange Impact
We estimate that changes in foreign exchange rates had a positive impact of approximately $19 million on Activision Blizzards net revenues for the three months ended March 31, 2010 as compared to the same period in 2009. The change is due to the weakening of the U.S. dollar in the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 relative to the British pound, euro, Australian dollar, Korean won, and Swedish krona.
Net Revenues by Platform
The following table details our net revenues by platform and as a percentage of total consolidated net revenues for the three months ended March 31, 2010 and 2009 (amounts in millions):
|
|
Three Months |
|
% of |
|