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| ATVI > SEC Filings for ATVI > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
Business Overview
Activision Blizzard, Inc. is a worldwide online, personal computer ("PC"), console, and handheld game publisher. The terms "Activision Blizzard," the "Company," "we," "us," and "our" are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries. Based upon our current organizational structure, we operate three operating segments as follows:
(i) Activision Publishing, Inc.
Activision Publishing, Inc. ("Activision") is a leading international publisher of interactive software products and peripherals. Activision develops and publishes video games on various consoles, handheld platforms and the PC platform through internally developed franchises and license agreements. Activision currently offers games that operate on the Sony Computer Entertainment ("Sony") PlayStation 2 ("PS2"), Sony PlayStation 3 ("PS3"), Nintendo Co. Ltd. ("Nintendo") Wii ("Wii"), and Microsoft Corporation ("Microsoft") Xbox 360 ("Xbox 360") console systems; the Sony PlayStation Portable ("PSP") and Nintendo Dual Screen ("NDS") handheld devices; the PC; and the new handheld game system Nintendo DSi. We will continue to market to the PS2 platform as long as it remains economically attractive given the console's installed base. Our Activision business involves the development, marketing, and sale of products directly, by license, or through our affiliate label program with certain third-party publishers. Activision's products cover diverse game categories including action/adventure, action sports, racing, role-playing, simulation, first-person action, music, and strategy. Activision's target customer base ranges from casual players to game enthusiasts, and children to adults.
(ii) Blizzard Entertainment, Inc.
Blizzard Entertainment, Inc. ("Blizzard") is a leader in terms of subscriber base and revenues generated in the subscription-based massively multi-player online role-playing game ("MMORPG") category. Blizzard internally develops and publishes PC-based computer games and maintains its proprietary online-game related service, Battle.net. Our Blizzard business involves the development, marketing, sales and support of role playing action and strategy games. Blizzard also develops, hosts, and supports its online subscription-based games in the MMORPG category. Blizzard is the development studio and publisher best known as the creator of World of Warcraft and the multiple award-winning Diablo, StarCraft, and Warcraft franchises. Blizzard distributes its products and generates revenues worldwide through various means, including: subscription revenues (which consist of fees from individuals playing World of Warcraft, prepaid cards and other ancillary online revenues); retail sales of physical "boxed" products; electronic download sales of PC products; and licensing of software to third-party companies that distribute World of Warcraft in China, Russia, and Taiwan. Blizzard is currently developing new games, including sequels to the StarCraft and Diablo franchises. Blizzard has entered into licensing arrangements for World of Warcraft, StarCraft II, Battle.net and Warcraft III with an affiliated company of NetEase.com, Inc. in China for a term of 3 years.
(iii) 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 Combination
On July 9, 2008, a business combination (the "Business Combination") by and among Activision, Inc., Sego Merger Corporation, a wholly-owned subsidiary of Activision, Inc., Vivendi S.A. ("Vivendi"), VGAC LLC, a wholly-owned subsidiary of Vivendi, and Vivendi Games, Inc. ("Vivendi Games"), a wholly-owned subsidiary of VGAC LLC, was consummated. As a result of the consummation of the Business Combination, Activision, Inc. was renamed Activision Blizzard, Inc. For accounting purposes, the Business Combination is treated as a "reverse acquisition," with Vivendi Games deemed to be the acquirer. The historical financial statements of Activision Blizzard, Inc. prior to July 10, 2008 are those of Vivendi Games. See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2008 for a more complete discussion of the Business Combination.
Activision Blizzard's non-core exit operations
Activision Blizzard's non-core exit operations ("Other" or "Non-Core") represent legacy Vivendi Games' divisions or business units that we have exited, divested, or wound down as part of our restructuring and integration efforts as a result of the Business Combination described above, but do not meet the criteria for separate reporting of discontinued operations. Prior to July 1, 2009, Non-Core activities were managed as a stand-alone operating segment, however, in light of the decreasing significance of Non-Core activities, as of that date we ceased their management as a separate operating segment and consequently we are no longer
providing separate operating segment disclosure and have reclassified our prior periods' segment presentation so that it conforms to the current periods' presentation.
Management's Overview of Business Trends
Business Highlights
According to the NPD Group with respect to the U.S. market, and Charttrack, and Gfk, for the European market during the three months ended September 30, 2009:
† Activision Blizzard grew its U.S. market share across all platforms by 3.1 points to 13.3% from 10.2% in the previous year;
† Activision Blizzard increased its combined U.S. and European market share across all platforms by 1.2 points to 12.3% from 11.1% in the previous year;
† Guitar Hero 5 and Guitar Hero World Tour were two of the top-10 best selling titles in the U.S.;
† Guitar Hero and Call of Duty were two of the top-10 best selling franchises in the U.S.; and
† Guitar Hero was the #1 best-selling third-party console and handheld franchise in Europe.
During the nine months ended September 30, 2009:
† Guitar Hero World Tour and Call of Duty: World at Warwere the number #1 and #2 third-party best selling titles, respectively, in the U.S. and Europe;
† Activision Blizzard grew its U.S. market share of the music/dance category by 5 points to 51%, from 46% in the previous year;
† Guitar Hero was the #1 best-selling third-party franchise in the U.S. and Europe; and
† Call of Duty was the #2 best-selling third-party franchise in the U.S. and Europe.
Other Business Highlights
On September 19, 2009, paid subscriptions of Blizzard's World of Warcraftwere resumed in China after an interruption as a result of a license transfer in June 2009.
Activision 2009 Releases
Activision expects to continue to build its success in releasing games based on proven franchises such as Call of Duty, Guitar Hero, Transformers, X-Men, Spiderman, and Tony Hawk.
Games released during the nine months ended September 30, 2009 included:
† Monsters vs. Aliens; † Guitar Hero: Metallica; † X-Men Origins: Wolverine; † Guitar Hero: Modern Hits; † PROTOTYPE; † Guitar Hero: Smash Hits; † Transformers: Revenge of the Fallen; † Ice Age: Dawn of the Dinosaurs; † Wolfenstein: Return to the Castle; † Guitar Hero 5; † Marvel Ultimate Alliance 2; and † the first, second, and third map packs for Call of Duty: World at War. |
The more notable games, among other titles, scheduled for release during the fourth quarter of 2009 include:
† Bakugan Battle Brawlers; † DJ Hero; † Band Hero; † Call of Duty: Modern Warfare 2; and † Tony Hawk: Ride. |
Economic Conditions
The video games industry in the U.S. and Europe had combined overall decreases of 21% and 19% in sales revenues for the three and nine months ended September 30, 2009, respectively, as compared to the same periods in 2008, according to the NPD Group with respect to the U.S. market and, Charttrack and Gfk with respect to the European market, resulting from a weakening economy in 2009 with retailers focused on reducing inventories, and the release of fewer blockbuster titles this quarter as compared to a year ago. In this challenging macroeconomic environment, Activision Blizzard gained market share during the three months ended September 30, 2009 as compared to the same period in 2008.
Consolidated Statements of Operations Data
Note-As the historical financial statements prior to July 10, 2008 are those of Vivendi Games, the financial information of the businesses operated by Activision, Inc. prior to the Business Combination are included from the date of the Business Combination (i.e. from July 10, 2008 onwards), but not for prior periods.
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 September 30, Nine months ended September 30,
2009 2008 2009 2008
Net revenues:
Product sales $ 411 58 % $ 413 58 % $ 1,848 68 % $ 553 40 %
Subscription, licensing,
and other revenues 292 42 298 42 874 32 834 60
Total net revenues 703 100 711 100 2,722 100 1,387 100
Costs and expenses:
Cost of sales - product
costs 185 26 279 39 762 28 350 25
Cost of sales - software
royalties and
amortization 54 8 50 7 212 8 88 6
Cost of sales -
intellectual property
licenses 45 7 36 5 163 6 45 3
Cost of sales - MMORPG 55 8 43 6 158 6 123 9
Product development 122 17 200 28 362 13 414 30
Sales and marketing 128 18 142 20 329 12 220 16
General and
administrative 106 15 94 13 301 11 172 13
Restructuring (1 ) - 61 9 29 1 61 4
Total costs and expenses 694 99 905 127 2,316 85 1,473 106
Operating income (loss) 9 1 (194 ) (27 ) 406 15 (86 ) (6 )
Investment and other
income, net 11 2 24 3 21 1 28 2
Income (loss) before
income tax expense
(benefit) 20 3 (170 ) (24 ) 427 16 (58 ) (4 )
Income tax expense
(benefit) 5 1 (62 ) (9 ) 28 1 (22 ) (1 )
Net income (loss) $ 15 2 % $ (108 ) (15 )% $ 399 15 % $ (36 ) (3 )%
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Three and Nine Months ended September 30, 2009 highlights
Operating Highlights (amounts in millions)
Three months ended September 30, Nine months ended September 30,
Increase/ Increase/
2009 2008 (Decrease) 2009 2008 (Decrease)
Segment net revenues:
Activision $ 415 $ 364 $ 51 $ 1,211 $ 457 $ 754
Blizzard 286 297 (11 ) 867 866 1
Distribution 54 56 (2 ) 202 56 146
Operating segments total 755 717 38 2,280 1,379 901
Reconciliation to consolidated net
revenues:
Net effect from deferral net
revenues (52 ) (12 ) 441 (8 )
Other* - 6 1 16
Consolidated net revenues 703 711 2,722 1,387
Segment income (loss) from
operations:
Activision (43 ) (26 ) (17 ) (49 ) (61 ) 12
Blizzard 116 146 (30 ) 393 447 (54 )
Distribution 2 2 - 6 3 3
Operating segments total 75 122 (47 ) 350 389 (39 )
Reconciliation to consolidated
operating income (loss):
Net effect from deferral of net
revenues and related costs of
sales 9 (12 ) 341 (7 )
Stock-based compensation expense (36 ) (26 ) (107 ) (47 )
Restructuring 1 (61 ) (29 ) (61 )
Amortization of intangible assets
and purchase price accounting
related adjustments (33 ) (90 ) (117 ) (92 )
Integration and transaction costs (7 ) (17 ) (24 ) (17 )
Other* - (110 ) (8 ) (251 )
Consolidated operating income
(loss) $ 9 $ (194 ) $ 406 $ (86 )
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Note - We provide discussion and analysis of the Activision segment for the nine
months ended September 30, 2009 and 2008 in the Supplemental Pro Forma
Information section as the pro forma basis provides greater comparability.
Segment Net Revenues Highlights
Activision
For the three months ended September 30, 2009, Activision's net revenues increased as the historical financial statements prior to July 10, 2008 are those of Vivendi Games, which resulted in net revenues from the Activision segment (business formerly operated by Activision, Inc. prior to the Business Combination) being included for the entire three months ended September 30, 2009, but only for the period from July 10, 2008 through September 30, 2008 in the three months ended September 30, 2008.
Additionally, the three months ended September 30, 2009 included the key releases of Guitar Hero 5, Marvel Ultimate Alliance 2, Wolfenstein: Return to the Castle, and our third map pack for Call of Duty: World at War, whereas during the same period of the prior year revenues were mainly driven by catalogue sales from our Guitar Hero franchise and Call of Duty: Modern Warfare, and the European launch of Star Wars: The Force Unleashed. For the three months ended September 2009, catalogue sales from our
Guitar Hero and Call of Duty franchises remained major revenue contributors and leading franchises.
Blizzard
Blizzard's net revenues slightly decreased for the three months ended September 30, 2009 as compared to the same period of the prior year primarily due to an interruption of paid subscriptions for World of Warcraft in China from June 2009 to September 19, 2009 as a result of a license transfer. This decrease was partially offset by an increase in other ancillary online revenues.
Consolidated Net Revenues
We estimate that changes in foreign exchange rates had an unfavorable impact of approximately $37 million to Activision Blizzard's consolidated net revenues for the three months ended September 30, 2009 as compared to the same period in 2008 as the U.S. dollar strengthened primarily in relation to the British pound, euro, Australian dollar, Korean won, and Swedish krona.
Segment Income (Loss) from Operations Highlights
Activision
For the three months ended September 30, 2009, Activision's operating loss increased as the historical financial statements prior to July 10, 2008 are those of Vivendi Games, which resulted in operating losses from the businesses formerly operated by Activision, Inc. prior to the Business Combination being included for the entire three months ended September 30, 2009, but only for the period from July 10, 2008 through September 30, 2008 in the three months ended September 30, 2008.
Additionally for the three months ended September 30, 2009, the increase in Activision's operating loss as compared to the same period in 2008 was principally attributable to the following:
† Increased marketing and trade promotion spending to generate sales in a challenging macro-economic and competitive environment;
† Higher amortization of capitalized software development costs of new releases during the period as compared to the same period in 2008 when revenues were primarily driven by catalogue sales; and
† Higher general and administrative expenses due to the unfavorable impact of foreign exchange rates.
These factors were partially offset by lower operating expenses due in part to the cost containment strategies that we implemented and synergies resulting from our restructuring efforts from the Business Combination.
Blizzard
For the three and nine months ended September 30, 2009, the decrease in Blizzard's segment income as compared to the same periods in 2008 was principally attributable to the following:
† An interruption of paid subscriptions for World of Warcraft in China from June 2009 to September 19, 2009 as a result of a license transfer;
† Incremental investments made by Blizzard for customer service and product development of its sequels to the StarCraft and Diablo franchises;
† A higher share of annual marketing costs spent earlier in 2009 as compared to the same period in 2008 when the majority of spending was allocated to World of Warcraft: Wrath of the Lich King, which was released in the three months ended December 31, 2008; and
† Higher general and administrative expenses as a result of the unfavorable impact of foreign exchange rates.
These factors were partially offset by an increase in other ancillary online revenues.
Supplemental Pro Forma Information
The consummation of the Business Combination has resulted in the businesses operated by Activision, Inc. prior to the Business Combination being included from the date of the Business Combination (i.e. from July 10, 2008 onwards), but not for prior periods. In the following table, we combine Activision, Inc.'s financial information with Activision Blizzard's reported financial information to show the comparable three and nine months pro forma periods ended September 30, 2008 of Activision Blizzard. This pro forma information is for informational purposes only and does not reflect any operating efficiencies or inefficiencies which may have resulted from the Business Combination and therefore is not necessarily indicative of results that would have been achieved had the business been combined during the periods presented. We have included schedules of reconciliation of the reported consolidated and segment financial information to the pro forma consolidated and segment financial information. Further, see Note 13 to the Condensed Consolidated Financial Statements for details of our segment presentation.
Three months ended September 30, Nine months ended September 30,
Increase/ Increase/
(Amounts in millions) 2009 2008 (Decrease) 2009 2008 (Decrease)
Pro forma segment net revenues:
Activision $ 415 $ 399 $ 16 $ 1,211 $ 1,584 $ (373 )
Blizzard 286 297 (11 ) 867 866 1
Distribution 54 74 (20 ) 202 239 (37 )
Pro forma operating segments total 755 770 (15 ) 2,280 2,689 (409 )
Reconciliation to pro forma
consolidated net revenues:
Net effect from deferral net
revenues (52 ) (12 ) 441 (8 )
Other* - 6 1 16
Pro forma consolidated net
revenues 703 764 2,722 2,697
Pro forma segment income (loss)
from operations:
Activision (43 ) (36 ) (7 ) (49 ) 101 (150 )
Blizzard 116 146 (30 ) 393 447 (54 )
Distribution 2 3 (1 ) 6 8 (2 )
Pro forma operating segments total 75 113 (38 ) 350 556 (206 )
Reconciliation to pro forma
consolidated operating income
(loss):
Net effect from deferral of net
revenues and related costs of
sales 9 (12 ) 341 (7 )
Stock-based compensation expense (36 ) (23 ) (107 ) (120 )
Restructuring 1 (61 ) (29 ) (61 )
Amortization of intangible assets
and purchase price accounting
related adjustments (33 ) (89 ) (117 ) (400 )
Integration and transaction costs (7 ) (13 ) (24 ) (29 )
Other* - (110 ) (8 ) (251 )
Pro forma consolidated operating
income (loss) $ 9 $ (195 ) $ 406 $ (312 )
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Note - We provide discussion and analysis of the Activision segment for the
three months ended September 30, 2009 and 2008 under Operating Highlightsabove.
In this section, we provide discussion and analysis of our Activision segment
operating results in the nine months ended September 30, 2009 as compared to the
same period in 2008.
Pro forma Activision Segment Net Revenues
For the nine months ended September 30, 2009, Activision net revenues decreased as compared to the same period of the previous year primarily due to weaker market conditions in 2009 driven by declining consumer spending and from the stronger performance of the Guitar Hero franchise in the prior year period.
Pro forma Activision Segment Income (Loss) From Operations Activision's operating loss increased in the nine months ended September 30, 2009 as compared to the same period of the prior year, which was mainly attributable to: † Stronger performance from the Guitar Hero franchise in the prior year period; † Higher amortization of capitalized software development costs and IP |
† Increased marketing and trade promotion spending to generate sales in a challenging macro-economic and competitive environment; and
† Higher general and administrative expenses due to the unfavorable impact of foreign exchange rates.
These factors were partially offset by:
† Strong performance from the Call of Duty franchise catalogue sales and Call of Duty: World at Warmap packs;
. . .
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