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, 2012 | |
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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 May 1, 2012 was 1,111,710,032.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
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PART I. |
FINANCIAL INFORMATION |
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Item 1. |
Financial Statements (Unaudited) |
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Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011 |
4 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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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 financial or operating performance; and (4) statements of assumptions underlying such statements. Activision Blizzard, Inc. (Activision Blizzard) generally uses words such as outlook, forecast, will, could, should, would, to be, plans, believes, may, expects, intends, 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 managements current expectations, estimates and projections about our business, and are inherently uncertain and difficult to predict. Our actual results could differ materially. Risks and uncertainties that may affect our future results include, but are not limited to, sales levels of Activision Blizzards titles, increasing concentration of titles, shifts in consumer spending trends, the impact of the current macroeconomic environment and market conditions within the video game industry, Activision Blizzards ability to predict consumer preferences, including interest in specific genres such as first-person action and massively multiplayer online games and preferences among competing hardware platforms, 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, rapid changes in technology and industry standards, litigation risks and associated costs, 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 our Annual Report on Form 10-K for the year ended December 31, 2011. 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. 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 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. All other product or service names are the property of their respective owners.
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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2012 |
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2011 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
3,049 |
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$ |
3,165 |
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Short-term investments |
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427 |
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360 |
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Accounts receivable, net of allowances of $234 million and $300 million at March 31, 2012 and December 31, 2011, respectively |
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103 |
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649 |
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Inventories, net |
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146 |
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144 |
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Software development |
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148 |
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137 |
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Intellectual property licenses |
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22 |
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22 |
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Deferred income taxes, net |
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445 |
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507 |
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Other current assets |
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226 |
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396 |
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Total current assets |
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4,566 |
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5,380 |
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Long-term investments |
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17 |
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16 |
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Software development |
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91 |
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62 |
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Intellectual property licenses |
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12 |
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12 |
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Property and equipment, net |
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154 |
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163 |
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Other assets |
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15 |
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12 |
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Intangible assets, net |
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85 |
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88 |
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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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7,109 |
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7,111 |
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Total assets |
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$ |
12,482 |
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$ |
13,277 |
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Liabilities and Shareholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
181 |
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$ |
390 |
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Deferred revenues |
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917 |
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1,472 |
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Accrued expenses and other liabilities |
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676 |
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694 |
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Total current liabilities |
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1,774 |
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2,556 |
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Deferred income taxes, net |
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57 |
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55 |
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Other liabilities |
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165 |
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174 |
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Total liabilities |
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1,996 |
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2,785 |
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Commitments and contingencies (Note 11) |
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Shareholders equity: |
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Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,114,117,148 and 1,133,391,371 shares issued at March 31, 2012 and December 31, 2011, respectively |
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Additional paid-in capital |
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9,391 |
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9,616 |
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Retained earnings |
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1,128 |
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948 |
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Accumulated other comprehensive income (loss) |
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(33 |
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(72 |
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Total shareholders equity |
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10,486 |
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10,492 |
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Total liabilities and shareholders equity |
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$ |
12,482 |
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$ |
13,277 |
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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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March 31, |
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2012 |
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2011 |
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Net revenues |
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Product sales |
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$ |
874 |
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$ |
1,061 |
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Subscription, licensing, and other revenues |
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298 |
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388 |
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Total net revenues |
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1,172 |
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1,449 |
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Costs and expenses |
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Cost of sales product costs |
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257 |
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299 |
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Cost of sales online subscriptions |
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59 |
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63 |
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Cost of sales software royalties and amortization |
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31 |
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61 |
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Cost of sales intellectual property licenses |
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7 |
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29 |
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Product development |
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124 |
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142 |
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Sales and marketing |
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79 |
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60 |
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General and administrative |
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102 |
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102 |
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Restructuring |
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19 |
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Total costs and expenses |
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659 |
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775 |
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Operating income |
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513 |
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674 |
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Investment and other income (expense), net |
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1 |
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2 |
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Income before income tax expense |
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514 |
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676 |
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Income tax expense |
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130 |
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173 |
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Net income |
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$ |
384 |
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$ |
503 |
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Earnings per common share |
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Basic |
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$ |
0.34 |
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$ |
0.42 |
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Diluted |
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$ |
0.33 |
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$ |
0.42 |
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Weighted-average shares outstanding |
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Basic |
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1,120 |
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1,173 |
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Diluted |
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1,127 |
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1,182 |
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Dividends per common share |
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$ |
0.18 |
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$ |
0.165 |
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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 COMPREHENSIVE INCOME
(Unaudited)
(Amounts in millions)
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For the Three Months Ended |
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March 31, |
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2012 |
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2011 |
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Net income |
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$ |
384 |
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$ |
503 |
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Other comprehensive income: |
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Foreign currency translation adjustment |
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38 |
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37 |
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Unrealized gains on investments, net of deferred income taxes of $1 million for March 31, 2012 and 2011 |
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1 |
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2 |
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Other comprehensive income |
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$ |
39 |
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$ |
39 |
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Comprehensive income |
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$ |
423 |
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$ |
542 |
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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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March 31, |
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2012 |
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2011 |
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Cash flows from operating activities: |
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Net income |
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$ |
384 |
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$ |
503 |
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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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65 |
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150 |
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Depreciation and amortization |
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23 |
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26 |
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Amortization and write-off of capitalized software development costs and intellectual property licenses (1) |
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30 |
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69 |
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Stock-based compensation expense (2) |
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21 |
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23 |
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Excess tax benefits from stock option exercises |
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(2 |
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(1 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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553 |
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554 |
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Inventories, net |
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11 |
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Software development and intellectual property licenses |
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(67 |
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(45 |
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Other assets |
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174 |
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129 |
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Deferred revenues |
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(576 |
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(716 |
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Accounts payable |
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(215 |
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(199 |
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Accrued expenses and other liabilities |
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(237 |
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(370 |
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Net cash provided by operating activities |
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153 |
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134 |
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Cash flows from investing activities: |
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Proceeds from maturities of available-for-sale investments |
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115 |
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154 |
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Payment of contingent consideration |
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(3 |
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Purchases of available-for-sale investments |
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(187 |
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(161 |
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Capital expenditures |
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(9 |
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(4 |
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Decrease in restricted cash |
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4 |
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Net cash used in investing activities |
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(77 |
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(14 |
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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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13 |
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5 |
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Repurchase of common stock |
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(261 |
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(343 |
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Excess tax benefits from stock option exercises |
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2 |
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1 |
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Net cash used in financing activities |
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(246 |
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(337 |
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Effect of foreign exchange rate changes on cash and cash equivalents |
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54 |
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63 |
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Net decrease in cash and cash equivalents |
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(116 |
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(154 |
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Cash and cash equivalents at beginning of period |
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3,165 |
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2,812 |
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Cash and cash equivalents at end of period |
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$ |
3,049 |
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$ |
2,658 |
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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, 2012
(Unaudited)
(Amounts in millions)
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Accumulated |
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Additional |
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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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Retained |
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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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Earnings |
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Income (Loss) |
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Equity |
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Balance at December 31, 2011 |
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1,133 |
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$ |
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$ |
9,616 |
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$ |
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$ |
948 |
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$ |
(72 |
) |
$ |
10,492 |
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Net income |
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384 |
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384 |
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Other comprehensive income |
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39 |
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39 |
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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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13 |
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13 |
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Stock-based compensation expense related to employee stock options and restricted stock rights |
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23 |
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23 |
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Dividends ($0.18 per common share) (See Note 10) |
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(204 |
) |
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(204 |
) | ||||||
Shares repurchased (See Note 10) |
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(22 |
) |
(261 |
) |
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(261 |
) | ||||||
Retirement of treasury shares |
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(22 |
) |
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(261 |
) |
22 |
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261 |
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Balance at March 31, 2012 |
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1,114 |
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$ |
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$ |
9,391 |
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$ |
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$ |
1,128 |
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$ |
(33 |
) |
$ |
10,486 |
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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 basis of consolidation and presentation
Description of Business
Activision Blizzard, Inc. is a worldwide online, personal computer (PC), console, handheld, and mobile 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 maintain significant operations in the United States, Canada, the United Kingdom, France, Germany, Ireland, Italy, Sweden, Spain, the Netherlands, Australia, South Korea and China.
The common stock of Activision Blizzard is traded on The NASDAQ Stock Market under the ticker symbol ATVI. Vivendi S.A. (Vivendi) owned approximately 61% of Activision Blizzards outstanding common stock at March 31, 2012.
Currently, we operate under three operating segments:
Activision Publishing, Inc.
Activision Publishing, Inc. (Activision) is a leading international developer and publisher of interactive software products and content. Activision develops games based on both internally-developed and licensed intellectual property. Activision markets and sells games it develops and, through our affiliate label program, games developed by certain third-party publishers. We sell games both through retail channels and by digital download. Activision currently offers games that operate on the Sony Computer Entertainment, Inc. (Sony) PlayStation 3 (PS3), Nintendo Co. Ltd. (Nintendo) Wii (Wii), and Microsoft Corporation (Microsoft) Xbox 360 (Xbox 360) console systems; the Nintendo Dual Screen handheld game systems; the PC; Apple iOS devices and other handheld and mobile devices.
Blizzard Entertainment, Inc.
Blizzard Entertainment, Inc. (Blizzard) is a leader in the subscription-based massively multi-player online role-playing game (MMORPG) category in terms of both subscriber base and revenues generated through its World of Warcraft® franchise, which it develops, hosts and supports. Blizzard also develops, markets and sells role-playing action and strategy PC-based computer games, including games in the multiple-award winning Diablo® and StarCraft® franchises. In addition, Blizzard maintains a proprietary online-game related service, Battle.net®. Blizzard distributes its products and generates revenues worldwide through various means, including: subscriptions (which consist of fees from individuals playing World of Warcraft, prepaid cards and other value-added service revenues such as realm transfers, faction changes, and other character customizations within World of Warcraft gameplay); retail sales of physical boxed products; online download sales of PC products; and licensing of software to third-party or related party companies that distribute World of Warcraft and StarCraft II®.
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.
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 year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. 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, 2011. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair statement of our financial position and results of operations in accordance with U.S. GAAP have been included in the accompanying unaudited condensed consolidated financial statements.
The accompanying consolidated financial statements include the accounts and operations of the Company. All intercompany accounts and transactions have been eliminated. The consolidated financial statements have been prepared in conformity with U.S. GAAP. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates and assumptions.
Certain reclassifications have been made to prior period 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, net
Our inventories, net consist of the following (amounts in millions):
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At March 31, 2012 |
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At December 31, 2011 |
| ||
Finished goods |
|
$ |
107 |
|
$ |
116 |
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Purchased parts and components |
|
39 |
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28 |
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|
|
|
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|
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Inventories, net |
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$ |
146 |
|
$ |
144 |
|
3. Intangible assets, net
Intangible assets, net consist of the following (amounts in millions):
|
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At March 31, 2012 |
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Estimated |
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Gross |
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useful |
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carrying |
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Accumulated |
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Net carrying |
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|
|
lives |
|
amount |
|
amortization |
|
amount |
| |||
Acquired definite-lived intangible assets: |
|
|
|
|
|
|
|
|
| |||
License agreements |
|
3 - 10 years |
|
$ |
88 |
|
$ |
(83 |
) |
$ |
5 |
|
Internally-developed franchises |
|
11 - 12 years |
|
309 |
|
(229 |
) |
80 |
| |||
Acquired indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
| |||
Activision trademark |
|
Indefinite |
|
386 |
|
|
|
386 |
| |||
Acquired trade names |
|
Indefinite |
|
47 |
|
|
|
47 |
| |||
Total |
|
|
|
$ |
830 |
|
$ |
(312 |
) |
$ |
518 |
|
|
|
At December 31, 2011 |
| |||||||||
|
|
Estimated |
|
Gross |
|
|
|
|
| |||
|
|
useful |
|
carrying |
|
Accumulated |
|
Net carrying |
| |||
|
|
lives |
|
amount |
|
amortization |
|
amount |
| |||
Acquired definite-lived intangible assets: |
|
|
|
|
|
|
|
|
| |||
License agreements |
|
3 - 10 years |
|
$ |
88 |
|
$ |
(82 |
) |
$ |
6 |
|
Game engines |
|
2 - 5 years |
|
32 |
|
(32 |
) |
|
| |||
Internally-developed franchises |
|
11 - 12 years |
|
309 |
|
(227 |
) |
82 |
| |||
Distribution agreements |
|
4 years |
|
18 |
|
(18 |
) |
|
| |||
Acquired indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
| |||
Activision trademark |
|
Indefinite |
|
386 |
|
|
|
386 |
| |||
Acquired trade names |
|
Indefinite |
|
47 |
|
|
|
47 |
| |||
Total |
|
|
|
$ |
880 |
|
$ |
(359 |
) |
$ |
521 |
|
Amortization expense of intangible assets was $3 million and $8 million for the three months ended March 31, 2012 and 2011, respectively.
At March 31, 2012, future amortization of definite-lived intangible assets is estimated as follows (amounts in millions):
2012 (remaining nine months) |
|
$ |
31 |
|
2013 |
|
28 |
| |
2014 |
|
14 |
| |
2015 |
|
7 |
| |
2016 |
|
3 |
| |
Thereafter |
|
2 |
| |
|
|
|
| |
Total |
|
$ |
85 |
|
4. Income taxes
The income tax expense of $130 million for the three months ended March 31, 2012 reflected an effective tax rate of 25.3%, which was consistent with the effective tax rate of 25.6% for the three months ended March 31, 2011. The effective tax rate of 25.3% for the three months ended March 31, 2012 differed from the statutory rate of 35.0%, primarily due to foreign income taxes levied at relatively lower rates, geographic mix in profitability, recognition of California research and development credits and federal domestic production deductions. As the federal research credit expired on December 31, 2011 and, as of March 31, 2012, an extension of the credit had not been signed into law, we have excluded the benefit from this tax credit in our income tax calculation for the three months ended March 31, 2012.
The overall effective income tax rate for the year could be different from the effective tax rate for the three months ended March 31, 2012 and will be dependent, in part, on our profitability for the remainder of the year. In addition, our effective income tax rates for the remainder of 2012 and future periods will depend on a variety of factors, such as changes in the mix of income by tax jurisdiction, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audits and other matters, and variations in the estimated and actual level of annual pre-tax income or loss. Further, the effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected by the extent that income (loss) before income tax expenses (benefit) is lower than anticipated in foreign regions where taxes are levied at lower statutory rates and/or higher than anticipated in the United States where taxes are levied at higher statutory rates.
The Internal Revenue Service (IRS) is currently examining the Companys federal tax returns for the 2009 tax year. The Company also has several state and non-U.S. audits pending. Although the final resolution of the Companys global tax disputes is uncertain, based on current information, in the opinion of the Companys management, the ultimate resolution of these matters will not have a material adverse effect on the Companys consolidated financial position, liquidity or results of operations. However, an unfavorable resolution of the Companys global tax disputes could have a material adverse effect on the Companys business and results of operations in an interim period in which the matters are ultimately resolved.
5. Software development and intellectual property licenses
The following table summarizes the components of our capitalized software development costs and intellectual property licenses (amounts in millions):
|
|
At |
|
At |
| ||
|
|
March 31, |
|
December 31, |
| ||
|
|
2012 |
|
2011 |
| ||
Internally developed software costs |
|
$ |
131 |
|
$ |
115 |
|
Payments made to third-party software developers |
|
108 |
|
84 |
| ||
Total software development costs |
|
$ |
239 |
|
$ |
199 |
|
|
|
|
|
|
| ||
Intellectual property licenses |
|
$ |
34 |
|
$ |
34 |
|
Amortization, write-offs and impairments of capitalized software development costs and intellectual property licenses are comprised of the following (amounts in millions):
|
|
Three Months Ended March 31, |
| ||||
|
|
2012 |
|
2011 |
| ||
Amortization of capitalized software development costs and intellectual property licenses |
|
$ |
31 |
|
$ |
73 |
|
Write-offs and impairments |
|
2 |
|
|
| ||
6. Fair value measurements
Financial Accounting Standards Board (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.
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, 2012, there were no impairment charges related to assets that are measured on a non-recurring basis.
The table below segregates all assets that are measured at fair value on a recurring basis (which means they are so measured at least annually) and assets that are not subject to recurring fair value measurement 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 |
|
|
| ||||||||
|
|
|
|
March 31, 2012 Using |
|
|
| ||||||||
|
|
|
|
Quoted |
|
|
|
|
|
|
| ||||
|
|
|
|
Prices in |
|
|
|
|
|
|
| ||||
|
|
|
|
Active |
|
Significant |
|
|
|
|
| ||||
|
|
|
|
Markets for |
|
Other |
|
Significant |
|
|
| ||||
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
| ||||
|
|
March 31, |
|
Assets |
|
Inputs |
|
Inputs |
|
Balance Sheet |
| ||||
|
|
2012 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Classification |
| ||||
Recurring fair value measurements: |
|
|
|
|
|
|
|
|
|
|
| ||||
Money market funds |
|
$ |
2,975 |
|
$ |
2,975 |
|
$ |
|
|
$ |
|
|
Cash and cash equivalents |
|
U.S. treasuries and government agency securities |
|
415 |
|
415 |
|
|
|
|
|
Short-term investments |
| ||||
Auction rate securities (ARS) |
|
17 |
|
|
|
|
|
17 |
|
Long-term investments |
| ||||
Total recurring fair value measurements |
|
$ |
3,407 |
|
$ |
3,390 |
|
$ |
|
|
$ |
17 |
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
| |||||||||
|
|
|
|
December 31, 2011 Using |
|
|
|
|
| |||||||||
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
Active |
|
Significant |
|
|
|
|
|
|
| |||||
|
|
|
|
Markets for |
|
Other |
|
Significant |
|
|
|
|
| |||||
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
|
|
| |||||
|
|
December 31, |
|
Assets |
|
Inputs |
|
Inputs |
|
Total Gains |
|
Balance Sheet |
| |||||
|
|
2011 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
(Losses) |
|
Classification |
| |||||
Recurring fair value measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Money market funds |
|
$ |
2,869 |
|
$ |
2,869 |
|
$ |
|
|
$ |
|
|
|
|
Cash and cash equivalents |
| |
U.S. treasuries with original maturities of three months or less |
|
2 |
|
2 |
|
|
|
|
|
|
|
Cash and cash equivalents |
| |||||
U.S. treasuries and government agency securities |
|
344 |
|
344 |
|
|
|
|
|
|
|
Short-term investments |
| |||||
ARS |
|
16 |
|
|
|
|
|
16 |
|
|
|
Long-term investments |
| |||||
Total recurring fair value measurements |
|
$ |
3,231 |
|
$ |
3,215 |
|
$ |
|
|
$ |
16 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Non-recurring fair value measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Goodwill (a) |
|
$ |
7,111 |
|
$ |
|
|
$ |
|
|
$ |
7,111 |
|
$ |
(12 |
) |
|
|
Total non-recurring fair value measurements |
|
$ |
7,111 |
|
$ |
|
|
$ |
|
|
$ |
7,111 |
|
$ |
(12 |
) |
|
|
(a) During our annual impairment review of goodwill performed as of December 31, 2011, we identified and recorded an impairment of $12 million in our Distribution segment. The decrease in fair value of the reporting unit was primarily due to the decrease of forecasted revenue from our Distribution segment in view of the industry trend towards digital distribution.
The following tables provide a reconciliation of the beginning and ending balances of our financial assets classified as Level 3 by major categories (amounts in millions) at March 31, 2012 and 2011, respectively:
|
|
Level 3 |
| ||||
|
|
|
|
Total |
| ||
|
|
|
|
financial |
| ||
|
|
|
|
assets at |
| ||
|
|
ARS |
|
fair |
| ||
|
|
(a) |
|
value |
| ||
Balance at January 1, 2012 |
|
$ |
16 |
|
$ |
16 |
|
Total unrealized gains included in other comprehensive income |
|
1 |
|
1 |
| ||
Balance at March 31, 2012 |
|
$ |
17 |
|
$ |
17 |
|
|
|
Level 3 |
| ||||
|
|
|
|
Total |
| ||
|
|
|
|
financial |
| ||
|
|
|
|
assets at |
| ||
|
|
ARS |
|
fair |
| ||
|
|
(a) |
|
value |
| ||
Balance at January 1, 2011 |
|
$ |
23 |
|
$ |
23 |
|
Total unrealized gains included in other comprehensive income |
|
2 |
|
2 |
| ||
Balance at March 31, 2011 |
|
$ |
25 |
|
$ |
25 |
|
(a) Fair value measurements of the ARS have been estimated using an income-approach model
(specifically, 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 the 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 less than 1% of our financial assets measured at fair value on a recurring basis at March 31, 2012.
Foreign Currency Forward Contracts Not Designated as Hedges
We transact business in various currencies other than the U.S. dollar and have significant international sales and expenses denominated in currencies other than the U.S. dollar, subjecting us to currency exchange rate risks. To mitigate our risk from foreign currency fluctuations we periodically enter into currency derivative contracts, primarily swaps and forward contracts with maturities of twelve months or less, with Vivendi as our principal counterparty. We do not hold or purchase any foreign currency contracts for trading or speculative purposes and we do not designate these forward contracts or swaps as hedging instruments. Accordingly, we report the fair value of these contracts in our condensed consolidated balance sheet with changes in fair value recorded in our condensed consolidated statement of operations. 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.
7. 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, 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 our online-enabled games, stock-based compensation expense, restructuring expense, and amortization of intangible assets. The CODM does not review any information regarding total assets on an operating segment basis and, accordingly, no disclosure is made with respect thereto. Information on the operating segments and reconciliations of total segment net revenues and total segment income from operations to consolidated net revenues and income before income tax expense from external customers for the three months ended March 31, 2012 and 2011 are presented below (amounts in millions):
|
|
Three months ended March 31, |
| ||||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
|
|
|
Income from operations |
| ||||||
|
|
Net revenues |
|
before income tax expense |
| ||||||||
Activision |
|
$ |
271 |
|
$ |
323 |
|
$ |
|
|
$ |
48 |
|
Blizzard |
|
251 |
|
357 |
|
89 |
|
170 |
| ||||
Distribution |
|
65 |
|
75 |
|
1 |
|
|
| ||||
Operating segments total |
|
587 |
|
755 |
|
90 |
|
218 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Reconciliation to consolidated net revenues / consolidated income before income tax expense: |
|
|
|
|
|
|
|
|
| ||||
Net effect from deferral of net revenues and related cost of sales |
|
585 |
|
694 |
|
447 |
|
506 |
| ||||
Stock-based compensation expense |
|
|
|
|
|
(21 |
) |
(23 |
) | ||||
Restructuring |
|
|
|
|
|
|
|
(19 |
) | ||||
Amortization of intangible assets |
|
|
|
|
|
(3 |
) |
(8 |
) | ||||
Consolidated net revenues / operating income |
|
$ |
1,172 |
|
$ |
1,449 |
|
513 |
|
674 |
| ||
Investment and other income (expense), net |
|
|
|
|
|
1 |
|
2 |
| ||||
Consolidated income before income tax expense |
|
|
|
|
|
$ |
514 |
|
$ |
676 |
|
Geographic information for the three months ended March 31, 2012 and 2011 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, |
| ||||
|
|
2012 |
|
2011 |
| ||
Net revenues by geographic region: |
|
|
|
|
| ||
North America |
|
$ |
601 |
|
$ |
748 |
|
Europe |
|
485 |
|
594 |
| ||
Asia Pacific |
|
86 |
|
107 |
| ||
Total consolidated net revenues |
|
$ |
1,172 |
|
$ |
1,449 |
|
Net revenues by platform were as follows (amounts in millions):
|
|
Three months ended March 31, |
| ||||
|
|
2012 |
|
2011 |
| ||
Net revenues by platform: |
|
|
|
|
| ||
Online subscriptions* |
|
$ |
256 |
|
$ |
395 |
|
Console |
|
688 |
|
824 |
| ||
Hand-held |
|
26 |
|
31 |
| ||
PC and Other |
|
137 |
|
124 |
| ||
Total platform net revenues |
|
1,107 |
|
1,374 |
| ||
Distribution |
|
65 |
|
75 |
| ||
Total consolidated net revenues |
|
$ |
1,172 |
|
$ |
1,449 |
|
*Revenue from online subscriptions consists of revenue from all World of Warcraft products, including subscriptions, boxed products, expansion packs, licensing royalties, and value-added services, and revenues from Call of Duty® Elite memberships.
Long-lived assets by geographic region at March 31, 2012 and December 31, 2011 were as follows (amounts in millions):
|
|
At March 31, 2012 |
|
At December 31, 2011 |
| ||
Long-lived assets* by geographic region: |
|
|
|
|
| ||
North America |
|
$ |
99 |
|
$ |
105 |
|
Europe |
|
44 |
|
46 |
| ||
Asia Pacific |
|
11 |
|
12 |
| ||
Total long-lived assets by geographic region |
|
$ |
154 |
|
$ |
163 |
|
*We classify long-lived assets as long term tangible fixed assets by the location of the controlling statutory entity, which only includes property, plant and equipment assets, as all other long term assets are not allocated by location.
We did not have any single external customer that accounted for 10% or more of consolidated net revenues for the three months ended March 31, 2012 and 2011.
8. Goodwill
The changes in the carrying amount of goodwill by operating segment for the three months ended March 31, 2012 are as follows (amounts in millions):
|
|
Activision |
|
Blizzard |
|
Total |
| |||
|
|
|
|
|
|
|
| |||
Balance at December 31, 2011 |
|
$ |
6,933 |
|
$ |
178 |
|
$ |
7,111 |
|
Tax benefit credited to goodwill |
|
(2 |
) |
|
|
(2 |
) | |||
|
|
|
|
|
|
|
| |||
Balance at March 31, 2012 |
|
$ |
6,931 |
|
$ |
178 |
|
$ |
7,109 |
|
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 the Company, 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.
9. 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, |
| ||||
|
|
2012 |
|
2011 |
| ||
|
|
|
|
|
| ||
Numerator: |
|
|
|
|
| ||
Consolidated net income |
|
$ |
384 |
|
$ |
503 |
|
Less: Distributed earnings to unvested stock-based awards that participate in earnings |
|
(4 |
) |
(3 |
) | ||
Less: Undistributed earnings allocated to unvested stock-based awards that participate in earnings |
|
(3 |
) |
(4 |
) | ||
Numerator for basic and diluted earnings per common share - net income available to common shareholders |
|
377 |
|
496 |
| ||
|
|
|
|
|
| ||
Denominator: |
|
|
|
|
| ||
Denominator for basic earnings per common share - weighted-average common shares outstanding |
|
1,120 |
|
1,173 |
| ||
|
|
|
|
|
| ||
Effect of potential dilutive common shares under the treasury stock method: |
|
|
|
|
| ||
Employee stock options |
|
7 |
|
9 |
| ||
Denominator for diluted earnings per common share - weighted-average common shares outstanding plus dilutive effect of employee stock options |
|
1,127 |
|
1,182 |
| ||
|
|
|
|
|
| ||
Basic earnings per common share |
|
$ |
0.34 |
|
$ |
0.42 |
|
|
|
|
|
|
| ||
Diluted earnings per common share |
|
$ |
0.33 |
|
$ |
0.42 |
|
Our unvested restricted stock rights 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, 2012 and 2011, we had outstanding unvested restricted stock rights with respect to 19 million and 17 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 20 million and 32 million shares of common stock were not included in the calculation of diluted earnings per common share for the three months ended March 31, 2012 and 2011, respectively.
10. Capital transactions
Repurchase Program
On February 3, 2011, our Board of Directors authorized a stock repurchase program under which we were authorized to repurchase up to $1.5 billion of our common stock, on terms and conditions to be determined by the Company, until March 31, 2012. For the three months ended March 31, 2012, we repurchased 22 million shares of our common stock for an aggregate purchase price of $261 million pursuant to that stock repurchase program.
On February 2, 2012, our Board of Directors authorized a new stock repurchase program under which we may repurchase up to $1 billion of our common stock, on terms and conditions to be determined by the Company, during the period between April 1, 2012 and the earlier of March 31, 2013 and a determination by the Board of Directors to discontinue the repurchase program.
For the three months ended March 31, 2011, we repurchased 31 million shares of our common stock for an aggregate purchase price of $343 million pursuant to stock repurchase plans authorized in 2010 and 2011.
Dividend
On February 9, 2012, our Board of Directors declared a cash dividend of $0.18 per common share to be paid on May 16, 2012 to shareholders of record at the close of business on March 21, 2012. We have included $204 million of dividends payable in accrued expense and other liabilities in respect of this payment.
On February 9, 2011, our Board of Directors approved a cash dividend of $0.165 per common share to be paid on May 11, 2011 to shareholders of record as of March 16, 2011, and on May 11, 2011, we made a cash dividend payment of $192 million to such shareholders. On August 12, 2011, the Company made dividend equivalent payments of $2 million related to this cash dividend to the holders of restricted stock units.
11. Commitments and contingencies
At March 31, 2012, we did not have any significant changes to our commitments since December 31, 2011. See Note 17 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, 2011 for more information regarding our commitments.
Legal Proceedings
The Company is subject to various legal proceedings and claims. FASB Accounting Standards Codification (ASC) Topic 450 governs the disclosure of loss contingencies and accrual of loss contingencies in respect of litigation and other claims. The Company records an accrual for a potential loss when it is probable that a loss will occur and the amount of the loss can be reasonably estimated. When the reasonable estimate of the potential loss is within a range of amounts, the minimum of the range of potential loss is accrued, unless a higher amount within the range is a better estimate than any other amount within the range. Moreover, even if an accrual is not appropriate, the Company provides additional disclosure related to litigation and other claims when it is reasonably possible (i.e., more than remote) that the outcomes of such litigation and other claims include potential material adverse impacts on the Company. The outcomes of legal proceedings and other claims are subject to significant uncertainties, many of which are outside the Companys control. There is significant judgment required in the analysis of these matters, including the probability determination and whether a potential exposure can be reasonably estimated. In making these determinations, the Company, in consultation with outside counsel, examines the relevant facts and circumstances on a quarterly basis assuming, as applicable, a combination of settlement and litigated outcomes and strategies. Moreover, legal matters are inherently unpredictable and the timing of development of factors on which reasonable judgments and estimates can be based can be slow. As such, there can be no assurance that the final outcome of these matters will not materially and adversely affect our business, financial condition, results of operations, or liquidity.
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. In their complaint, West and Zampella alleged damages, including punitive damages, in excess of $36 million, an amount they have since significantly increased during discovery to over $1 billion, as well as 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.
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 (Alderman et al. v. Activision Publishing, Inc. et al). An amended complaint was filed on July 8, 2010, which added seven additional plaintiffs. On October 5, 2010, five plaintiffs, all current employees of Infinity Ward, filed dismissals without prejudice. There are currently 40 plaintiffs in the case. The plaintiffs have asserted claims for breach of contract, violation of the Labor Code of the State of California, conversion and other claims. In their complaint, the plaintiffs
claimed that the Company failed to pay bonuses and other compensation allegedly owed to them in an amount at least between $75 million to $125 million, plus punitive damages, an amount they have since increased in discovery to approximately $350 million, plus punitive damages. On October 12, 2010, the court consolidated this matter with the West and Zampella matter.
On January 18, 2011, the court granted the Companys motion to amend its cross complaint against West and Zampella to add allegations with respect to them and to add Electronic Arts, Inc. as a party. On January 31, 2011, the case was transferred to the complex division.
On March 5, 2012, the court ruled on a number of dispositive motions presented by the parties. Among them, the court granted the Companys motion to dismiss the Alderman plaintiffs cause of action for conversion. The court denied, however, the Companys motion to dismiss Wests and Zampellas claim for promissory fraud and the Companys motion to dismiss the Alderman plaintiffs claims for damages resulting from bonuses allegedly owed after the dates of their resignations from the Company.
Some of the parties have filed, and are likely to file, additional pre-trial motions and discovery is almost complete. The court has set a trial date of May 29, 2012.
The Company has accrued and will continue to accrue appropriate amounts related to bonuses and other monies allegedly owed in connection with this matter. Due to the inherent uncertainties of litigation, particularly with respect to matters tried before juries, other potential outcomes are reasonably possible, including outcomes which are above the amount of the accrual. In light of the plaintiffs claims, which exceed $1 billion, although the Company does not believe such a result would be justified, there is a range of reasonably possible outcomes that could have a material impact on the Companys business, financial condition, results of operation or liquidity in an interim period as well as in the full reporting year in which the lawsuit is ultimately resolved or in which an increase in the accrual occurs.
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 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.
12. 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 were $74 million and $85 million at March 31, 2012 and December 31, 2011, respectively. A pre-tax net unrealized loss of less than a million for each of the three months ended March 31, 2012 and 2011, 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, and music royalty agreements with Vivendi and its subsidiaries and other affiliates. None of these services, transactions and agreements with Vivendi and its affiliates is material, either individually or in the aggregate, to the condensed consolidated financial statements as a whole.
13. Recently issued accounting pronouncements
Fair value measurements and disclosures
Effective January 1, 2012, we adopted an update to the accounting rules for fair value measurement. The new accounting principal establishes a consistent definition of fair value in an effort to ensure that the fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards (IFRS) are comparable. This update changes certain fair value measurement principles and enhances the disclosure requirements for fair value measurements. This update does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use was already required or permitted by other standards within U.S. GAAP or IFRS. This update is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The adoption of this pronouncement did not have a material impact on the Companys Condensed Consolidated Financial Statements and accompanying disclosures.
Statement of comprehensive income
Effective January 1, 2012, we adopted the FASB issued authoritative guidance on the presentation of comprehensive income. This update requires that all non-owner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The adoption of this pronouncement did not have a material impact on the Companys Condensed Consolidated Financial Statements and accompanying disclosures.
Goodwill impairment
Effective January 1, 2012, the Company adopted an update to the authoritative guidance related to goodwill impairment testing. This update gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two-step test mandated prior to the update. If, after assessing the totality of events and circumstances, a company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then it must perform the two-step test. Otherwise, a company may skip the two-step test. Companies are not required to perform the qualitative assessment and may, instead proceed directly to the first step of the two-part test. The adoption of this updated guidance does not have a material impact on the Companys Condensed Consolidated Financial Statements.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Activision Blizzard, Inc. is a worldwide online, personal computer (PC), console, handheld, and mobile game publisher. The terms Activision Blizzard, the Company, we, us, and our are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries. Based upon our organizational structure, we conduct our business through three operating segments as follows:
Activision Publishing, Inc.
Activision Publishing, Inc. (Activision) is a leading international developer and publisher of interactive software products and content. Activision develops games based on both internally-developed and licensed intellectual property. Activision markets and sells games it develops and, through our affiliate label program, games developed by certain third-party publishers. We sell games both through retail channels and by digital download. Activision currently offers games that operate on the Sony Computer Entertainment, Inc. (Sony) PlayStation 3 (PS3), Nintendo Co. Ltd. (Nintendo) Wii (Wii), and Microsoft Corporation (Microsoft) Xbox 360 (Xbox 360) console systems; the Nintendo Dual Screen (NDS) handheld game systems; the PC; Apple iOS devices and other handheld and mobile devices.
Blizzard Entertainment, Inc.
Blizzard Entertainment, Inc. (Blizzard) is a leader in the subscription-based massively multi-player online role-playing game (MMORPG) category in terms of both subscriber base and revenues generated through its World of Warcraft® franchise, which it develops, hosts and supports. Blizzard also develops, markets and sells role-playing action and strategy PC-based computer games, including games in the multiple-award winning Diablo® and StarCraft® franchises. In addition, Blizzard maintains a proprietary online-game related service, Battle.net®. Blizzard distributes its products and generates revenues worldwide through various means, including: subscriptions (which consist of fees from individuals playing World of Warcraft, prepaid cards and other value-added service revenues such as realm transfers, faction changes, and other character customizations within World of Warcraft gameplay); retail sales of physical boxed products; online download sales of PC products; and licensing of software to third-party or related party companies that distribute World of Warcraft and StarCraft II®.
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.
Business Highlights
For the three months ended March 31, 2012, Activision Blizzard had net revenues of $1.2 billion, as compared to net revenues of $1.4 billion for the same period in 2011, and earnings per diluted share of $0.33, as compared to earnings per diluted share of $0.42 for the same period in 2011.
According to The NPD Group, with respect to the U.S. market data, Charttrack and Gfk for Europe market data, for the first quarter of 2012, in the U.S. and Europe:
· Call of Duty: Modern Warfare 3 was the #2 best-selling console game overall.
· Skylanders Spyros Adventure (including accessory packs and figures) was the #3 best-selling game overall in dollars across all platforms and the #1 selling kids title in dollars.
· Activision Blizzard had two top-10 PC titles, with Activision Publishings Call of Duty: Modern Warfare 3, and with Blizzard Entertainments StarCraft II: Wings of Liberty.
On March 20, 2012, Activision Publishing released the Call of Duty® Modern Warfare 3 Content Collection #1 for Xbox 360.
On March 20, 2012, Blizzard Entertainment announced that they renewed their license with NetEase for World of Warcraft in mainland China, adding an additional three years to the current license agreement. Further, Blizzard Entertainment launched the World of Warcraft: Mists of Pandaria beta on March 21, 2012.
Activision Blizzard Recent and Upcoming Product Releases
Activision Publishing released the Call of Duty® Modern Warfare 3 Content Collection #1 for PS3 on April 19, 2012 and the PC on May 8, 2012. On April 5, 2012, Activision Publishing expanded the reach of the Skylanders franchise with the debut of Skylanders Cloud Patrol, an entirely new gaming experience for iPhone, iPad and iPod touch users. Also, on April 24, 2012, the company released PROTOTYPE 2 for the Xbox 360, PS3 and PC.
Activision Publishing also expects to release two additional games during the second quarter of 2012, the Hasbro, Inc. branded game BATTLESHIP®, which is planned to launch in mid May 2012 timed to Universal Pictures upcoming feature film of the same name; and The Amazing Spider-Man video game, which is planned to launch in late June 2012 timed to Sony Picture Entertainments upcoming feature film of the same name. Both games will be released on the Xbox 360, PS3, Wii, and NDS.
Additionally, Blizzard Entertainment expects to release Diablo III on May 15, 2012.
Managements Overview of Business Trends
We provide our products through both retail channels and digital online delivery methods. Many of our video games that are available through retailers as physical boxed software products such as DVDs are also available by direct digital download over the Internet (both from websites that we own and from others owned by third parties). In addition, we offer players downloadable content as add-ons to our products (e.g., new multi-player content packs). Such digital online-delivered content is generally offered to consumers for a one-time fee.
We also offer subscription-based services for World of Warcraft, which are digitally delivered and hosted by Blizzards proprietary online game related service, Battle.net. In November 2011, we launched Call of Duty® Elite, a digital service that provides both free and paid subscription-based content and features for the Call of Duty franchise. Digital revenues have become an increasingly important part of our business, and we continue to focus on and develop products that can be delivered via digital online channels.
Net revenues from digital online channels represented 27% of the total consolidated net revenues for the three months ended March 31, 2012. Net revenues from digital online channels excluding the impact of the change in deferred net revenues (a non-GAAP financial measure), represented 51% of the total consolidated net revenues for the three months ended March 31, 2012. We currently define digital online channel-related sales as revenues from subscriptions and licensing royalties, value added services, downloadable content, digitally distributed products and wireless devices, which may differ from definitions used by our competitors or other companies.
Conditions in the retail channels of the video games industry have remained challenging and weakened during the first three months of 2012. In the U.S. and Europe, video game retail sales declined 24% as compared to the same period in 2011, according to The NPD Group, Charttrack and Gfk. The declines in the U.S. and European markets were driven by fewer releases in the three months ended March 31, 2012 as compared to the same period in 2011, as well as price declines experienced at the end of 2011. These factors have contributed to the Companys overall catalogue weakness in both U.S. and Europe for the three months ended March 31, 2012.
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, |
| ||||||||
|
|
2012 |
|
2011 |
| ||||||
|
|
|
|
|
|
|
|
|
| ||
Net revenues: |
|
|
|
|
|
|
|
|
| ||
Product sales |
|
$ |
874 |
|
75 |
% |
$ |
1,061 |
|
73 |
% |
Subscription, licensing, and other revenues |
|
298 |
|
25 |
|
388 |
|
27 |
| ||
Total net revenues |
|
1,172 |
|
100 |
|
1,449 |
|
100 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Costs and expenses: |
|
|
|
|
|
|
|
|
| ||
Cost of sales product costs |
|
257 |
|
22 |
|
299 |
|
21 |
| ||
Cost of sales online subscriptions |
|
59 |
|
5 |
|
63 |
|
4 |
| ||
Cost of sales software royalties and amortization |
|
31 |
|
3 |
|
61 |
|
4 |
| ||
Cost of sales intellectual property licenses |
|
7 |
|
|
|
29 |
|
2 |
| ||
Product development |
|
124 |
|
10 |
|
142 |
|
10 |
| ||
Sales and marketing |
|
79 |
|
7 |
|
60 |
|
4 |
| ||
General and administrative |
|
102 |
|
9 |
|
102 |
|
7 |
| ||
Restructuring |
|
|
|
|
|
19 |
|
1 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total costs and expenses |
|
659 |
|
56 |
|
775 |
|
53 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Operating income |
|
513 |
|
44 |
|
674 |
|
47 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Investment and other income (expense), net |
|
1 |
|
|
|
2 |
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Income before income tax expense |
|
514 |
|
44 |
|
676 |
|
47 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Income tax expense |
|
130 |
|
11 |
|
173 |
|
12 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Net income |
|
$ |
384 |
|
33 |
% |
$ |
503 |
|
35 |
% |
Operating Segment Results
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, 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 our online-enabled games, stock-based compensation expense, restructuring expense, and amortization of intangible assets. The CODM does not review any information regarding total assets on an operating segment basis and, accordingly, no disclosure is made with respect thereto. Information on the operating segments and reconciliations of total segment net revenues and total segment income from operations to consolidated net revenues and income before income tax expense from external customers for the three months ended March 31, 2012 and 2011 are presented below (amounts in millions):
|
|
Three months ended March 31, |
| |||||||
|
|
|
|
|
|
Increase |
| |||
|
|
2012 |
|
2011 |
|
(Decrease) |
| |||
|
|
|
|
|
|
|
| |||
Segment net revenues: |
|
|
|
|
|
|
| |||
Activision |
|
$ |
271 |
|
$ |
323 |
|
$ |
(52 |
) |
Blizzard |
|
251 |
|
357 |
|
(106 |
) | |||
Distribution |
|
65 |
|
75 |
|
(10 |
) | |||
Operating segment net revenue total |
|
587 |
|
755 |
|
(168 |
) | |||
|
|
|
|
|
|
|
| |||
Reconciliation to consolidated net revenues: |
|
|
|
|
|
|
| |||
Net effect from deferral of net revenues |
|
585 |
|
694 |
|
|
| |||
Consolidated net revenues |
|
$ |
1,172 |
|
$ |
1,449 |
|
|
| |
|
|
|
|
|
|
|
| |||
Segment income from operations: |
|
|
|
|
|
|
| |||
Activision |
|
$ |
|
|
$ |
48 |
|
$ |
(48 |
) |
Blizzard |
|
89 |
|
170 |
|
(81 |
) | |||
Distribution |
|
1 |
|
|
|
1 |
| |||
Operating segment income from operations total |
|
90 |
|
218 |
|
(128 |
) | |||
|
|
|
|
|
|
|
| |||
Reconciliation to consolidated operating income and consolidated income before income tax expense: |
|
|
|
|
|
|
| |||
Net effect from deferral of net revenues and related cost of sales |
|
447 |
|
506 |
|
|
| |||
Stock-based compensation expense |
|
(21 |
) |
(23 |
) |
|
| |||
Restructuring |
|
|
|
(19 |
) |
|
| |||
Amortization of intangible assets |
|
(3 |
) |
(8 |
) |
|
| |||
|
|
|
|
|
|
|
| |||
Consolidated operating income |
|
513 |
|
674 |
|
|
| |||
Investment and other income (expense), net |
|
1 |
|
2 |
|
|
| |||
|
|
|
|
|
|
|
| |||
Consolidated income before income tax expense |
|
$ |
514 |
|
$ |
676 |
|
|
|
Segment Net Revenues
Activision
Activisions net revenues decreased for the three months ended March 31, 2012 as compared to the same period in 2011, primarily due to the later release and lower sales from downloadable content for Call of Duty®: Modern Warfare 3 (Content Collection #1) than for Call of Duty®: Black Ops (First Strike) in the same period of 2011. Also, lower catalogue sales from Call of Duty franchise titles, and fewer releases in 2012 than in the same period of 2011 resulted in lower net revenues. These decreases in net revenues were partially offset by the continued strong performance of Skylanders Spyros AdventureTM (including toys and accessories associated with the Skylanders franchise), and revenues from Call of Duty® Elite memberships.
Blizzard
Blizzards net revenues decreased for the three months ended March 31, 2012 as compared to the same period in 2011, primarily due to lower World of Warcraft subscription revenues resulting from a lower number of subscribers, and lower catalogue revenues generated from World of Warcraft: Cataclysm, which was released in December 2010.
At March 31, 2012, the worldwide subscriber base for World of Warcraft was 10.2 million, compared to a subscriber base of 10.2 million at December 31, 2011, and 11.4 million at March 31, 2011. During the quarter there was a slight increase in subscribers in Asia. In general, the average revenue per subscriber is lower in Asia than in the U.S. and Europe. Looking forward, the companys objective is to deliver new game content for World of Warcraft in all regions to further appeal to the gaming community.
Distribution
Distributions net revenues decreased for the three months ended March 31, 2012 as compared to the same period in 2011, which was largely due to the weak video games retail sales environment, particularly in the United Kingdom, as well as unfavorable movements in foreign exchange rates.
Segment Income from Operations
Activision
For the three months ended March 31, 2012, Activisions operating income decreased as compared to the same period in 2011, primarily driven by lower net revenues as previously described and higher sales and marketing costs related to the Skylanders and Call of Duty franchises. The decrease was partially offset by lower costs of sales (consistent with lower net revenues), and lower operating expenses resulting from the restructuring activities implemented in February 2011.
Blizzard
Blizzards operating income decreased for the three months ended March 31, 2012 as compared to the same period in 2011, primarily as a result of the decrease in net revenues previously described. The decrease was partially offset by lower cost of sales (consistent with lower net revenues), and lower product development expenses from capitalization of upcoming title releases.
Non-GAAP Financial Measures
The analysis of revenues by distribution channel is presented both on a GAAP (including the impact from change in deferred revenues) and non-GAAP (excluding the impact from change in deferred revenues) basis. We use this non-GAAP measure internally when evaluating our operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of our management team. We believe this is appropriate because this non-GAAP measure 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, and facilitates comparison of operating performance between periods. In addition, excluding the impact from change in deferred net revenue provides a much more timely indication of trends in our sales and other operating results. While we believe that this non-GAAP measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation from, as a substitute for, or as more important than, the related financial information prepared in accordance with GAAP. In addition, this non-GAAP financial measure may not be the same as any non-GAAP measure presented by another company. This non-GAAP financial measure has limitations in that it does not reflect all of the items associated with our GAAP revenues. We compensate for the limitations resulting from the exclusion of the change in deferred revenues by considering the impact of that item separately and by considering our GAAP, as well as non-GAAP, revenues.
We currently define digital online channels-related sales as revenues from subscriptions and licensing royalties, value added services, downloadable content, digitally distributed products, and wireless devices.
The following table provides a reconciliation between GAAP and non-GAAP net revenues by distribution channel for the three months ended March 31, 2012 and 2011 (amounts in millions):
|
|
Three months ended March 31, |
|
Increase |
| |||||
|
|
2012 |
|
2011 |
|
(Decrease) |
| |||
GAAP net revenues by distribution channel |
|
|
|
|
|
|
| |||
Retail channels |
|
$ |
793 |
|
$ |
946 |
|
$ |
(153 |
) |
Digital online channels |
|
314 |
|
428 |
|
(114 |
) | |||
Total Activision and Blizzard |
|
1,107 |
|
1,374 |
|
(267 |
) | |||
|
|
|
|
|
|
|
| |||
Distribution |
|
65 |
|
75 |
|
(10 |
) | |||
Total consolidated GAAP net revenues |
|
1,172 |
|
1,449 |
|
(277 |
) | |||
|
|
|
|
|
|
|
| |||
Change in deferred net revenues (1) |
|
|
|
|
|
|
| |||
Retail channels |
|
(569 |
) |
(706 |
) |
|
| |||
Digital online channels |
|
(16 |
) |
12 |
|
|
| |||
Total changes in deferred net revenues |
|
(585 |
) |
(694 |
) |
|
| |||
|
|
|
|
|
|
|
| |||
Non-GAAP net revenues by distribution channel |
|
|
|
|
|
|
| |||
Retail channels |
|
224 |
|
240 |
|
(16 |
) | |||
Digital online channels |
|
298 |
|
440 |
|
(142 |
) | |||
Total Activision and Blizzard |
|
522 |
|
680 |
|
(158 |
) | |||
|
|
|
|
|
|
|
| |||
Distribution |
|
65 |
|
75 |
|
(10 |
) | |||
Total non-GAAP net revenues (2) |
|
$ |
587 |
|
$ |
755 |
|
$ |
(168 |
) |
(1) We have determined that some of our games online functionality represents an essential component of gameplay and as a result a more-than-inconsequential separate deliverable. As such, we are required to recognize the revenues of these game titles over the estimated service periods, which may range from a minimum of five months to a maximum of less than a year. In the table above, we present the amount of net revenues for each period as a result of the accounting treatment.
(2) Total non-GAAP net revenues presented also represents our total operating segment net revenues.
The decrease in GAAP and non-GAAP net revenues from digital online channels for the three months ended March 31, 2012 as compared to the same period in 2011 was attributable to the decline in net revenues from subscriptions and value added services from World of Warcraft and lower net revenues from Call of Duty downloadable content. World of Warcraft subscription revenues were down due to a lower subscriber base year-over-year. Revenues from Call of Duty downloadable content decreased significantly, reflecting lower sales of Call of Duty®: Modern Warfare 3 Content Collection #1 in 2012 than Call of Duty®: Black Ops First Strike in 2011, partially driven by the later release of the downloadable content in 2012. The decrease was partially offset by revenues from Call of Duty® Elite memberships.
The decrease in GAAP and non-GAAP net revenues from retail channels for the three months ended March 31, 2012 as compared to the same period in 2011 was attributable to lower catalogue sales of Call of Duty franchise titles, lower revenues generated from World of Warcraft: Cataclysm, which was released in December 2010, lower catalogue revenues from StarCraft II: Wings of Liberty, which was released in July 2010, and fewer releases in 2012 than in the same period of 2011. The decrease was partially offset by revenues from Skylanders Spyros Adventure (including toys and accessories associated with the Skylanders franchise).
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, 2012 and 2011 (amounts in millions):
|
|
Three months ended March 31, |
|
Increase |
| |||||
|
|
2012 |
|
2011 |
|
(Decrease) |
| |||
Geographic region net revenues: |
|
|
|
|
|
|
| |||
North America |
|
$ |
601 |
|
$ |
748 |
|
$ |
(147 |
) |
Europe |
|
485 |
|
594 |
|
(109 |
) | |||
Asia Pacific |
|
86 |
|
107 |
|
(21 |
) | |||
Consolidated net revenues |
|
$ |
1,172 |
|
$ |
1,449 |
|
$ |
(277 |
) |
The decrease in deferred revenues recognized by geographic region for the three months ended March 31, 2012 and 2011 was as follows (amounts in millions):
|
|
Three months ended March 31, |
|
Increase |
| |||||
|
|
2012 |
|
2011 |
|
(Decrease) |
| |||
Decrease in deferred revenues recognized by geographic region: |
|
|
|
|
|
|
| |||
North America |
|
$ |
331 |
|
$ |
383 |
|
$ |
(52 |
) |
Europe |
|
225 |
|
271 |
|
(46 |
) | |||
Asia Pacific |
|
29 |
|
40 |
|
(11 |
) | |||
Total impact on consolidated net revenues |
|
$ |
585 |
|
$ |
694 |
|
$ |
(109 |
) |
As previously discussed, the Companys net revenues for the three months ended March 31, 2012 were negatively impacted by the lower Call of Duty catalogue and downloadable content sales, fewer releases and the lower World of Warcraft subscriber base year-over-year. These negative impacts were partially offset by the strong sales performance of Skylanders Spyros AdventureTM (including toys and accessories associated with the Skylanders franchise), and revenues from Call of Duty® Elite memberships. These factors impacted net revenues in all regions. Furthermore, net revenue declined in Europe and Asia Pacific because we published Lego Star Wars III, on behalf of Lucas Arts in Europe and certain countries in Asia Pacific, in the first three months of 2011, while no comparable title was released in the first three month of 2012.
The decrease in deferred revenues recognized was primarily attributable to the lower revenues from our Call of Duty franchise titles and digital downloadable content, and lower Blizzard catalogue sales of World of Warcraft: Cataclysm and Starcraft II: Wings of Liberty. The decrease was partially offset by the recognition of deferred revenues from the initial launch of Call of Duty®: Modern Warfare® 3.
Foreign Exchange Impact
Changes in foreign exchange rates had a negative impact of approximately $17 million on Activision Blizzards net revenues for the three months ended March 31, 2012 as compared to the same period in 2011. The change is primarily due to the strengthening of the U.S. dollar relative to the British pound, the Euro, and the Australian dollar in 2012 compared to 2011.
Net Revenues by Platform
The following tables detail our net revenues by platform and as a percentage of total consolidated net revenues for the three months ended March 31, 2012 and 2011 (amounts in millions):
|
|
Three months |
|
% of total |
|
Three months |
|
% of total |
|
|
| |||
|
|
ended |
|
consolidated |
|
ended |
|
consolidated |
|