Activision Blizzard Announces Better-Than-Expected Third-Quarter 2017 Financial Results

Record Q3 Revenues

Record Year-to-Date Revenues and EPS

Company Increases CY 2017 Revenues and EPS Outlook

SANTA MONICA, Calif.–Activision Blizzard, Inc. (Nasdaq: ATVI) today announced
better-than-expected third-quarter 2017 results.

 

Third Quarter
Prior
(in millions, except EPS) 2017 Outlook* 2016
GAAP Net Revenues $ 1,618 $ 1,385 $ 1,568
Impact of GAAP deferralsA $ 284 $ 315 $ 62
GAAP EPS $ 0.25 $ 0.09 $ 0.26
Non-GAAP EPS $ 0.47 $ 0.34 $ 0.49
Impact of GAAP deferralsA $ 0.13 $ 0.11 $ 0.03

* Prior outlook was provided by the company on August 3, 2017 in
its earnings release.

For the quarter ended September 30, 2017, Activision Blizzard’s net
revenues presented in accordance with GAAP were a Q3 record of $1.62
billion, as compared with $1.57 billion for the third quarter of 2016.
GAAP net revenues from digital channels were a Q3 record of $1.35
billion. GAAP operating margin was 16%. GAAP earnings per diluted share
were $0.25, as compared with $0.26 for the third quarter of 2016.

For the quarter ended September 30, 2017, on a non-GAAP basis,
Activision Blizzard’s operating margin was 30% and earnings per diluted
share were $0.47, as compared with $0.49 for the third quarter of 2016.

For the quarter, operating cash flows were $379 million.

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

Bobby Kotick, Chief Executive Officer of Activision Blizzard, said, “This was another strong quarter. We delivered record results and impressive engagement. With the recently released Destiny 2 off to a strong start, King’s position as the number one mobile publisher in the U.S.1, our release of Call of Duty®: WWII, and the upcoming launch of the Overwatch League™, we have great momentum as we approach the end of the year.” Kotick added, “By investing in our franchises and communities, we
continue to make progress on our efforts to connect and engage the world
through epic entertainment.”

Selected Business Highlights:

We serve our hundreds of millions of audience members with an ongoing
pipeline of content, services, and features. In Q3 we demonstrated that
meaningful results can come from content investments, both large and
small.

Audience Reach

  • Activision Blizzard had 384 million Monthly Active Users (MAUs)B in
    the quarter.
  • Activision had the biggest third-quarter online player community in
    its history, with a record 49 million MAUsB.
  • Launched in September, Destiny 2 is the best-selling
    console game year-to-date in the U.S.2 Digital mix was over
    50% of console full game sell-through, a new record for the company.
    In October, we introduced the Destiny franchise to PC
    gamers on Blizzard’s Battle.net® platform, opening the
    franchise to new global audiences and future growth opportunities.
  • Activision’s Call of Duty continued its strong momentum
    with record Q3 MAUsB ahead of the highly anticipated launch
    of Call of Duty: WWII on November 3, 2017. Pre-order
    momentum has been strong, with a higher percentage of pre-orders on
    the digital offering than prior Call of Duty titles.
  • Blizzard had the biggest third quarter online player community in its
    history, with a record 42 million MAUsB. This is the fourth
    quarter in a row that Blizzard drove quarterly record MAUsB.
    Overwatch® and Hearthstone® MAUsB
    grew year-over-year. The Overwatch community grew to
    over 35 million registered players.
  • King had 293 million MAUsB for the quarter and has had two
    of the top-10 highest-grossing titles in the U.S. mobile app stores
    for sixteen quarters in a row.1 Candy Crush Saga,
    which is celebrating its 5th anniversary, returned to the
    #1 grossing position in U.S. mobile app stores for the quarter.1

Deep Engagement

  • The company achieved a new milestone with players spending over 50
    minutes per day in Activision Blizzard games, in line with some of the
    most engaging online connected platforms in the world.
  • Activision and Bungie’s Destiny 2 is well ahead of the
    highly engaging original Destiny on time spent per
    player and attach rate to the Expansion Pass.
  • Blizzard’s Hearthstone: Knights of the Frozen
    Throne
    expansion led to double-digit percentage
    growth in time spent year-over-year for the franchise. Overwatch had
    a Summer Games seasonal event in August and a
    Halloween Terror event in October, both of which
    continued to drive strong engagement and participation in
    customization items. World of Warcraft® released a new
    content update in the quarter, leading to stable MAUsB for
    the franchise quarter-over-quarter and continued participation in
    value added services.
  • King’s increased cadence of live operations and new features continued
    to drive strong engagement. The frequency with which players returned
    to play and the time spent per player are at record highs.
  • The inaugural season of the Overwatch League is set to begin at
    the Blizzard Arena Los Angeles, with 12 world-class teams from around
    the world competing in regular season games starting on January 10,
    2018. This morning, Blizzard announced groundbreaking Overwatch
    League
    sponsorship deals with HP and Intel.
  • Blizzard’s eleventh BlizzCon® will be returning to the Anaheim
    Convention Center this Friday, November 3, and Saturday, November 4,
    where it will host over 30,000 people. With tickets having sold out in
    a matter of seconds, millions more will be able to join through
    live-streaming or the BlizzCon Virtual Ticket. BlizzCon will
    feature a number of events, including the finals of several Blizzard
    esports tournaments, with global champions crowned across a number of
    franchises.
  • The new season of Activision’s Call of Duty World League is set
    to begin in December, featuring the largest prize pool in franchise
    history.

Player Investment

  • Activision Blizzard delivered a Q3 record of over $1 billion of
    in-game revenues, with record performance year-to-date.
  • Activision achieved record Q3 segment revenues and operating income,
    capping record year-to-date performance.
  • With the launch of the game on PC, Destiny 2 is now
    ahead of the original game in consumer spend.
  • Call of Duty had strong franchise engagement
    and stable in-game purchases sequentially.
  • King’s paying players grew for the first time since Q1 2016, while
    gross bookingsC per paying user also grew for the ninth
    quarter in a row to a new record.
  • Candy Crush franchise gross bookingsC
    grew to their highest level since 2013. King also achieved record
    quarterly mobile gross bookingsC in Q3, driving the third
    sequential quarter of segment revenues growth.
  • Both Activision and Blizzard delivered strong library content in the
    quarter with Activision’s Crash Bandicoot N. Sane
    Trilogy
    , and Call of Duty: Modern Warfare® Remastered,
    released as a standalone game, and Blizzard’s StarCraft®:
    Remastered
    .

Company Outlook:

(in millions, except EPS)

GAAP
Outlook

Non-GAAP
Outlook

Impact of GAAP
deferralsA

CY 2017

Net Revenues $ 6,675 6,675 175
EPS $ 1.22 2.08 0.08
Fully Diluted Shares 767 767

Q4 2017

Net Revenues $ 1,700 1,700 635
EPS $ 0.10 0.36 0.46
Fully Diluted Shares 769 769

Currency Assumptions for 2017 Outlook:

  • $1.12 USD/Euro for current outlook (vs. average of $1.11 for 2016 and
    $1.11 for 2015); and
  • $1.32 USD/British Pound Sterling for current outlook (vs. average of
    $1.36 for 2016 and $1.53 for 2015).
  • Note: Our financial guidance includes the forecasted impact of the FX
    cash flow hedging program.

Conference Call:

Today at 4:30 p.m. EDT, Activision Blizzard’s management will host a
conference call and Webcast to discuss the company’s results for the
quarter ended September 30, 2017 and management’s outlook for the
remainder of the calendar year. The company welcomes all members of the
financial and media communities and other interested parties to visit
the “Investor Relations” area of www.activisionblizzard.com
to listen to the conference call via live Webcast or to listen to the
call live by dialing into 877-604-9668 in the U.S. with passcode 2253748.

About Activision Blizzard:

Activision Blizzard, Inc., a member of the Fortune 500 and S&P 500, is
the world’s most successful standalone interactive entertainment
company. We delight hundreds of millions of monthly active users around
the world through franchises including Activision’s Call of Duty®,
Destiny and Skylanders®, Blizzard Entertainment’s World
of Warcraft
®, Overwatch®, Hearthstone®, Diablo®,
StarCraft®, and Heroes of the Storm®, and King’s Candy
Crush
™, Pet Rescue™, Bubble Witch™ and Farm Heroes™.
The company is one of the Fortune “100 Best Companies To Work For®.”
Headquartered in Santa Monica, California, Activision Blizzard has
operations throughout the world, and its games are played in 196
countries. More information about Activision Blizzard and its products
can be found on the company’s website, www.activisionblizzard.com.

1 U.S. ranking for Apple App Store and Google Play Store
combined, per App Annie Intelligence for third quarter 2017.

2 Per NPD and internal estimates

A Net effect of accounting treatment from revenue deferrals
on certain of our online enabled products. Some of our games’ online
functionality represents an essential component of gameplay and, as a
result, a more-than-inconsequential separate deliverable. As a result,
we recognize revenues attributed to these game titles over their
estimated service periods, which is generally less than a year. The
related cost of revenues is deferred and recognized as an expense as the
related revenues are recognized. Impact from changes in deferrals refers
to the net effect from revenue deferrals accounting treatment for the
purposes of revenues, along with, for the purposes of EPS, the related
cost of revenues deferrals treatment and the related tax impacts.
Internally, management excludes the impact of this change in deferred
revenues and related cost of revenues when evaluating the company’s
operating performance, when planning, forecasting and analyzing future
periods, and when assessing the performance of its management team.
Management believes this is appropriate because doing so enables an
analysis of performance based on the timing of actual transactions with
our customers. In addition, management believes excluding the change in
deferred revenues and the related cost of revenues provides a much more
timely indication of trends in our operating results.

B Monthly Active User (“MAU”) Definition: We monitor
MAUs as a key measure of the overall size of our user base. MAUs are the
number of individuals who played a particular game in a given month. We
calculate average MAUs in a period by adding the total number of MAUs in
each of the months in a given period and dividing that total by the
number of months in the period. An individual who plays two of our games
would be counted as two users. In addition, due to technical
limitations, for Activision and King, an individual who plays the same
game on two platforms or devices in the relevant period would be counted
as two users. For Blizzard, an individual who plays the same game on two
platforms or devices in the relevant period would generally be counted
as a single user.

C Gross bookings is an operating metric that
represents the total cash spent by players in the period for the
purchase of virtual items. King uses gross bookings to evaluate its
results of operations, generate future operating plans and assess
performance. Gross bookings is the total price paid by players, which
includes indirect taxes (sales tax or value added tax etc.), platform
providers fees, and King’s share of revenues.

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

Activision Blizzard provides net income (loss), earnings (loss) per
share, and operating margin data and guidance both including (in
accordance with GAAP) and excluding (non-GAAP) certain items. When
relevant, the company also provides constant FX information to provide a
framework for assessing how our underlying businesses performed
excluding the effect of foreign currency rate fluctuations. In addition,
Activision Blizzard provides EBITDA (defined as GAAP net income (loss)
before interest (income) expense, income taxes, depreciation and
amortization) and adjusted EBITDA (defined as non-GAAP operating margin
(see non-GAAP financial measure below) before depreciation). The
non-GAAP financial measures exclude the following items, as applicable
in any given reporting period and our outlook:

  • expenses related to stock-based compensation;
  • the amortization of intangibles from purchase price accounting;
  • fees and other expenses related to the King acquisition, inclusive of
    related debt financings, and refinancing of long-term debt, including
    penalties and the write off of unamortized discount and deferred
    financing costs;
  • restructuring charges;
  • other non-cash charges from reclassification of certain cumulative
    translation adjustments into earnings as required by GAAP; and
  • the income tax adjustments associated with any of the above items (tax
    impact on non-GAAP pre-tax income is calculated under the same
    accounting principles applied to the GAAP pre-tax income under ASC
    740, which employs an annual effective tax rate method to the results).

In the future, Activision Blizzard may also consider whether other items
should also be excluded in calculating the non-GAAP financial measures
used by the company. Management believes that the presentation of these
non-GAAP financial measures provides investors with additional useful
information to measure Activision Blizzard’s financial and operating
performance. In particular, the measures facilitate comparison of
operating performance between periods and help investors to better
understand the operating results of Activision Blizzard by excluding
certain items that may not be indicative of the company’s core business,
operating results, or future outlook. Internally, management uses these
non-GAAP financial measures, along with others, in assessing the
company’s operating results, and measuring compliance with the
requirements of the company’s debt financing agreements, as well as in
planning and forecasting.

Activision Blizzard’s non-GAAP financial measures are not based on a
comprehensive set of accounting rules or principles, and the terms
non-GAAP net income, non-GAAP earnings per share, non-GAAP operating
margin, and non-GAAP or adjusted EBITDA do not have a standardized
meaning. Therefore, other companies may use the same or similarly named
measures, but exclude different items, which may not provide investors a
comparable view of Activision Blizzard’s performance in relation to
other companies.

Management compensates for the limitations resulting from the exclusion
of these items by considering the impact of the items separately and by
considering Activision Blizzard’s GAAP, as well as non-GAAP, results and
outlook, and by presenting the most comparable GAAP measures directly
ahead of non-GAAP measures, and by providing a reconciliation that
indicates and describes the adjustments made.

Cautionary Note Regarding Forward-looking Statements: The
statements contained herein that are not historical facts are
forward-looking statements, including, but not limited to, statements
about: (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 related to releases of
products and services; (3) statements of future financial or operating
performance; and (4) statements of assumptions underlying such
statements. The company generally uses words such as “outlook,”
“forecast,” “will,” “could,” “should,” “would,” “to be,” “plan,”
“plans,” “believes,” “may,” “might,” “expects,” “intends,” “intends as,”
“anticipates,” “estimate,” “future,” “positioned,” “potential,”
“project,” “remain,” “scheduled,” “set to,” “subject to,” “upcoming,”
and other similar expressions to help identify forward-looking
statements. Forward-looking statements are subject to business and
economic risks, reflect management’s current expectations, estimates and
projections about our business, and are inherently uncertain and
difficult to predict.

The company cautions that a number of important factors could cause
Activision Blizzard’s actual future results and other future
circumstances to differ materially from those expressed in any
forward-looking statements. Such factors include, but are not limited
to: sales levels of Activision Blizzard’s titles, products and services;
concentration of revenue among a small number of titles; Activision
Blizzard’s ability to predict consumer preferences, including interest
in specific genres, and preferences among platforms; the diversion of
management time and attention to issues relating to the operations of
our acquired or newly started businesses; the amount of our debt and the
limitations imposed by the covenants in the agreements governing our
debt; the adoption rate and availability of new hardware (including
peripherals) and related software; counterparty risks relating to
customers, licensees, licensors and manufacturers; maintenance of
relationships with key personnel, customers, financing providers,
licensees, licensors, manufacturers, vendors, and third-party
developers, including the ability to attract, retain and develop key
personnel and developers that can create high-quality titles, products
and services; risks relating to the expansion into new businesses,
including the potential impact on our existing businesses; changing
business models within the video game industry, including digital
delivery of content and the increased prevalence of free-to-play games;
product delays or defects; competition, including from other forms of
entertainment; rapid changes in technology and industry standards;
possible declines in software pricing; product returns and price
protection; the identification of suitable future acquisition
opportunities and potential challenges associated with geographic
expansion; the seasonal and cyclical nature of the interactive
entertainment market; the outcome of current or future tax disputes;
litigation risks and associated costs; protection of proprietary rights;
shifts in consumer spending trends; capital market risks; the impact of
applicable regulations; domestic and international economic, financial
and political conditions and policies; tax rates and foreign exchange
rates; the impact of the current macroeconomic environment; and the
other factors identified in “Risk Factors” included in Part I, Item 1A
of our Annual Report on Form 10-K for the year ended December 31, 2016.

The forward-looking statements in this press release are based on
information available to the company at this time 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 BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in millions, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Net revenues
Product sales $ 384 $ 355 $ 1,373 $ 1,501

Subscription, licensing, and other revenues 1

1,234 1,213 3,601 3,093
Total net revenues 1,618 1,568 4,974 4,594
Costs and expenses
Cost of revenues—product sales:
Product costs 149 111 422 429
Software royalties, amortization, and intellectual property licenses 37 42 200 250
Cost of revenues—subscription, licensing, and other:
Game operations and distribution costs 249 237 717 620
Software royalties, amortization, and intellectual property licenses 117 139 359 319
Product development 273 249 750 673
Sales and marketing 345 340 899 830
General and administrative 191 156 539 486
Total costs and expenses 1,361 1,274 3,886 3,607
Operating income 257 294 1,088 987
Interest and other expense (income), net 37 63 121 181
Income before income tax expense 220 231 967 806
Income tax expense 32 32 109 93
Net income $ 188 $ 199 $ 858 $ 713
Basic earnings per common share $ 0.25 $ 0.27 $ 1.14 $ 0.96
Weighted average common shares outstanding 755 742 753 739
Diluted earnings per common share $ 0.25 $ 0.26 $ 1.12 $ 0.94
Weighted average common shares outstanding assuming dilution 766 756 764 753
1 Subscription, licensing, and other revenues represent revenues from
World of Warcraft subscriptions, licensing royalties from our
products and franchises, value-added services, downloadable content,
microtransactions, and other miscellaneous revenues.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in millions)
September 30, December 31,
2017 2016
Assets
Current assets
Cash and cash equivalents $ 3,576 $ 3,245
Accounts receivable, net 888 732
Inventories, net 94 49
Software development 377 412
Other current assets 451 392
Total current assets 5,386 4,830
Software development 114 54
Property and equipment, net 254 258
Deferred income taxes, net 439 283
Other assets 469 401
Intangible assets, net 1,292 1,858
Goodwill 9,764 9,768
Total assets $ 17,718 $ 17,452
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable $ 313 $ 222
Deferred revenues 1,373 1,628
Accrued expenses and other liabilities 703 806
Total current liabilities 2,389 2,656
Long-term debt, net 4,388 4,887
Deferred income taxes, net 40 44
Other liabilities 934 746
Total liabilities 7,751 8,333
Shareholders’ equity
Common stock
Additional paid-in capital 10,671 10,442
Treasury stock (5,563 ) (5,563 )
Retained earnings 5,501 4,869
Accumulated other comprehensive loss (642 ) (629 )
Total shareholders’ equity 9,967 9,119
Total liabilities and shareholders’ equity $ 17,718 $ 17,452
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES
(Amounts in millions, except per share data)
Three Months Ended September 30, 2017 Net Revenues Cost of Revenues – Product Sales: Product Costs Cost of Revenues – Product Sales: Software Royalties and
Amortization
Cost of Revenues – Subs/Lic/Other: Game Operations and
Distribution Costs
Cost of Revenues – Subs/Lic/Other: Software Royalties and
Amortization
Product Development Sales and Marketing General and Administrative Total Costs and Expenses
GAAP Measurement $ 1,618 $ 149 $ 37 $ 249 $ 117 $ 273 $ 345 $ 191 $ 1,361
Share-based compensation1 (1 ) (1 ) (15 ) (3 ) (27 ) (47 )
Amortization of intangible assets2 (109 ) (76 ) (2 ) (187 )
Fees and other expenses related to the King Acquisition3 (3 ) (3 )
Other non-cash charges4 1 1
Non-GAAP Measurement $ 1,618 $ 149 $ 36 $ 249 $ 7 $ 258 $ 266 $ 160 $ 1,125
Net effect of deferred revenues and related cost of revenues5 $ 284 $ 30 $ 120 $ 3 $ (1 ) $ $ $ $ 152
Operating Income Net Income Basic Earnings per Share Diluted Earnings per Share
GAAP Measurement $ 257 $ 188 $ 0.25 $ 0.25
Share-based compensation1 47 47 0.06 0.06
Amortization of intangible assets2 187 187 0.25 0.24
Fees and other expenses related to the King Acquisition3 3 4 0.01 0.01
Other non-cash charges4 (1 ) (1 )
Income tax impacts from items above6 (67 ) (0.09 ) (0.09 )
Non-GAAP Measurement $ 493 $ 358 $ 0.47 $ 0.47
Net effect of deferred revenues and related cost of revenues5 $ 132 $ 100 $ 0.14 $ 0.13

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