Better-Than-Expected Q3 Results

SANTA MONICA, Calif .– (BUSINESS WIRE) –Activision Blizzard, Inc. (Nasdaq: ATVI) today announced third-quarter 2019 results.

"Our third quarter results exceeded our prior outlook for both revenue and earnings per share," said Bobby Kotick, Chief Executive Officer of Activision Blizzard. “Recent launches have enabled significant growth on the size of our audiences for our Call of Duty® and World of Warcraft® franchises. As we introduces mobile and free-to-play games based on our franchises we believe we can increase audience size, engagement and monetization across our wholly owned franchises. With a strong pipeline content and momentum in mobile, exporting and advertising, we are confident we will remain a leader in connecting and engaging the world through epic entertainment. "

Financial Metrics

Q3

(in millions, except EPS)

2019

Prior Outlook *

2018

GAAP Net Revenues

$ 1,282

$ 1,105

$ 1,512

Impact of GAAP deferralsA

($ 68)

($ 5)

$ 146

GAAP EPS

$ 0.26

$ 0.05

$ 0.34

Non-GAAP EPS

$ 0.38

$ 0.20

$ 0.42

Impact of GAAP deferralsA

($ 0.06)

$ 0.10

* Prior outlook was provided by the company on August 8, 2019 in its earnings release.

For the quarter ended September 30, 2019, Activision Blizzard's net revenues presented in accordance with GAAP were $ 1.28 billion, compared with $ 1.51 billion for the third quarter of 2018. GAAP net revenues from digital channels were $ 1.01 billion. GAAP operating margin was 19%. GAAP earnings for diluted share were $ 0.26, as compared with $ 0.34 for the third quarter of 2018.

For the quarter ended September 30, 2019, on a non-GAAP basis, Activision Blizzard's operating margin was 27% and earnings per diluted share were

For the quarter ended September 30, 2019, operating cash flow was $ 309 million. For the trailing twelve-month period, operating cash flow was $ 1.91 billion.

GAAP and non-GAAP results, please refer to the tables below.

Operating Metrics

For the quarter ended September 30, 2019, Activision Blizzard's net bookingsB were $ 1.21 billion, compared with $ 1.66 billion for the third quarter of 2018. Net bookingsB from digital channels were $ 0.98 billion, compared with $ 1.44 billion for the third quarter of 2018. In-game net bookingsC were $ 0.71 billion. Overall Activision Blizzard Monthly Active Users (MAUs)D were 316 million.

Selected Business Highlights

Activision Blizzard exceeded its third quarter outlook, driven by better-than-expected performance for Call of Duty in-game and World of Warcraft, as well as favorable cost timing. The company started the fourth quarter with successful launches for Call of Duty®: Mobile and Call of Duty®: Modern Warfare, and achieved important milestones for several other franchises. Activision Blizzard is intent on building on this momentum as the company invests in the potential of its franchises in 2020 and beyond.

Activision

  • In the third quarter of 2019:
    • Activision had 36 million MAUsD.
    • Call of Duty®: Black Ops 4 reach and net bookings from in-game items grew sharply versus Call of Duty®: WWII in the third quarter of 2018.
  • The October 1, 2019, launch of Call of Duty: Mobile saw over 100 million downloads in its first month, reaching the top of the mobile app download charts in over 150 countries and regions, with a 4.9-star rating in the US iOS store.1
  • On October 25, 2019, Call of Duty: Modern Warfare launched and became the top-selling new premium game release of the year. In its first week, sell-through units grew to high-teen percentage versus Call of Duty: Black Ops 4, with strong console growth and PC units on Battle.net® reaching new highs.

Blizzard

  • In the third quarter of 2019:
    • Blizzard had 33 million MAUsD.
    • World of Warcraft® Classic drove the biggest quarterly increase to subscription plans2 in franchise history, in both the West and East.
    • The Overwatch League Fans of the San Francisco Shock Defeat the Vancouver Titans in the Grand Finals at the Wells Fargo Center in Philadelphia in September. Season Two average minute audience grew 11,000% year-over-year.3
  • At BlizzCon on November 1, 2019, Blizzard revealed some of the exciting content in its pipeline:
    • Hearthstone® Descent of Dragons ™ expansion, set for release on the fourth quarter of 2019, and the new Battlegrounds auto-battler mode, which is already in early open access on November 12, 2019,
    • World of Warcraft's next expansion, Shadowlands, set to launch in 2020,
    • Overwatch® 2, the next major installment for the franchise, and
    • Diablo® IV, the highly-anticipated sequel to the genre-defining franchise.

King

  • In the third quarter of 2019:
    • King had 247 million MAUsD.
    • Candy Crush ™ mobile franchise reach a year-over-year, driven by the addition of Candy Crush Friends Saga ™ which launched in October 2018.
    • Candy Crush was once again the top-grossing franchise in the US mobile app stores.1
    • Advertising continued to grow profitably, with net bookings almost year-over-year.

Company Outlook

(in millions, except EPS)

GAAP

Outlook

Non-GAAP

Outlook

Impact of GAAP

deferralsA

CY 2019

Net Revenues

$ 6,315

$ 6,315

$ 10

EPS

$ 1.56

$ 2.13

$ 0.04

Fully Diluted Shares

772

772

Q4 2019

Net Revenues

$ 1,812

$ 1,812

$ 834

EPS

$ 0.29

$ 0.43

$ 0.72

Fully Diluted Shares

774

774

Net bookingsB are expected to be $ 6.33 billion for 2019 and $ 2.65 billion for the fourth quarter of 2019.

Currency Assumptions for 2019 Outlook:

  • $ 1.15 USD / Euro for current outlook (vs. average of $ 1.12 for 2018); and
  • $ 1.23 USD / British Pound Sterling for current outlook (vs. average of $ 1.30 for 2018).
  • Notes: Our financial guidance includes the forecasted impact of our FX hedging program.

Conference Call

Today at 4: 30 pm EST, Activision Blizzard's management will host a conference call and webcast to discuss the company's results for the quarter ended. The company welcomes all members of the financial and media communities and other interested parties to visit https://investor.activision.com to listen to the conference call via 866-548-4713 in the US with passcode 8907639. A replay of the call will also be available after the call's conclusion https://investor.activision.com/events.cfm.

About Activision Blizzard

Activision Blizzard, Inc., a member of the Fortune 500 and S&P 500, is a leading standalone interactive entertainment company. We are looking forward to hearing from you! the Storm®, and King's Candy Crush ™, Bubble Witch ™, and Farm Heroes ™. The company is one of the Fortunes "100 Best Companies To Work For®." Headquartered in Santa Monica, California, Activision Blizzard has operations throughout the world. More information about Activision Blizzard and its products can be found on the company's website, www.activisionblizzard.com.

1 For App Annie Intelligence for respective regions, app stores, and periods.
2 Monthly or longer-term subscriptions.
3 For Nielsen.

A Net effect of accounting treatment from revenue deferrals on certain of our online-enabled products. We have been able to provide online services and / or services. are generally less than a year. The related cost of revenues is recognized and recognized as an expense. Impact of changes in deferrals refers to the net effect of revenue deferrals of the treatment of revenues, of the purposes of EPS, of the related deferrals of treatment and of the related tax impacts. Internationally, management excludes the impact of this change in revenues from revenues and related 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 in the reduction of revenues and in the revenues of our operating system.

B Net bookings is a network of products and services. impact from deferrals.

C In-game net bookings primarily includes the net amount of downloadable content and microtransactions sold during the period, and is equal to in-game revenues.

D 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 accessed a particular month. We calculate average MAUs in a period by adding the total number of months. An individual who accessed two of our games would be counted as two users. In addition, two to technical limitations, for Activision and King, an individual who accesses the same game on two platforms or devices in the relevant period would be counted as two users. For Blizzard, an individual who accesses the same game on a single user platform.

Non-GAAP Financial Measures: As a supplement to our financial measures in accordance with US 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 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 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, operating margin and guidance both including (in accordance with GAAP) and excluding (non-GAAP) certain items. The following is an example of foreign currency rate fluctuations. In addition, Activision Blizzard provides EBITDA (defined as GAAP net income (loss) before interest (income) expense, income tax, 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 appropriate in any given reporting period:

  • expenses related to share-based compensation;
  • the amortization of intangibles from purchase price accounting;
  • fees and other expenses related to King acquisition, long-term debt, refinancing of long-term debt, including penalties
  • restructuring and related charges;
  • other non-cash charges from reclassification of certain cumulative translation adjustments into earnings as required by GAAP;
  • the income tax adjustments associated with the above items (non-GAAP tax on income tax is calculated on the basis of the GAAP pre-tax income under ASC 740, which uses an annual effective tax rate method to the results); and
  • significant discrete tax-related items, including the Tax Cuts and Jobs Act, enacted in December 2017, and other unusual or unique tax-related items and activities.

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 Activation Blizzard's financial and operating performance. In particular, the measures facilitated comparisons of operating performance with periods of time and with the help of investors to better understand the operating results of Activision Blizzard by excluding certain items that may be indicative of the company's core business, operating results, or future outlook. Additionally, we consider quantitative and qualitative factors in assessing the impact of items that may be significant or that could affect an ongoing financial and business performance or trends. Internationally, management uses these non-GAAP financial measures, assessing the company's operating results, and measuring compliance with the company's debt-financing concept, as well as in planning and forecasting.

Activision Blizzard's non-GAAP financial measures, 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 similar named measures, but exclude different items, which may provide investors with comparable views of Activision's performance in relation to other companies.

Blizzard's GAAP, as well as non-GAAP, results and outlook - ADAP 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 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 (3) statements of future financial or operating performance, including the impact of tax items thereon; and (4) statements of assumptions underlying such statements. The company 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, estimates of expectations, estimates, and projections about our business, and are inherently uncertain and difficult to predict.

We caution that a number of relevant factors could cause future events and other future events to differ from those expressed in any forward-looking statements. Such factors include, but are not limited to: our ability to consistently deliver popular, high-quality titles in a timely manner; ability to satisfy consumers' expectations with respect to our brands, games, services, and / or business practices; concentration of revenue among a small number of titles; the growth of the business of the new business; the development of the business of the new business; the development of the business of the new business; our ability to realize our predicted restructuring plans; increasing importance of revenues derived from digital distribution channels; risks associated with the retail sales business model; substantial influence of third-party platform providers over our products and costs; success and availability of video game consoles manufactured by third parties; risks associated with the free business model; risks and costs associated with legal proceedings; changes in tax rates or exposure to additional tax liabilities, as well as the outcome of current or future tax disputes; rapid changes in technology and industry standards; competition, including from other forms of entertainment; our ability to sell products at assumed pricing levels; our ability to attract, retain, and motivate skilled personnel; reliance on external developers for the development of some of our software products; the amount of debt and the limitations imposed by the covenants in the agreements governing our debt; counterparty risks relating to customers, licensees, licensors, and manufacturers; intellectual property claims; piracy and unauthorized copying of our products; risks and uncertainties of conducting business outside the US; fluctuations in currency exchange rates; increasing regulation of our business, products, and distribution in key territories; compliance with continuously evolving laws and regulations concerning data privacy; potential data breaches and other cybersecurity risks; 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, 2018.

The forward-looking statements assume no obligation to update any such forward-looking statements. These statements are believed to be true when made, they may ultimately prove to be incorrect. These statements are guarantees of future performance and risks, uncertainties, and other factors.

(Tables to Follow)

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in millions, except for share data)

Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

2019

2018

Net revenues

Product sales

$

260

$

263

$

1,276

$

1,447

Subscription, licensing, and other revenues 1

1,022

1,249

3,227

3,672

Total net revenues

1,282

1,512

4,503

5,119

Costs and expenses

Cost of revenues — product sales:

Product costs

137

127

388

416

Software royalties, amortization, and intellectual property licenses

9

20

171

214

Cost of revenues — subscription, licensing, and other:

Game operations and distribution costs

246

257

714

777

Software royalties, amortization, and intellectual property licenses

50

109

164

278

Product development

210

263

702

776

Sales and marketing

182

263

580

741

General and administrative

177

208

527

623

Restructuring and related costs

24

XNUMX

104

XNUMX

Total costs and expenses

1,035

1,247

3,350

3,825

Operating income

247

265

1,153

1,294

Interest and other expense (income), net

(2

)

13

(33

)

67

Loss on extinguishment of debt

XNUMX

40

XNUMX

40

Income before income tax expense (benefit)

249

212

1,186

1,187

Income tax expense (benefit)

45

(48

)

208

25

Net income

$

204

$

260

$

978

$

1,162

Basic earnings for common share

$

0.27

$

0.34

$

1.28

$

1.53

Weighted average common shares outstanding

767

763

766

761

Diluted earnings for common share

$

0.26

$

0.34

$

1.27

$

1.51

Weighted average common shares outstanding assuming dilution

771

771

770

771

1

Subscription, licensing, and other revenues from revenues of our products and franchises, downloadable content, microtransactions, and other miscellaneous revenues.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in millions)

September 30, 2019 1

December 31, 2018 2

Assets

Current assets

Cash and cash equivalents

$

4,939

$

4,225

Accounts receivable, net

386

1,035

Inventories, net

102

43

Software development

240

264

Other current assets

345

539

Total current assets

6,012

6,106

Software development

109

65

Property and equipment, net

249

282

Deferred income taxes, net

357

458

Other assets

731

482

Intangible assets, net

583

735

Goodwill

9,764

9,762

Total assets

$

17,805

$

17,890

Liabilities and Shareholders Equity

Current liabilities

Payable accounts

$

274

$

253

Deferred revenues

695

1,493

Accrued expenses and other liabilities

782

896

Total current liabilities

1,751

2,642

Long-term debt, net

2,674

2,671

Deferred income taxes, net

23

18

Other liabilities

1,122

1,167

Total liabilities

5,570

6,498

Shareholders equity

Common stock

XNUMX

XNUMX

Additional paid-in capital

11,116

10,963

Treasury stock

(5,563

)

(5,563

)

Retained earnings

7,289

6,593

Accumulated other comprehensive loss

(607

)

(601

)

Total shareholders' equity

12,235

11,392

Total liabilities and shareholders' equity

$

17,805

$

17,890

1

We adopted a new lease accounting standard in the first quarter of 2019. The new lease accounting standard increased our “Other assets,” “Accrued expenses and other liabilities,” and “Other liabilities” as of September 30, 2019. Refer to our Form 10-Q for three months ended September 30, 2019 for additional information.

2

During the three months ended 31, 2019, we identified an amount which should have been recorded in the fourth quarter of 2018 35-K for the year ending December 2018, 10. Our balance sheet as of December 31, 2019, as presented above has been revised to reflect the correction. Refer to our Form 31-Q for three months ended September 2018, 10, for additional information.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES

(Amounts in millions, except for share data)

Three Months Ended September 30, 2019

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

Restructuring
and related
costs

Total Costs and
Expenses

GAAP Measurement

$

1,282

$

137

$

9

$

246

$

50

$

210

$

182

$

177

$

24

$

1,035

Share-based compensation1

XNUMX

XNUMX

(1

)

XNUMX

XNUMX

(7

)

(2

)

(17

)

XNUMX

(27

)

Amortization of intangible assets2

XNUMX

XNUMX

XNUMX

XNUMX

(48

)

XNUMX

XNUMX

(2

)

XNUMX

(50

)

Restructuring and related costs3

XNUMX

(4

)

XNUMX

XNUMX

XNUMX

XNUMX

XNUMX

XNUMX

(24

)

(28

)

Non-GAAP Measurement

$

1,282

$

133

$

8

$

246

$

2

$

203

$

180

$

158

$

XNUMX

$

930

Net effect of deferred revenues and related cost of revenues4

$

(68

)

$

(7

)

$

(6

)

$

(1

)

$

(1

)

$

XNUMX

$

XNUMX

$

XNUMX

$

XNUMX

$

(15

)

Operating
Income

Net Income

Basic Earnings
for Share

Diluted Earnings
for Share

GAAP Measurement

$

247

$

204

$

0.27

$

0.26

Share-based compensation1

27

27

0.03

0.03

Amortization of intangible assets2

50

50

0.06

0.06

Restructuring and related costs3

28

28

0.04

0.04

Income tax impacts from items above5

XNUMX

(14

)

(0.02

)

(0.02

)

Non-GAAP Measurement

$

352

$

295

$

0.38

$

0.38

Net effect of deferred revenues and related cost of revenues4

$

(53

)

$

(48

)

$

(0.06

)

$

(0.06

)

Contacts

Activision Blizzard, Inc.
Investors and Analysts:
ir@activisionblizzard.com
or
Press:
pr@activisionblizzard.com

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