Activision Blizzard Announces Record Fourth Quarter and Calendar Year 2011 Earnings

FINANCIAL HIGHLIGHTS

- CY 2011 EPS Grows by More than 17% Establishing New Company Record

- Company Achieves Record GAAP and Non-GAAP Operating Margins of 28% and 30%

- Company Generates Nearly $1 Billion in Operating Cash Flow

- Company Announces new $1 Billion Stock Repurchase Program

- Company Announces 9% Increase in Cash Dividend to $0.18 per Common Share

- Company Expects 2012 GAAP EPS of $0.63 and Non-GAAP EPS of $0.94

BUSINESS HIGHLIGHTS

- #1 Third-Party Interactive Entertainment Digital Publisher in U.S. and Europe in 2011

- Digital Revenues of $1.6 Billion Accounted for More than 34% of Total Revenues in 2011

- Call of Duty®: Modern Warfare® 3 was #1 Best-Selling Game for 2011

- Skylanders Spyro’s Adventure™ was #1 Kids Video Game for 2011 with 20+ Million Toys Sold

- Call of Duty Elite Has 7+ Million Registered Users Including 1.5+ Million Annual Premium Members as of 1/31/12

- Blizzard Entertainment’s World of Warcraft® Remains #1 Subscription-based MMORPG with Approximately 10.2 Million Subscribers as of 12/31/11

09 Feb, 2012, 16:15 ET from Activision Blizzard, Inc.

SANTA MONICA, Calif., Feb. 9, 2012 /PRNewswire/ -- Activision Blizzard, Inc. (Nasdaq: ATVI) today announced better-than-expected financial results for the fourth quarter and calendar year 2011.

(Logo:  http://photos.prnewswire.com/prnh/20120209/LA49702LOGO)

Fourth Quarter

Calendar Year

(in millions, except EPS)

2011

Prior

Outlook*

2010

2011

2010

GAAP  Net Revenues

$

1,407

$

980

$

1,427

$

4,755

$

4,447

 EPS

$

0.08

$

   (0.08)

$

(0.20)

$

0.92

$

0.33

Non-GAAP  Net Revenues

$

2,408

$

2,170

$

2,548

$

4,489

$

4,803

 EPS

$

0.62

$

0.55

$

0.53

$

0.93

$

0.79

*Prior Outlook was provided by the company on November 8, 2011 in its earnings release

For calendar year 2011, Activision Blizzard’s GAAP net revenues were $4.76 billion, as compared with $4.45 billion for 2010.  On a non-GAAP basis, the company’s net revenues were $4.49 billion, as compared with $4.80 billion for 2010.   The company delivered record calendar year GAAP and non-GAAP net revenues from digital channels,(1) accounting for a record of more than 34% of the company’s total net revenues.

For calendar year 2011, Activision Blizzard’s GAAP earnings per diluted share increased to $0.92, as compared with $0.33 per diluted share for 2010.  On a non-GAAP basis, the company’s earnings per diluted share grew 18% to a record $0.93, as compared with $0.79 per diluted share for 2010.

For the quarter ended December 31, 2011, the company delivered GAAP net revenues of $1.41 billion, as compared with $1.43 billion for the fourth quarter of 2010.   On a non-GAAP basis, the company’s net revenues were $2.41 billion, as compared with $2.55 billion for the fourth quarter of 2010.    

For the quarter ended December 31, 2011, Activision Blizzard’s GAAP earnings per diluted share were $0.08, as compared with a loss per share of $0.20 for the fourth quarter of 2010.  On a non-GAAP basis, the company’s earnings per diluted share were $0.62, as compared with $0.53 for the fourth quarter of 2010.  

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

Bobby Kotick, Chief Executive Officer, Activision Blizzard, said, “As we continue to strengthen our leadership position in interactive entertainment, our proven management team and talented employees delivered another extraordinary year of outperformance.  With better than expected net revenues, record earnings, record operating margins, and having generated nearly $1 billion in operating cash flow, Activision Blizzard continues to set the industry success bar.”

Kotick continued, “Blizzard Entertainment’s World of Warcraft® maintained its leadership position as the #1 subscription-based MMORPG around the world(2) and Activision Publishing’s Call of Duty®: Modern Warfare 3® was the #1-selling game.(3)  Skylanders Spyro’s Adventurewas the biggest new IP launch in Activision’s history and it is on track to become an important and sustainable franchise.   We launched our online service, Call of Duty Elite, which is one of the fastest growing premium online services ever created.”  

Kotick added, “Our extraordinary employees around the world are focused on making 2012 another great year for our audience and stakeholders.  Blizzard Entertainment plans to have multiple highly-anticipated titles to release, including Diablo® III, and Activision Publishing expects to release a new Call of Duty game.  In addition, Activision Publishing expects to continue to grow Call of Duty Elite and launch Skylanders Giants.”

Selected Business Highlights:

  • Activision Publishing was the #1 console and handheld publisher in the U.S. and Europe for the fourth quarter of 2011 and the #1 console and handheld publisher in the U.S. for the calendar year.(3)
  • For the calendar year, in aggregate across all platforms in the U.S. and Europe, Activision Publishing’s Call of Duty: Modern Warfare 3 was the #1 best-selling title in dollars, and Call of Duty: Black Ops was the #5 best-selling title in dollars.(3)
  • In November 2011, Call of Duty: Modern Warfare 3 became the first video game ever to surpass $775 million in retail sales in its first five days of release and the only entertainment property to cross the $1 billion mark in 16-days, eclipsing “Avatar’s” 17-day record.(4)
  • As of January 31, 2012, more than seven million gamers have registered for Call of Duty Elite, including more than 1.5 million premium annual memberships the company has sold for the online service.(2)
  • Call of Duty: Modern Warfare 3 players logged more than 639 million hours of online gameplay through December 31, 2011.(5)
  • Total unique online gamers playing Call of Duty: Modern Warfare 3 were more than 12% greater than the total unique online gamers who played Call of Duty: Black Ops during the first two months after each game’s release.(5)
  • In North America and Europe, including accessory packs and figures, Skylanders Spyro’s Adventure was the #8 best-selling game in dollars for the fourth quarter of 2011 and #1 selling kids’ title in dollars in the calendar year.(3)  Additionally, in North America, including accessory packs and figures, Skylanders  Spyro’s Adventure was the #10 best-selling title in dollars.(6)
  • For the calendar year, Blizzard Entertainment had two top-10 PC games in North America and Europe with StarCraft® II: Wings of Liberty® and World of Warcraft: Cataclysm®.(3)
  • Activision Blizzard purchased an aggregate of 61 million shares of its common stock for approximately $692 million in 2011.  

Company Outlook In March 2012, Activision Publishing expects to release the first Call of Duty: Modern Warfare 3 Content Collection, a compilation of content previously released to Call of Duty Elite premium members, on the Xbox 360 video game and entertainment system from Microsoft.  

The company’s first quarter 2012 outlook does not incorporate a new release from Blizzard Entertainment, but its calendar year 2012 outlook anticipates two releases from Blizzard Entertainment.   In addition, the company’s full year revenue outlook is expected to be impacted by a reduction of about $130 million in revenues from the company’s lower margin distribution and affiliate title businesses and a negative year-over-year foreign exchange planning assumption of approximately $200 million.  

GAAP

Non-GAAP

(in millions, except EPS)

Outlook

Outlook

CY 2012

  Net Revenues

$

4,150

$

4,500

  EPS

$

0.63

$

0.94

Q1 2012

  Net Revenues

$

965

$

525

  EPS

$

0.22

$

0.03

Board Authorizes Stock Repurchase Program and Declares Cash Dividend Activision Blizzard today announced that its Board of Directors has authorized a new stock repurchase program effective April 1, 2012 under which the company can repurchase up to $1 billion of the company’s outstanding common stock.  The company’s $1.5 billion stock repurchase plan program authorized in February 2011 is set to expire on March 31, 2012.  

The Board of Directors also declared a cash dividend of $0.18 per common share payable on May 16, 2012 to shareholders of record at the close of business on March 21, 2012.  This represents a 9% increase over the dividend that was paid in 2011.

Conference Call Today at 4:30 p.m. EST, Activision Blizzard’s management will host a conference call and Webcast to discuss the company’s results for the quarter and year ended December 31, 2011 and management’s outlook for 2012. The company welcomes all members of the financial and media communities and other interested parties to visit the “Investor Relations” area of www.activisionblizzard.com to listen to the conference call via live Webcast or to listen to the call live by dialing into 888-481-2845 in the U.S. with passcode 8472934 .

About Activision Blizzard Headquartered in Santa Monica, California, Activision Blizzard, Inc. is a worldwide online, PC, console, handheld and mobile game publisher with leading positions across the major categories of the rapidly growing interactive entertainment software industry.

Activision Blizzard maintains operations in the U.S., Canada, the United Kingdom, France, Germany, Ireland, Italy, Sweden, Spain, the Netherlands, Australia, South Korea and China.  More information about Activision Blizzard and its products can be found on the company's website, www.activisionblizzard.com.

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

Activision Blizzard provides net revenues, net income (loss), earnings (loss) per share and operating margin data and guidance both including (in accordance with GAAP) and excluding (non-GAAP) certain items. The non-GAAP financial measures exclude the following items, as applicable in any given reporting period:

  • the change in deferred net revenue and related cost of sales with respect to certain of the company’s online-enabled games;
  • expenses related to stock-based compensation;
  • expenses related to restructuring;
  • the amortization of intangibles, and impairment of intangible assets and goodwill; and
  • the income tax adjustments associated with any of the above items.

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

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

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

In addition to the reasons stated above, which are generally applicable to each of the items Activision Blizzard excludes from its non-GAAP financial measures, there are additional specific reasons why the company believes it is appropriate to exclude the change in deferred net revenue and related cost of sales with respect to certain of the company’s online-enabled games.

Since Activision Blizzard has determined that some of our games’ online functionality represents an essential component of gameplay and, as a result, a more-than-inconsequential separate deliverable, we recognize revenue attributed to these game titles over their estimated service periods, which may range from five months to a maximum of less than a year. The related cost of sales is deferred and recognized as the related revenues are recognized. Internally, management excludes the impact of this change in deferred net revenue and related cost of sales in its non-GAAP financial measures when evaluating the company’s operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team.

Management believes this is appropriate because doing so enables an analysis of performance based on the timing of actual transactions with our customers, which is consistent with the way the company is measured by investment analysts and industry data sources. In addition, excluding the change in deferred net revenue and the related cost of sales provides a much more timely indication of trends in our operating results.

Cautionary Note Regarding Forward-looking Statements:  Information in this press release that involves Activision Blizzard’s expectations, plans, intentions or strategies regarding the future, including statements under the heading “Company Outlook,” are forward-looking statements that are not facts and involve a number of risks and uncertainties.    Activision Blizzard generally uses words such as “outlook,” “will,”  “could,” “should,” “would,” “might,” “to be,” “plans,” “believes,” “may,” “expects,” “intends,” "anticipates," "estimate," “future," "plan," "positioned," "potential," "project," "remain," "scheduled," "set to," "subject to," "upcoming" and similar expressions to identify forward-looking statements.  Factors that could cause Activision Blizzard’s actual future results to differ materially from those expressed in the forward-looking statements set forth in this release include, but are not limited to, sales levels of Activision Blizzard’s titles, increasing concentration of titles, shifts in consumer spending trends, the impact of the current macroeconomic environment and market conditions within the video game industry, Activision Blizzard’s 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 the risk factors section of Activision Blizzard’s most recent annual report on Form 10-K.   The forward-looking statements in this release are based upon information available to Activision Blizzard as of the date of this release, and Activision Blizzard assumes no obligation to update any such forward-looking statements.  Although these forward-looking statements are believed to be true when made, they may ultimately prove to be incorrect. These statements are not guarantees of the future performance of Activision Blizzard and are subject to risks, uncertainties and other factors, some of which are beyond its control and may cause actual results to differ materially from current expectations.

(1) Net revenues from digital online channel represent revenues from subscriptions and memberships, licensing royalties, value-added services, downloadable content, digitally distributed products, and wireless devices. (2) According to Activision Blizzard’s internal data (3) According to The NPD Group, Charttrack and Gfk (4) According to The NPD Group, Charttrack, retail customer sell-through information, Boxofficemojo.com and PricewaterhouseCoopers’ Global Entertainment and Media Outlook (5) According to Microsoft, Sony and Activision Blizzard internal estimates (6) According to The NPD Group

(Tables to Follow)

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in millions, except per share data)

Three Months Ended December 31,

Year Ended December 31,

2011 

2010 

2011 

2010 

Net revenues:

Product sales

$

1,060 

$

1,061 

$

3,257 

$

3,087 

Subscription, licensing and other revenues*

347 

366 

1,498 

1,360 

    Total net revenues

1,407 

1,427 

4,755 

4,447 

Costs and expenses:

Cost of sales - product costs

483 

585 

1,134 

1,350 

Cost of sales - online subscriptions

58 

73 

238 

241 

Cost of sales - software royalties and amortization

85 

128 

218 

338 

Cost of sales - intellectual property licenses

96 

92 

165 

197 

Product development

256 

273 

646 

635 

Sales and marketing

281 

225 

545 

516 

General and administrative

122 

122 

456 

375 

Impairment of intangible assets

326 

326 

Restructuring

25 

    Total costs and expenses

1,382 

1,824 

3,427 

3,978 

Operating income (loss)

25 

(397)

1,328 

469 

Investment and other income (expense), net

(5)

23 

Income (loss) before income tax expense

20 

(389)

1,331 

492 

Income tax (benefit) expense

(79)

(156)

246 

74 

Net income (loss)

$

99 

$

(233)

$

1,085 

$

418 

Basic earnings (loss) per common share

$

0.09 

$

(0.20)

$

0.93 

$

0.34 

Weighted average common shares outstanding

1,139 

1,198 

1,148 

1,222 

Diluted earnings (loss) per common share (1)

$

0.08 

$

(0.20)

$

0.92 

$

0.33 

Weighted average common shares outstanding assuming dilution

1,147 

1,198 

1,156 

1,236 

(1) The company calculates earnings per share pursuant to the two-class method which requires the allocation of net income between common shareholders and participating security holders. Net income attributable to Activision Blizzard Inc. common shareholders used to calculate earnings per common share assuming dilution was $97 million and $1,069 million for the three months and year ended December 31, 2011 as compared to the total net income of $99 million and $1,085 million for the same periods, respectively. Net income (loss) attributable to Activision Blizzard Inc. common shareholders used to calculate earnings per common share assuming dilution was $(233) million and $414 million for the three months and year ended December 31, 2010 as compared to $(233) million and $418 million for the same periods, respectively.

* Subscription, licensing and other revenues represents revenues from World of Warcraft subscriptions, Call of Duty Elite memberships, licensing royalties from our products and franchises, value-added services, downloadable content, and other miscellaneous revenues.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in millions)

December 31,

December 31,

2011 

2010 

ASSETS

Current assets:

Cash and cash equivalents

$

3,165 

$

2,812 

Short-term investments

360 

696 

Accounts receivable, net

649 

673 

Inventories

144 

112 

Software development

137 

147 

Intellectual property licenses

22 

45 

Deferred income taxes, net

507 

648 

Other current assets

396 

299 

    Total current assets

5,380 

5,432 

Long-term investments

16 

23 

Software development

62 

55 

Intellectual property licenses

12 

28 

Property and equipment, net

163 

169 

Other assets

12 

15 

Intangible assets, net

88 

160 

Trademark and trade names

433 

433 

Goodwill

7,111 

7,132 

Total assets

$

13,277 

$

13,447 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

390 

$

363 

Deferred revenues

1,472 

1,726 

Accrued expenses and other liabilities

694 

871 

     Total current liabilities

2,556 

2,960 

Deferred income taxes, net

55 

120 

Other liabilities

174 

164 

Total liabilities

2,785 

3,244 

Shareholders' equity:

Common stock

--- 

--- 

Additional paid-in capital

9,616 

12,353 

Treasury stock

--- 

(2,194)

Retained earnings

948 

57 

Accumulated other comprehensive loss

(72)

(13)

     Total shareholders' equity

10,492 

10,203 

         Total liabilities and shareholders' equity

$

13,277 

$

13,447 

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in millions)

Three Months Ended December 31,

Year Ended December 31,

2011 

2010 

2011 

2010 

Cash flows from operating activities:

Net income (loss)

$

99 

$

(233)

$

1,085 

$

418 

Adjustments to reconcile net income (loss) to net

cash provided by operating activities:

Deferred income taxes

(49)

(329)

75 

(278)

Impairment of goodwill / intangible assets

12 

326 

12 

326 

Depreciation and amortization

71 

101 

148 

198 

Loss on disposal of property and equipment

Amortization and write-off of capitalized

software development costs and intellectual

property licenses (1)

136 

137 

287 

319 

Stock-based compensation expense (2)

42 

37 

103 

131 

Excess tax benefits from stock options exercises

(3)

(11)

(24)

(22)

Changes in operating assets and liabilities:

Accounts receivable

(503)

(428)

13 

43 

Inventories

62 

143 

(34)

124 

Software development and intellectual property

(73)

(75)

(254)

(313)

Other assets

(237)

(201)

(67)

17 

Deferred revenues

1,020 

1,103 

(248)

293 

Accounts payable

148 

130 

31 

70 

Accrued expenses and other liabilities

122 

292 

(179)

49 

Net cash provided by operating activities

850 

993 

952 

1,376 

Cash flows from investing activities:

Proceeds from maturities of available-for-sale investments

137 

107 

740 

519 

Proceeds from maturities of auction rate securities

("ARS") classified as trading securities

--- 

--- 

--- 

61 

Proceeds from auction rate securities ("ARS") called at par

10 

--- 

10 

--- 

Payment of contingent consideration

--- 

--- 

(3)

(4)

Purchases of available-for-sale investments

(92)

(119)

(417)

(800)

Capital expenditures

(25)

(21)

(72)

(97)

Decrease in restricted cash

26 

44 

Net cash provided by (used in) investing activities

56 

11 

266 

(312)

Cash flows from financing activities:

Proceeds from issuance of common stock to employees

15

19

54

73

Repurchase of common stock

(168)

(346)

(692)

(959)

Dividends paid

--- 

(2)

(194)

(189)

Excess tax benefits from stock option exercises

11 

24 

22 

Net cash used in financing activities

(150)

(318)

(808)

(1,053)

Effect of foreign exchange rate changes on cash

and cash equivalents

(60)

(57)

33 

Net increase (decrease) in cash and cash equivalents

696 

689 

353 

44 

Cash and cash equivalents at beginning of period

2,469 

2,123 

2,812 

2,768 

Cash and cash equivalents at end of period

$

3,165 

$

2,812 

$

3,165 

$

2,812 

(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.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL INFORMATION

(Amounts in millions)

Three Months Ended

December 31,

March 31,

June 30,

September 30,

December 31,

2009 

2010 

2010 

2010 

2010 

Cash Flow Data

Operating Cash Flow                                         

$

813 

$

227 

$

(26)

$

182 

$

993 

Operating Cash Flow - TTM (1) 

1,183 

1,083 

1,175 

1,196 

1,376 

Capital Expenditures

28 

12 

27 

37 

21 

Capital Expenditures - TTM (1) 

69 

71 

84 

104 

97 

Non-GAAP Free Cash Flow (2) 

785 

215 

(53)

145 

972 

Non-GAAP Free Cash Flow - TTM (1) 

$

1,114 

$

1,012 

$

1,091 

$

1,092 

$

1,279 

Three Months Ended

March 31,

June 30,

September 30,

December 31,

2011 

2011 

2011 

2011 

Cash Flow Data

Operating Cash Flow

$

134 

$

(78)

$

46 

$

850 

Operating Cash Flow - TTM (1) 

1,283 

1,231 

1,095 

952 

Capital Expenditures

14 

29 

25 

Capital Expenditures - TTM (1) 

89 

76 

68 

72 

Non-GAAP Free Cash Flow (2) 

130 

(92)

17 

825 

Non-GAAP Free Cash Flow - TTM (1) 

$

1,194 

$

1,155 

$

1,027 

$

880 

(1) 

TTM represents trailing twelve months. Operating Cash Flow for the year ended December 31, 2009, three months ended September 30, 2009, three months ended June 30, 2009, and three months ended March 31, 2009 was $1,183 million, $161 million, $(181) million, and $327 million, respectively. Capital expenditures for the year ended December 31, 2009, three months ended September 30, 2009, three months ended June 30, 2009, and three months ended March 31, 2009 was $69 million, $17 million, $14 million, and $10 million, respectively.

(2) 

Non-GAAP free cash flow represents operating cash flow minus capital expenditures.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES

(Amounts in millions, except earnings per share data)

Three Months Ended December 31, 2011

Net Revenues

Cost of Sales -

Product Costs

Cost of Sales -

Online Subscriptions

Cost of Sales - Software Royalties

and Amortization

Cost of Sales -

Intellectual

Property Licenses

Product

Development

Sales and

Marketing

General and

Administrative

Restructuring

Total Costs and

Expenses

GAAP Measurement

$

1,407 

$

483 

$

58 

$

85 

$

96 

$

256 

$

281 

$

122 

$

$

1,382 

Less:  Net effect from deferral in net revenues and related cost of sales

(a)

1,001 

209 

37 

(3)

243 

Less:  Stock-based compensation

(b)

(3)

(25)

(2)

(13)

(43)

Less:  Restructuring

(c)

(1)

(1)

(2)

Less:  Amortization of intangible assets

(d)

(2)

(48)

(50)

Less:  Impairment of goodwill

(e)

(12)

(12)

Non-GAAP Measurement

$

2,408 

$

690 

$

58 

$

119 

$

45 

$

231 

$

279 

$

96 

$

$

1,518 

Three Months Ended December 31, 2011

Operating

Income 

Net Income

Basic Earnings

per Share

Diluted Earnings

per Share

GAAP Measurement

$

25 

$

99 

$

0.09 

$

0.08 

Less:  Net effect from deferral in net revenues and related cost of sales

(a)

758 

549 

0.47 

0.47 

Less:  Stock-based compensation

(b)

43 

33 

0.03 

0.03 

Less:  Restructuring

(c)

Less:  Amortization of intangible assets

(d)

50 

31 

0.03 

0.03 

Less:  Impairment of goodwill

(e)

12 

12 

0.01 

0.01 

Non-GAAP Measurement

$

890 

$

725 

$

0.63 

$

0.62 

Year Ended December 31, 2011

Net Revenues

Cost of Sales -

Product Costs

Cost of Sales -

Online Subscriptions

Cost of Sales -

Software Royalties

and Amortization

Cost of Sales -

Intellectual

Property Licenses

Product

Development

Sales and

Marketing

General and

Administrative

Restructuring

Total Costs and

Expenses

GAAP Measurement

$

4,755 

$

1,134 

238 

$

218 

$

165 

$

646 

$

545 

$

456 

$

25 

$

3,427 

Less:  Net effect from deferral in net revenues and related cost of sales

(a)

(266)

(11)

(48)

(24)

(83)

Less:  Stock-based compensation

(b)

(10)

(40)

(6)

(47)

(103)

Less:  Restructuring

(c)

(1)

(25)

(26)

Less:  Amortization of intangible assets

(d)

(2)

(1)

(69)

(72)

Less:  Impairment of goodwill

(e)

(12)

(12)

Non-GAAP Measurement

$

4,489 

$

1,121 

$

238 

$

159 

$

72 

$

606 

$

539 

$

396 

$

$

3,131 

Year Ended December 31, 2011

Operating

Income

Net Income

Basic Earnings

(Loss) per Share

Diluted Earnings (Loss) per

Share

GAAP Measurement

$

1,328 

$

1,085 

$

0.93 

$

0.92 

Less:  Net effect from deferral in net revenues and related cost of sales

(a)

(183)

(151)

(0.13)

(0.13)

Less:  Stock-based compensation

(b)

103 

76 

0.07 

0.06 

Less:  Restructuring

(c)

26 

19 

0.02 

0.02 

Less:  Amortization of intangible assets

(d)

72 

46 

0.04 

0.04 

Less:  Impairment of goodwill

(e)

12 

12 

0.01 

0.01 

Non-GAAP Measurement

$

1,358 

$

1,087 

$

0.93 

$

0.93 

(a) Reflects the net change in deferred net revenues and related cost of sales.

(b) Includes expense related to stock-based compensation.  

(c) Reflects restructuring related to our Activision Publishing operations.

(d) Reflects amortization of intangible assets.

(e) Reflects impairment of goodwill.

The company calculates earnings per share pursuant to the two-class method which requires the allocation of net income between common shareholders and participating security holders.  Net income attributable to Activision Blizzard Inc. common shareholders used to calculate non-GAAP earnings per common share assuming dilution was $715 million and $1,071 million for the three months and year ended December 31, 2011 as compared to the total non-GAAP net income of $725 million and $1,087 million for the same periods, respectively.

The per share adjustments are presented as calculated, and the GAAP and non-GAAP earnings per share information is also presented as calculated. The sum of these measures, as presented, may differ due to the impact of rounding.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES

(Amounts in millions, except earnings per share data)

Three Months Ended December 31, 2010

Net Revenues

Cost of Sales -

Product Costs

Cost of Sales -

Online Subscriptions

Cost of Sales -

Software Royalties

and Amortization

Cost of Sales -

Intellectual

Property Licenses

Product

Development

Sales and

Marketing

General and

Administrative

Impairment of

Intangible Assets

Total Costs

and Expenses

GAAP Measurement

$

1,427 

$

585 

$

73 

$

128 

$

92 

$

273

$

225 

$

122 

$

326 

$

1,824 

Less:  Net effect from deferral in net revenues and related cost of sales

(a)

1,121 

200 

45 

17 

-

262 

Less:  Stock-based compensation

(b)

(14)

(8)

(2)

(13)

(37)

Less:  Restructuring (included in general and administrative)

(c)

-

Less:  Amortization of intangible assets

(d)

(2)

(6)

(69)

-

(77)

Less:  Impairment of intangible assets

(e)

-

(326)

(326)

Non-GAAP Measurement

$

2,548 

$

783 

$

73 

$

153 

$

40 

$

265

$

223 

$

110 

$

$

1,647 

Three Months Ended December 31, 2010

Operating

Income (Loss)

Net Income

(Loss)

Basic Earnings

(Loss) per Share

Diluted Earnings

(Loss) per Share

GAAP Measurement

$

(397)

$

(233)

$

(0.20)

$

(0.20)

Less:  Net effect from deferral in net revenues and related cost of sales

(a)

859 

628 

0.52 

0.51 

Less:  Stock-based compensation

(b)

37 

24 

0.02 

0.02 

Less:  Restructuring (included in general and administrative)

(c)

(1)

Less:  Amortization of intangible assets

(d)

77 

38 

0.03 

0.03 

Less:  Impairment of intangible assets

(e)

326 

198 

0.16 

0.16 

Non-GAAP Measurement

$

901 

$

655 

$

0.54 

$

0.53 

Year Ended December 31, 2010

Net Revenues

Cost of Sales -

Product Costs

Cost of Sales -

Online Subscriptions

Cost of Sales -

Software Royalties

and Amortization

Cost of Sales -

Intellectual

Property Licenses

Product

Development

Sales and

Marketing

General and

Administrative

Impairment of

Intangible Assets

Total Costs

and Expenses

GAAP Measurement

$

4,447 

$

1,350 

$

241 

$

338 

$

197 

$

635 

$

516 

$

375 

$

326 

$

3,978 

Less:  Net effect from deferral in net revenues and related cost of sales

(a)

356 

29 

37 

Less:  Stock-based compensation

(b)

(65)

(12)

(8)

(46)

(131)

Less:  Restructuring (included in general and administrative)

(c)

(3)

(3)

Less:  Amortization of intangible assets

(d)

(5)

(15)

(102)

(1)

(123)

Less:  Impairment of intangible assets

(e)

(326)

(326)

Non-GAAP Measurement

$

4,803 

$

1,348 

$

241 

$

287 

$

100 

$

623 

$

508 

$

325 

$

$

3,432 

Year Ended December 31, 2010

Operating

Income 

Net Income

Basic Earnings

per Share

Diluted Earnings

per Share

GAAP Measurement

$

469 

$

418 

$

0.34 

$

0.33 

Less:  Net effect from deferral in net revenues and related cost of sales

(a)

319 

232 

0.19 

0.19 

Less:  Stock-based compensation

(b)

131 

88 

0.07 

0.07 

Less:  Restructuring (included in general and administrative)

(c)

Less:  Amortization of intangible assets

(d)

123 

53 

0.04 

0.04 

Less:  Impairment of intangible assets

(e)

326 

198 

0.16 

0.16 

Non-GAAP Measurement

$

1,371 

$

991 

$

0.81 

$

0.79 

(a) Reflects the net change in deferred net revenues and related cost of sales.

(b) Includes expense related to stock-based compensation.

(c) Reflects restructuring related to the Business Combination with Vivendi Games.  Restructuring activities includes severance costs, facility exit costs and balance sheet write down and exit costs from the cancellation of projects.

(d) Reflects amortization of intangible assets.

(e) Reflects impairment of intangible assets acquired as a result of purchase accounting.

The company calculates earnings per share pursuant to the two-class method which requires the allocation of net income between common shareholders and participating security holders.  Net income attributable to Activision Blizzard Inc. common shareholders used to calculate non-GAAP earnings per common share assuming dilution was $646 million and $982 million for the three months and year ended December 31, 2010 as compared to the total non-GAAP net income of $655 million and $991 million for the same periods, respectively.

The per share adjustments are presented as calculated, and the GAAP and non-GAAP earnings per share information is also presented as calculated. The sum of these measures, as presented, may differ due to the impact of rounding.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

FINANCIAL INFORMATION

For the Three Months and Year Ended December 31, 2011 and 2010

(Amounts in millions)

Three Months Ended

December 31, 2011

December 31, 2010

$ Increase

% Increase

Amount

% of Total

Amount

% of Total

(Decrease)

(Decrease)

GAAP Net Revenues by Distribution Channel               

Retail channel

$

841 

60 

%

$

820 

57 

%

$

21 

%

Digital online channels*

363 

26 

414 

29 

(51)

(12)

Total Activision and Blizzard

1,204 

86 

1,234 

86 

(30)

(2)

Distribution

203 

14 

193 

14 

10 

Total consolidated GAAP net revenues  

1,407 

100 

1,427 

100 

(20)

(1)

Change in Deferred Net Revenues (1) 

Retail channel

1,055 

1,065 

Digital online channels*

(54)

56 

Total changes in deferred net revenues