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Activision Blizzard Announces Better-Than-Expected and Record Third Quarter 2016 Financial Results

November 3, 2016 4:08 PM

Company Increases CY 2016 Revenues and EPS Outlook



Record Third Quarter Revenues, Operating Income, EPS and Operating Cash Flow



Record Quarterly GAAP Digital Revenues of Over $1.3 Billion, Up 114% Year-over-Year



Company Had 482 Million Monthly Active Users, and More Than 10 Billion Hours of Play Time During the Third Quarter

SANTA MONICA, Calif.--(BUSINESS WIRE)-- Activision Blizzard, Inc. (Nasdaq: ATVI) today announced better-than-expected financial results for the third quarter of 2016.

Third Quarter
(in millions, except EPS) 2016 Prior

Outlook*

2015
GAAP Net Revenues $ 1,568 $ 1,490 $ 990
Impact of GAAP deferrals $ 62 $ 45 $ 50
GAAP EPS $ 0.26 $ 0.06 $ 0.17
Non-GAAP (redefined) EPS* $ 0.49 $ 0.39 $ 0.20
Impact of GAAP deferrals $ 0.03 $ 0.01 $ 0.01

* “Non-GAAP (redefined)” includes the net effect of revenue deferrals accounting treatment on certain of our online enabled products. Please refer to our July 29, 2016 call and materials for additional information.

For the quarter ended September 30, 2016, Activision Blizzard’s net revenues presented in accordance with Generally Accepted Accounting Principles (“GAAP”) were a third-quarter record $1.57 billion, as compared with $990 million for the third quarter of 2015, an increase of 58%. GAAP net revenues from digital channels were an all-time quarterly record of $1.34 billion, growing 18% quarter-over-quarter and 114% year-over-year. GAAP earnings per diluted share were a third-quarter record $0.26, as compared with $0.17 for the third quarter of 2015, an increase of 53%. On a non-GAAP (redefined) basis, the company’s earnings per diluted share were a third-quarter record $0.49, as compared with $0.20 for the third quarter of 2015, an increase of 145%.

The Activision and Blizzard segments had record combined third-quarter performance with $1.10B in net revenues, a 15% increase year-over-year, and $444M in operating income, a 78% increase year-over-year. Year-to-date, the combined segments generated record revenue of $2.83B, a 22% increase year-over-year, and record operating income of $1.05B, a 67% increase year-over-year.

Activision Blizzard generated a third-quarter record $456 million in operating cash flow for the quarter ended September 30, 2016. For the trailing twelve months ended September 30, 2016, operating cash flow totaled $2.36 billion, a 68% increase year-over-year.

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

Bobby Kotick, Chief Executive Officer of Activision Blizzard, said, “This quarter we again over-performed our plan, delivering record third-quarter revenues of $1.57 billion, up almost 60% and earnings per share of $0.49, more than doubling year-over-year on a non-GAAP basis (as redefined).”

Kotick added, “We continue to see enthusiasm from our global audiences for our key franchises including Call of Duty, Destiny, Candy Crush and World of Warcraft, plus our newest franchise – Overwatch, which after only about four months had already reached over 20 million players and has incredible player engagement. Looking forward, we expect continued momentum from all of our growth strategies, especially our esports initiatives and our integration of in-game advertising.”

Selected Business Highlights:

Audience Reach

Deep Engagement

Player Investment

Company Outlook:

GAAP Outlook

Non-GAAP Outlook (redefined) Impact of GAAP deferralsC
(in millions, except EPS)

CY 2016

Net Revenues

$

6,450

$

6,450

$

75

EPS $ 0.98 $ 1.92 $

0.10

Fully Diluted Shares* 762 762

Q4 2016

Net Revenues

$

1,856

$

1,856

$

522

EPS $ 0.05 $

0.40

$ 0.34
Fully Diluted Shares* 765 765

* Fully diluted weighted average shares include participating securities and dilutive options on a weighted average basis.

As referenced on our July 29, 2016 call, if you would like to calculate Non-GAAP metrics as previously defined, in order to do year-over-year comparisons, you would add the impact of GAAP deferrals to the Non-GAAP (redefined) metrics.

Currency Assumptions for 2016 Outlook:

Debt Repayment

In the quarter ended September 30, 2016, we made repayments to reduce our total outstanding term loans by $185 million. This brings our total prepayments in 2016 to $1.5 billion.

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, 2016 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 888-395-3239 in the U.S. with passcode 5137988.

About Activision Blizzard

Activision Blizzard, Inc., a member of the S&P 500, is the world's most successful standalone interactive entertainment company. We delight nearly 500 million monthly active users around the world through franchises including Activision's Call of Duty®, Destiny and Skylanders®, Blizzard Entertainment's World of Warcraft®, StarCraft®, Diablo®, Hearthstone®: Heroes of Warcraft™ and Overwatch®, and King's Candy Crush™, Bubble Witch™, Pet Rescue™ and Farm Heroes™. The company is one of the Fortune ʺ100 Best Companies To Work For®ʺ. 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 Gametrics.com2 Based on data from the NPD Group and GfK Chart-Track3 U.S. ranking for Apple App Store and Google Play Store combined, per App Annie Intelligence for third quarter 20164 Per MLGPRO Facebook Insights Portal

A Monthly Active User (“MAU”) Definition: We monitor MAUs as a key measure of the overall size of our user base and their regular engagement with our portfolio of games. 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 with respect to Activision Publishing and King MAUs, an individual who plays the same game on two platforms or devices in the relevant period would be counted as two users. For Blizzard MAUs, an individual who plays the same game on two platforms or devices in the relevant period would generally be counted as a single user.

B 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.

C 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, and together with the related cost of revenues deferrals treatment and the related tax impacts for the purposes of EPS. 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.

Non-GAAP (as previously defined) and Non-GAAP (redefined) Financial Measures: In accordance with the updated Compliance and Disclosure Interpretations issued by the SEC staff on May 17, 2016, we reported our third quarter of 2016 results, and provided our outlook, using GAAP and non-GAAP (redefined). We have historically provided Non-GAAP (as previously defined) financial measures. The only difference between the two measures is the inclusion (Non-GAAP (redefined)) or exclusion (Non-GAAP (as previously defined)) of the impact from revenue deferrals accounting treatment on certain of our online enabled products. Please see materials from July 29, 2016 call for further details.

Non-GAAP (redefined) 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:

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 in this press release 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; (4) statements relating to the acquisition of King and expected impact of that transaction, including without limitation, the expected impact on Activision Blizzard, Inc.'s future financial results; and (5) 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 risk, 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: uncertainties as to whether and when Activision Blizzard will be able to realize the anticipated financial benefits from the acquisition of King; the integration of King being more difficult, time-consuming or costly than expected; the diversion of management time and attention to issues relating to the operations and integration of King and Major League Gaming; 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 hardware platforms; the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt; 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 used games and 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; 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, 2015.

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 EndedSeptember 30,

Nine Months EndedSeptember 30,

2016 2015 2016 2015
Net revenues
Product sales $ 355 $ 425 $ 1,501 $ 1,736
Subscription, licensing and other revenues1 1,213 565 3,093 1,576
Net revenues 1,568 990 4,594 3,312
Costs and expenses
Cost of revenues - product sales:
Product costs 111 179 429 528
Software royalties, amortization, and intellectual property licenses 42 62 250 273
Cost of revenues - subscription, licensing, and other:
Game operations and distribution costs 237 71 620 192
Software royalties, amortization, and intellectual property licenses 139 25 319 54
Product development 249 159 673 453
Sales and marketing 340 189 830 445
General and administrative 156 109 486 297
Total costs and expenses 1,274 794 3,607 2,242
Operating income 294 196 987 1,070
Interest and other expense (income), net 63 51 181 151
Income before income tax expense 231 145 806 919
Income tax expense 32 18 93 186
Net income $ 199 $ 127 $ 713 $ 733
Basic earnings per common share 2 $ 0.27 $ 0.17 $ 0.96 $ 0.99
Weighted average common shares outstanding 742 730 739 727
Diluted earnings per common share 2 $ 0.26 $ 0.17 $ 0.94 $ 0.98
Weighted average common shares outstanding assuming dilution 756 739 753 736
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.
2 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. We had, on a weighted-average basis, participating securities of approximately 2 million and 3 million for the three and nine months ended September 30, 2016 respectively, and 8 million and 9 million for the three and nine months ended September 30, 2015 respectively. For the three and nine months ended September 30, 2016, net income attributable to Activision Blizzard, Inc. common shareholders used to calculate earnings per common share, assuming dilution, was $198 million and $709 million, respectively, as compared to total net income of $199 million and $713 million, respectively, for the same period. For the three and nine months ended September 30, 2015, net income attributable to Activision Blizzard, Inc. common shareholders used to calculate earnings per common share, assuming dilution, was $125 million and $723 million, respectively, as compared to total net income of $127 million and $733 million, respectively, for the same period.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in millions)

September 30, 2016

December 31, 2015

Assets
Current assets
Cash and cash equivalents $ 4,029 $ 1,823
Accounts receivable, net 446 679
Inventories, net 131 128
Software development 414 336
Other current assets 314 421
Total current assets 5,334 3,387
Cash in escrow 3,561
Software development 64 80
Property and equipment, net 258 189
Deferred income taxes, net 485 275
Other assets 382 177
Intangible assets, net 2,070 482
Goodwill 9,787 7,095
Total assets $ 18,380 $ 15,246
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 211 $ 284
Deferred revenues 1,320 1,702
Accrued expenses and other liabilities 689 625
Current portion of long-term debt, net 1,481
Total current liabilities 3,701 2,611
Long-term debt, net 4,881 4,074
Deferred income taxes, net 43 10
Other liabilities 937 483
Total liabilities 9,562 7,178
Shareholders' equity
Common stock
Additional paid-in capital 10,427 10,242
Treasury stock (5,572 ) (5,637 )
Retained earnings 4,616 4,096
Accumulated other comprehensive loss (653 ) (633 )
Total shareholders’ equity 8,818 8,068
Total liabilities and shareholders’ equity $ 18,380 $ 15,246
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, 2016

NetRevenues

Cost ofRevenues -Product Sales:Product Costs

Cost ofRevenues -Product Sales:SoftwareRoyalties andAmortization

Cost ofRevenues -Subs/Lic/Other:Game Operationsand DistributionCosts

Cost ofRevenues -Subs/Lic/Other:SoftwareRoyalties andAmortization

ProductDevelopment

Sales andMarketing

General andAdministrative

Total Costsand Expenses

GAAP Measurement $ 1,568 $ 111 $ 42 $ 237 $ 139 $ 249 $ 340 $ 156 $ 1,274
Stock-based compensation1 (2 ) (1 ) (11 ) (5 ) (14 ) (33 )
Amortization of intangible assets2 (1 ) (129 ) (78 ) (3 ) (211 )
Fees and other expenses related to acquisitions3 (4 ) (4 )
Non-GAAP (redefined) Measurement $ 1,568 $ 111 $ 39 $ 237 $ 9 $ 238 $ 257 $ 135 $ 1,026
Net effect of deferred revenues and related cost of revenues4 $ 62 $ (16 ) $ 28 $ 5 $ 12 $ $ $ $ 29

OperatingIncome

Net Income

Basic Earningsper Share

Diluted Earningsper Share

GAAP Measurement $ 294 $ 199 $ 0.27 $ 0.26
Stock-based compensation1 33 33 0.04 0.04
Amortization of intangible assets2 211 211 0.28 0.28
Fees and other expenses related to acquisitions3 4 6 0.01 0.01

Loss on extinguishment of debt5

10 0.01 0.01

Income tax impacts from items above6 (88 ) (0.12 ) (0.12 )
Non-GAAP (redefined) Measurement $ 542 $ 371 $ 0.50 $ 0.49
Net effect of deferred revenues and related cost of revenues4 $ 33 $ 26 $ 0.03 $ 0.03
1 Includes expenses related to stock-based compensation.
2 Reflects amortization of intangible assets from purchase price accounting.
3 Reflects fees and other expenses related to the acquisition of King Digital Entertainment ("King Acquisition"), inclusive of related debt financings and integration costs.
4 Reflects the net effect from deferral of revenues and (recognition) of deferred revenues, along with related cost of revenues, on certain of our online enabled products, including the effects of taxes.
5 Reflects the loss on extinguishment of debt.
6 Reflects the income tax impact associated with the above items. Tax impact on non-GAAP (redefined) 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.

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

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. For the three months ended September 30, 2016, net income attributable to Activision Blizzard, Inc. common shareholders used to calculate non-GAAP (redefined) earnings per common share, assuming dilution, was $370 million, as compared to total net income of $371 million, for the same period.

For purposes of calculating earnings per share, we had, on a weighted-average basis, common shares outstanding of 742 million, participating securities of approximately 2 million, and dilutive shares of 14 million during the three months ended September 30, 2016.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES

(Amounts in millions, except per share data)

Nine Months Ended September 30, 2016

NetRevenues

Cost ofRevenues -Product Sales:Product Costs

Cost ofRevenues -Product Sales:SoftwareRoyalties andAmortization

Cost ofRevenues -Subs/Lic/Other:Game Operationsand DistributionCosts

Cost ofRevenues -Subs/Lic/Other:SoftwareRoyalties andAmortization

ProductDevelopment

Sales andMarketing

General andAdministrative

Total Costsand Expenses

GAAP Measurement $ 4,594 $ 429 $ 250 $ 620 $ 319 $ 673 $ 830 $ 486 $ 3,607
Stock-based compensation1 (16 ) (1 ) (34 ) (12 ) (55 ) (118 )
Amortization of intangible assets2 (2 ) (2 ) (297 ) (188 ) (6 ) (495 )
Fees and other expenses related to acquisitions3 (43 ) (43 )
Non-GAAP (redefined) Measurement $ 4,594 $ 429 $ 232 $ 618 $ 21 $ 639 $ 630 $ 382 $ 2,951
Net effect of deferred revenues and related cost of revenues4 $ (447 ) $ (143 ) $ (96 ) $ 8 $ 12 $ $ $ $ (219 )

OperatingIncome

Net Income

Basic Earningsper Share

Diluted Earningsper Share

GAAP Measurement $ 987 $ 713 $ 0.96 $ 0.94
Stock-based compensation1 118 118 0.16 0.16
Amortization of intangible assets2 495 495 0.67 0.65
Fees and other expenses related to acquisitions3 43 48 0.06 0.06

Loss on extinguishment of debt5

10 0.01 0.01
Income tax impacts from items above6 (230 ) (0.31 ) (0.30 )
Non-GAAP (redefined) Measurement $ 1,643 $ 1,154 $ 1.55 $ 1.52
Net effect of deferred revenues and related cost of revenues4 $ (228 ) $ (180 ) $ (0.24 ) $ (0.23 )
1 Includes expenses related to stock-based compensation.
2 Reflects amortization of intangible assets from purchase price accounting.
3 Reflects fees and other expenses related to the acquisition of King Digital Entertainment ("King Acquisition"), inclusive of related debt financings and integration costs.
4 Reflects the net effect from deferral of revenues and (recognition) of deferred revenues, along with related cost of revenues, on certain of our online enabled products, including the effects of taxes.
5 Reflects the loss on extinguishment of debt.
6 Reflects the income tax impact associated with the above items. Tax impact on non-GAAP (redefined) 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.

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

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. For the nine months ended September 30, 2016, net income attributable to Activision Blizzard, Inc. common shareholders used to calculate non-GAAP (redefined) earnings per common share, assuming dilution, was $1,148 million, as compared to total net income of $1,154 million, for the same period.

For purposes of calculating earnings per share, we had, on a weighted-average basis, common shares outstanding of 739 million, participating securities of approximately 3 million, and dilutive shares of 14 million during the nine months ended September 30, 2016.

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, 2015

NetRevenues

Cost ofRevenues -Product Sales:Product Costs

Cost ofRevenues -Product Sales:SoftwareRoyalties andAmortization

Cost ofRevenues -Subs/Lic/Other:Game Operationsand DistributionCosts

Cost ofRevenues -Subs/Lic/Other:Software Royalties andAmortization

ProductDevelopment

Sales andMarketing

General andAdministrative

Total Costsand Expenses

GAAP Measurement $ 990 $ 179 $ 62 $ 71 $ 25 $ 159 $ 189 $ 109 $ 794
Stock-based compensation1 (3 ) (2 ) (6 ) (2 ) (15 ) (28 )
Amortization of intangible assets2 (1 ) (1 )
Non-GAAP (redefined) Measurement $ 990 $ 179 $ 58 $ 71 $ 23 $ 153 $ 187 $ 94 $ 765
Net effect of deferred revenues and related cost of revenues3 $ 50 $ (4 ) $ 36 $ 10 $ (18 ) $ $ $ $ 24

OperatingIncome

Net Income

Basic Earningsper Share

Diluted Earningsper Share

GAAP Measurement $ 196 $ 127 $ 0.17 $ 0.17
Stock-based compensation1 28 28 0.04 0.04
Amortization of intangible assets2 1 1
Income tax impacts from items above4 (9 ) (0.01 ) (0.01 )
Non-GAAP (redefined) Measurement $ 225 $ 147 $ 0.20 $ 0.20
Net effect of deferred revenues and related cost of revenues3 $ 26 $ 11 $ 0.01 $ 0.01
1 Includes expenses related to stock-based compensation.
2 Reflects amortization of intangible assets from purchase price accounting.
3 Reflects the net effect from deferral of revenues and (recognition) of deferred revenues, along with related cost of revenues, on certain of our online enabled products, including the effects of taxes.
4 Reflects the income tax impact associated with the above items. Tax impact on non-GAAP (redefined) 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.

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

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. For the three months ended September 30, 2015, net income attributable to Activision Blizzard, Inc. common shareholders used to calculate non-GAAP (redefined) earnings per common share, assuming dilution, was $146 million, as compared to total net income of $147 million, for the same period.

For purposes of calculating earnings per share, we had, on a weighted-average basis, common shares outstanding of 730 million, participating securities of approximately 8 million, and dilutive shares of 9 million during the three months ended September 30, 2015.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES
(Amounts in millions, except per share data)

Nine Months Ended September 30, 2015

NetRevenues

Cost ofRevenues -Product Sales:Product Costs

Cost ofRevenues -Product Sales:SoftwareRoyalties andAmortization

Cost ofRevenues -Subs/Lic/Other:Game Operationsand DistributionCosts

Cost ofRevenues -Subs/Lic/Other:SoftwareRoyalties andAmortization

ProductDevelopment

Sales andMarketing

General andAdministrative

Total Costsand Expenses

GAAP Measurement $ 3,312 $ 528 $ 273 $ 192 $ 54 $ 453 $ 445 $ 297 $ 2,242
Stock-based compensation1 (7 ) (3 ) (20 ) (7 ) (33 ) (70 )
Amortization of intangible assets2 (4 ) (4 )
Non-GAAP (redefined) Measurement $ 3,312 $ 528 $ 262 $ 192 $ 51 $ 433 $ 438 $ 264 $ 2,168
Net effect of deferred revenues and related cost of revenues3 $ (809 ) $ (181 ) $ (137 ) $ 17 $ 9 $ $ $ $ (292 )

OperatingIncome

Net Income

Basic Earningsper Share

Diluted Earningsper Share

GAAP Measurement $ 1,070 $ 733 $ 0.99 $ 0.98
Stock-based compensation1 70 70 0.10 0.09
Amortization of intangible assets2 4 4 0.01 0.01
Income tax impacts from items above4 (21 ) (0.03 ) (0.03 )
Non-GAAP (redefined) Measurement $ 1,144 $ 786 $ 1.07 $ 1.05
Net effect of deferred revenues and related cost of revenues3 $ (517 ) $ (419 ) $ (0.57 ) $ (0.56 )
1 Includes expenses related to stock-based compensation.
2 Reflects amortization of intangible assets from purchase price accounting.
3 Reflects the net effect from deferral of revenues and (recognition) of deferred revenues, along with related cost of revenues, on certain of our online enabled products, including the effects of taxes.
4 Reflects the income tax impact associated with the above items. Tax impact on non-GAAP (redefined) 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.

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

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. For the nine months ended September 30, 2015, net income attributable to Activision Blizzard, Inc. common shareholders used to calculate non-GAAP (redefined) earnings per common share, assuming dilution, was $776 million, as compared to total net income of $786 million, for the same period.

For purposes of calculating earnings per share, we had, on a weighted-average basis, common shares outstanding of 727 million, participating securities of approximately 9 million, and dilutive shares of 9 million during the nine months ended September 30, 2015.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

FINANCIAL INFORMATION
For the Three and Nine Months Ended September 30, 2016 and 2015
(Amounts in millions)
Three Months Ended
September 30, 2016 September 30, 2015

$ Increase(Decrease)

% Increase(Decrease)

Amount

% of Total1

Amount

% of Total1

Net Revenues by Distribution Channel
Digital online channels2 $ 1,344 86 % $ 629 64 % $ 715 114 %
Retail channels 157 10 281 28 (124 ) (44 )
Other3 67 4 80 8 (13 ) (16 )
Total consolidated net revenues

$

1,568

100

%

$

990

100

%

$

578

58
Change in deferred revenues4
Digital online channels2

$

158

$

68

Retail channels (96 ) (18 )
Total changes in deferred revenues

$

62

$

50

Nine Months Ended
September 30, 2016 September 30, 2015

$ Increase(Decrease)

% Increase(Decrease)

Amount

% of Total1

Amount

% of Total1

Net Revenues by Distribution Channel
Digital online channels2 $ 3,412 74 % $ 1,779 54 % $ 1,633 92 %
Retail channels 1,013 22 1,344 41 (331 ) (25 )
Other3 169 4 189 6 (20 ) (11 )
Total consolidated net revenues

$

4,594

100

%

$

3,312

100

%

$

1,282

39
Change in deferred revenues4
Digital online channels2

$

288

$

67

Retail channels (735 ) (876 )
Total changes in deferred revenues

$

(447

)

$

(809

)

1 The percentages of total are presented as calculated. Therefore the sum of these percentages, as presented, may differ due to the impact of rounding.
2 Net revenues from digital online channels represent revenues from digitally distributed subscriptions, licensing royalties, value-added services, downloadable content, microtransactions, and products.
3 Net revenues from Other include revenues from our Major League Gaming, studios, and distribution businesses.
4 Reflects the net effect from deferral of revenues and (recognition) of deferred revenues on certain of our online enabled products.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

FINANCIAL INFORMATION
For the Three and Nine Months Ended September 30, 2016 and 2015
(Amounts in millions)
Three Months Ended
September 30, 2016 September 30, 2015

$ Increase(Decrease)

% Increase(Decrease)

Amount

% of Total1

Amount

% of Total1

Net Revenues by Platform
Console $ 452 29 % $ 420 42 % $ 32 8 %

PC2

609 39 359 36 250 70

Mobile and ancillary3

440 28 131 13 309 NM
Other4 67 4 80 8 (13 ) (16 )
Total consolidated net revenues

$

1,568

100

%

$

990

100

%

$

578

58
Change in deferred revenues5
Console

$

(35

)

$

80

PC2

82 (36 )
Mobile and ancillary3 15 6
Total changes in deferred revenues

$

62

$

50

Nine Months Ended
September 30, 2016 September 30, 2015

$ Increase(Decrease)

% Increase(Decrease)

Amount

% of Total1

Amount

% of Total1

Net Revenues by Platform

Console

$ 1,867 41 % $ 1,737 52 % $ 130 7 %

PC2

1,421 31 1,114 34 307 28

Mobile and ancillary3

1,137 25 272 8 865 NM

Other4

169 4 189 6 (20 ) (11 )
Total consolidated net revenues

$

4,594

100

%

$

3,312

100

%

$

1,282

39
Change in deferred revenues5
Console

$

(683

)

$

(728

)

PC2

202 (113 )

Mobile and ancillary3

34 32
Total changes in deferred revenues

$

(447

)

$

(809

)

1 The percentages of total are presented as calculated. Therefore the sum of these percentages, as presented, may differ due to the impact of rounding.
2 Net revenues from PC include revenues that were historically shown as Online.
3 Net revenues from mobile and ancillary include revenues from handheld, mobile and tablet devices, as well as non-platform specific game related revenues such as standalone sales of toys and accessories from the Skylanders franchise and other physical merchandise and accessories.
4 Net revenues from Other include revenues from our Major League Gaming, studios, and distribution businesses.
5 Reflects the net effect from deferral of revenues and (recognition) of deferred revenues on certain of our online enabled products.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

FINANCIAL INFORMATION
For the Three and Nine Months Ended September 30, 2016 and 2015
(Amounts in millions)
Three Months Ended
September 30, 2016 September 30, 2015

$ Increase(Decrease)

% Increase(Decrease)

Amount

% of Total1

Amount

% of Total1

Net Revenues by Geographic Region

Americas

$ 796 51 % $ 495 50 % $ 301 61 %
EMEA2 499 32 367 37 132 36
Asia Pacific 273 17 128 13 145 113
Total consolidated GAAP net revenues

$

1,568

100

%

$

990

100

%

$

578

58
Change in deferred revenues3
Americas

$

14

$

45

EMEA2 34 11
Asia Pacific 14 (6 )
Total changes in net revenues

$

62

$

50

Nine Months Ended

September 30, 2016

September 30, 2015

$ Increase(Decrease)

% Increase(Decrease)

Amount

% of Total1

Amount

% of Total1

Net Revenues by Geographic Region
Americas $ 2,411 52 % $ 1,750 53 % $ 661 38 %
EMEA2 1,528 33 1,219 37 309 25
Asia Pacific 655 14 343 10 312 91
Total consolidated GAAP net revenues

$

4,594

100

%

$

3,312

100

%

$

1,282

39
Change in deferred revenues3
Americas

$

(308

)

$

(502

)

EMEA2 (175 ) (298 )
Asia Pacific 36 (9 )
Total changes in net revenues

$

(447

)

$

(809

)

1 The percentages of total are presented as calculated. Therefore the sum of these percentages, as presented, may differ due to the impact of rounding.
2 EMEA consists of the Europe, Middle East, and Africa geographic regions.
3 Reflects the net effect from deferral of revenues and (recognition) of deferred revenues on certain of our online enabled products.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
For the Three and Nine Months Ended September 30, 2016 and 2015
(Amounts in millions)
Three Months Ended
September 30, 2016 September 30, 2015

$ Increase(Decrease)

% Increase(Decrease)

Amount

% ofTotal1

Amount

% ofTotal1

Segment net revenues:
Activision2 $ 377 24 % $ 591 62 % $ (214 ) (36 )%
Blizzard3 727 47 369 38 358 97
King4 459 29 459 NM
Reportable segments total 1,563 100 % 960 100 % 603 63
Reconciliation to consolidated net revenues:
Other segments5 67 80
Net effect from deferral of net revenues6 (62 ) (50 )
Consolidated net revenues $ 1,568 $ 990

$

578

58 %
Segment income (loss) from operations:
Activision2 $ 123 $ 122 $ 1 1 %
Blizzard3 321 128 193 151
King4 138 138 NM
Reportable segments total 582 250 332 133
Reconciliation to consolidated operating income and consolidated income before income tax expense
Other segments5 (7 ) 1
Net effect from certain revenues deferrals accounting treatment6 (33 ) (26 )
Stock-based compensation expense (33 ) (28 )
Amortization of intangible assets (211 ) (1 )
Fees and other expenses related to acquisitions7 (4 )
Consolidated operating income 294 196 98 50
Interest and other expense (income), net 63 51
Consolidated income before income tax expense $ 231 $ 145

$

86

59 %
Operating margin from total reportable segments 37.2 % 26.0 %
Nine Months Ended
September 30, 2016 September 30, 2015

$ Increase(Decrease)

% Increase(Decrease)

Amount

% ofTotal1

Amount

% ofTotal1

Segment net revenues:
Activision2 $ 1,069 27 % $ 1,208 52 % $ (139 ) (12 )%
Blizzard3 1,760 44 1,106 48 654 59
King4 1,149 29 1,149 NM
Reportable segments total 3,978 100 % 2,314 100 % 1,664 72
Reconciliation to consolidated net revenues:
Other segments5 169 189
Net effect from deferral of net revenues6 447 809
Consolidated net revenues $ 4,594 $ 3,312

$

1,282

39 %
Segment income (loss) from operations:
Activision2 $ 309 $ 244 $ 65 27 %
Blizzard3 740 383 357 93
King4 381 381 NM
Reportable segments total 1,430 627 803 128
Reconciliation to consolidated operating income and consolidated income before income tax expense
Other segments5 (15 )
Net effect from certain revenues deferrals accounting treatment6 228 517
Stock-based compensation expense (118 ) (70 )
Amortization of intangible assets (495 ) (4 )
Fees and other expenses related to acquisitions7 (43 )
Consolidated operating income 987 1,070 (83 ) (8 )
Interest and other expense (income), net 181 151
Consolidated income before income tax expense $ 806 $ 919

$

(113

)

(12 )%
Operating margin from total reportable segments 35.9 % 27.1 %
1 The percentages of total are presented as calculated. Therefore the sum of these percentages, as presented, may differ due to the impact of rounding.
2 Activision Publishing (“Activision”) — publishes interactive entertainment products and content.
3 Blizzard Entertainment, Inc. (“Blizzard”) — publishes interactive entertainment products and online subscription-based games.
4 King Digital Entertainment plc (“King”) — publishes interactive mobile entertainment products.
5 Other includes other income and expenses from operating segments managed outside the reportable segments, including our Major League Gaming, studios, and distribution businesses. Other also includes unallocated corporate income and expenses.
6 Reflects the net effect from deferral of revenues and (recognition) of deferred revenues, along with related cost of revenues, on certain of our online enabled products.
7 Reflects fees and other expenses related to the King Acquisition, inclusive of related debt financings and integration costs.

Our segments are consistent with our internal organizational structure, the manner in which our operations are reviewed and managed by our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), the manner in which we assess operating performance and allocate resources, and the availability of separate financial information. The CODM reviews segment performance exclusive of the impact of the change in deferred revenues and related cost of revenues with respect to certain of our online-enabled products, stock-based compensation expense, amortization of intangible assets as a result of purchase price accounting, and fees and other expenses related to financings and acquisitions.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
EBITDA and Adjusted EBITDA

For the Trailing Twelve Months Ended September 30, 2016
(Amounts in millions)

Trailing TwelveMonths Ended

December 31,2015

March 31,2016

June 30,2016

September 30,2016

September 30,2016

GAAP Net Income1

$ 159 $ 363 $ 151 $ 199 $ 872
Interest Expense, net 50 52 66 63 231

Provision for income taxes1

42 46 16 32 136
Depreciation and amortization 30 107 233 243 613
EBITDA 281 568 466 537 1,852

Stock-based compensation expense2

22 44 41 33 140

Fees and other expenses related to acquisitions3

5 34 4 4 47
Adjusted EBITDA (redefined) $ 308 $ 646 $ 511 $ 574 $ 2,039

Change in deferred net revenues and related cost of revenues4

$ 554 $ (369 ) $ 108 $ 33 $ 326
1

During the third quarter 2016, we adopted a new accounting standard on share based payments. The new standard requires that all excess tax benefits and shortfalls from share-based payments to be recorded as an income tax expense or benefit that is treated as discrete items in the reporting period in which they occur rather than be recorded to additional-paid-in-capital (APIC) as is required under previous guidance. The new standard requires us to present the effects on our financial statements as if we had adopted the standard on January 1, 2016. Accordingly, excess tax benefits previously recorded in APIC of $27 million and $24 million for the three months ended March 31, 2016, and June 30, 2016, respectively, are now recorded to income tax expense as a tax benefit. As such, for the three months ended March 31, 2016, and June 30, 2016, GAAP Net Income and Provision for Income Taxes has been revised for the adoption of this standard.

2

Includes expenses related to stock-based compensation.

3

Reflects fees and other expenses related to the King Acquisition, inclusive of related debt financings and integration costs.

4

Reflects the net effect from deferral of revenues and (recognition) of deferred revenues, along with related cost of revenues, on certain of our online enabled products.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(Amounts in millions)

Three Months Ended

September 30,2015

December 31,2015

March 31,2016

June 30,2016

September 30,2016

Year over Year %Increase(Decrease)

Cash Flow Data

Operating Cash Flow1

$ (171 ) $ 1,063 $ 337 $ 503 $ 456 367 %
Capital Expenditures 46 16 27 44 28 (39 )

Non-GAAP Free Cash Flow2

(217 ) 1,047 310 459 428 297
Operating Cash Flow - TTM3 1,401 1,259 1,373 1,732 2,359 68
Capital Expenditures - TTM3 112 111 117 133 115 3
Non-GAAP Free Cash Flow - TTM3 $ 1,289 $ 1,148 $ 1,256 $ 1,599 $ 2,244 74 %
1

During the third quarter 2016, we adopted a new accounting standard on share based payments. The new standard requires excess tax benefits and shortfalls associated with share-based payments to be reported within operating activities instead of financing activities as is required under current guidance. We elected to apply this guidance retrospectively for all periods presented resulting in increases in our operating cash flow of $10 million, $34 million, $28 million, $24 million, and $12 million for the three months ended September 30, 2015, three months ended December 31, 2015, three months ended March 31, 2016, three months ended June 30, 2016, and three months ended September 30, 2016, respectively.

2

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

3 TTM represents trailing twelve months. Operating Cash Flow for the three months ended December 31, 2014, three months ended March 31, 2015, and three months ended June 30, 2015, was $1,205 million, $223 million, and $144 million, respectively. Capital Expenditures for the three months ended December 31, 2014, three months ended March 31, 2015. and three months ended June 30, 2015, was $17 million, $21 million, and $28 million, respectively. The adoption of the accounting standard discussed above resulted in increases in our operating cash flow of $10 million, $14 million, and $9 million for three months ended December 31, 2014, three months ended March 31, 2015, and three months ended June 30, 2015, respectively.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
Outlook for the Three Months and Year Ending December 31, 2016
GAAP to Non-GAAP (redefined) Reconciliation
(Amounts in millions, except per share data)
Outlook for the Outlook for the
Three Months Ending Year Ending
December 31, 2016 December 31, 2016
Net Revenues1 $

1,856

$

6,450

Change in deferred revenues2 $

522

$

75

Earnings Per Diluted Share (GAAP) $

0.05

$

0.98

Excluding the impact of:
Stock-based compensation3 0.06 0.22
Amortization of intangible assets4 0.28 0.93
Fees and other expenses related to acquisitions5 0.12 0.19
Income tax impacts from items above6 (0.10 ) (0.40 )
Earnings Per Diluted Share (Non-GAAP redefined) $

0.40

$

1.92

Net effect of deferred net revenues and related cost of revenues on Earnings Per Diluted Share7 $

0.34

$

0.10

1 Net Revenues represents the revenue outlook for both GAAP and Non-GAAP (redefined) as they are measured the same.
2 Reflects the net effect from deferral of revenues and (recognition) of deferred revenues on certain of our online enabled products.
3 Reflects expenses related to stock-based compensation.
4 Reflects amortization of intangible assets from purchase price accounting, including intangible assets from the King Acquisition.
5

Reflects fees and other expenses related to the King Acquisition, inclusive of related debt financings and integration costs, as well as anticipated costs associated with future debt refinancing activities. For the three months ended December 31, 2016, this includes a loss on extinguishment of debt of $82 million that was recognized in October 2016 upon extinguishment of $1.5 billion of our senior notes. For the year ending December 31, 2016, this includes a loss on extinguishment of debt of $92 million, inclusive of a $10 million loss recognized in the third quarter of 2016 related to our term loan refinancing activities.

6

Reflects the income tax impacts associated with the above items. For the nine months ended September 30, 2016, we recognized excess tax benefits on share based payments of $0.08 from the third quarter 2016 adoption of a new accounting standard on share based payments, which is included in the outlook for the year ending December 31, 2016. The new standard requires that all excess tax benefits and shortfalls from share-based payments be recorded as an income tax expense or benefit that is treated as a discrete item in the reporting period in which it occurs. Due to the inherent uncertainties in share price and option exercise behavior, we do not forecast excess tax benefits or tax shortfalls.

7 Reflects the net effect from deferral of revenues and (recognition) of deferred revenues, along with related cost of revenues, on certain of our online enabled products, including the effect of taxes.

The per share adjustments and the GAAP and Non-GAAP (redefined) earnings per share information are presented as calculated. Therefore the sum of these measures, as presented, may differ due to the impact of rounding.

Activision Blizzard, Inc.

Colin Roussil

Sr. Director, Investor Relations

424-272-3164

[email protected]

or

Mary Osako

SVP, Global Communications

424-322-5166

[email protected]

Source: Activision Blizzard, Inc.

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