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Activision Blizzard Announces Agreement to Acquire King Digital Entertainment and Better-Than-Expected Third Quarter 2015 Financial Results

November 2, 2015 10:31 PM

Company Increases CY 2015 Revenues and EPS Outlook

Company Delivered Record Quarterly Digital Revenues, Generating $697 Million in Non-GAAP Digital Revenues, Growing 38% Year-Over-Year

Announces Agreement to Acquire King Digital Entertainment for $5.9 Billion, Accretive to Estimated 2016 Non-GAAP EPS by ~30%1

SANTA MONICA, Calif.--(BUSINESS WIRE)-- Activision Blizzard, Inc. (Nasdaq: ATVI) today announced better-than-expected financial results for the third quarter of 2015 and an agreement to acquire King Digital Entertainment for $5.9 billion in equity value ($5.0 billion in enterprise value). The addition of King’s highly-complementary business further positions Activision Blizzard for growth across platforms, audiences, genres, and business models. Please see our separate press release for details.

As a result of this announcement, Activision Blizzard will host a conference call to discuss both the transaction and earnings. The call will be broadcast over the Internet at 5 a.m. Pacific Time (8:00 a.m. Eastern Time) before market opens on Tuesday, November 3, 2015. Please see further call-in details below.

Third Quarter

(in millions, except EPS)

2015

PriorOutlook*

2014

GAAP

Net Revenues

$ 990 $ 875 $ 753
EPS $ 0.17 $ 0.08 $ (0.03)

Non-GAAP

Net Revenues

$ 1,040 $ 930 $ 1,170
EPS $ 0.21 $ 0.14 $ 0.23

*Prior outlook was provided by the company on August 4, 2015 in its earnings release.

For the quarter ended September 30, 2015, Activision Blizzard’s GAAP net revenues were $990 million, as compared with $753 million for the third quarter of 2014. On a non-GAAP basis, the company’s net revenues were $1.04 billion, as compared with $1.17 billion for the third quarter of 2014. For the third quarter, GAAP net revenues from digital channels were a record $629 million. On a non-GAAP basis, net revenues from digital channels were a record $697 million and represented a Q3 record 67% of the company’s total revenues, growing 38% year-over-year.

For the quarter ended September 30, 2015, Activision Blizzard’s GAAP earnings per diluted share were $0.17, as compared with a loss of $0.03 for the third quarter of 2014. On a non-GAAP basis, the company’s earnings per diluted share were $0.21, as compared with $0.23 for the third quarter of 2014.

At constant FXA, non-GAAP revenues were down 4% and EPS was up 13% for the quarter versus prior year. Year-to-date, non-GAAP revenues and EPS were up 5% and 35%, respectively, year-over-year, given strong engagement and recurring digital trends on our year-round monetizing franchises.

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

Bobby Kotick, Chief Executive Officer of Activision Blizzard, said, “We continue to benefit from our focus on creating the world’s best interactive entertainment. Our incredibly talented employees around the world once again delivered great content and strong financial results. Mobile gaming is the largest and fastest-growing opportunity for interactive entertainment and we will have one of the world’s most successful mobile game companies and its talented teams providing great content to new customers, in new geographies throughout the world. King has a truly fantastic management team and over 1,600 incredibly talented employees and we are excited to welcome them into the Activision Blizzard family.”

Selected Business Highlights:

Company Outlook:

Activision Blizzard’s fourth quarter and calendar year 2015 outlook is, as follows:

Prior Outlook* Current Outlook

(in millions, except

EPS)

GAAPOutlook

Non-GAAP Outlook

GAAP Outlook

Non-GAAP Outlook

CY 2015

Net Revenues $ 4,425 $ 4,600 $ 4,530 $ 4,650
EPS $ 1.06 $ 1.30 $ 1.07 $ 1.31

Fully Diluted

Shares**

750 750 750 750

Q4 2015

Net Revenues N/A N/A $ 1,218 $ 2,148
EPS N/A N/A $ 0.09 $ 0.82

Fully Diluted

Shares**

N/A N/A

753

753

The following table compares our CY14 actual earnings per share to CY15 outlook earnings per share.

Comparison
EPS

Prior Non-GAAP Outlook*

Current Non-GAAP Outlook

Change
CY14 – Actuals $ 1.42 $ 1.42
Slate / Operations 0.15 0.17 0.02
Foreign Currency (0.19) (0.20) (0.01)
Tax Rate & Share Count (0.08) (0.08)
CY15 – Outlook $ 1.30 $ 1.31 0.01

Currency Assumptions for 2015 Outlook (Q3-Q4):

* Prior outlook was provided by the company on August 4, 2015 in its earnings release.** Fully diluted weighted average shares include participating securities and dilutive options on a weighted average basis.

Conference Call

Activision Blizzard will host a conference call that will be broadcast over the Internet at 5 a.m. Pacific Time (8:00 a.m. Eastern Time) before market opens on November 3, 2015. The previously scheduled conference call for 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time) is cancelled. Details for the call have changed and are as follows:

Tuesday, November 3, 2015

5:00 a.m. Pacific Time (8:00 a.m. Eastern Time)

To listen to the call, please log onto:

http://investor.activision.com/events.cfm

Or dial:

U.S. and Canada: 888-596-2572

International: 913-312-0653

Passcode: 9960349

King will announce third quarter 2015 results and hold its conference call for analysts and investors on November 4, 2015 as regularly scheduled.

About Activision Blizzard

Activision Blizzard, Inc., a member of the S&P 500, is the world’s most successful standalone interactive entertainment company. It develops and publishes games based on some of the most beloved entertainment franchises, including Call of Duty®, Destiny, Skylanders®, Guitar Hero®, World of Warcraft®, StarCraft®, Diablo®, and Hearthstone®: Heroes of Warcraft™. The company is one of the FORTUNE “100 Best Companies To Work For®” 2015. Headquartered in Santa Monica, California, it has operations throughout the world, and its games are played in 196 countries. Activision Blizzard makes games for leading interactive platforms. More information about Activision Blizzard and its products can be found on the company's website, www.activisionblizzard.com.

1 Based on 2016E IBES Consensus estimates as of October 30, 2015. Assumes $2.3 billion of incremental term loan financing at 3.25% interest rate based on Activision Blizzard current Term Loan interest rate and US marginal tax rate of 36.3%. Assumes transaction closes on March 31, 2016 and additional dilutive share impact to EPS of 5 million shares from our internal estimate of conversion equity based on outstanding options, restricted shares, and restricted stock units of King as of October 30, 2015 (i.e. no further assumption of exercises, vesting, grants of equity awards post October 30, 2015). Does not include any synergies.2 The NPD Group and GfK Chart-Track

A Constant FX Definition: Constant FX provides current period results converted into USD using the average exchange rates from the comparative prior periods rather than the actual exchange rates in effect during the respective current periods.

B 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 by the number of months in the period. An individual who plays two of our games would be counted as two users. For Activision Publishing MAUs, an individual who plays the same game on two platforms or devices in the relevant period would be counted as two users due to technical limitations. For Blizzard MAUs, an individual who plays the same game on two platforms or devices in the relevant period would be counted as one user.

C Subscriber Definition: World of Warcraft subscribers include individuals who have paid a subscription fee or have an active prepaid card to play World of Warcraft, as well as those who have purchased the game and are within their free month of access. Internet Game Room players who have accessed the game over the last thirty days are also counted as subscribers. The above definition excludes all players under free promotional subscriptions, expired or cancelled subscriptions, and expired prepaid cards. Subscribers in licensees' territories are defined along the same rules.

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

Activision Blizzard provides net 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. 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:

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 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 revenues, 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.

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 revenues 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 revenues 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 revenues 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 revenues and the related cost of sales provides a much more timely indication of trends in our operating results.

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 product releases; (3) statements of future financial or operating performance; (4) statements relating to the agreement to acquire King Digital Entertainment plc and the potential impact of that proposed transaction; 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: sales levels of Activision Blizzard’s titles; increasing 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, particularly during the console transitions; 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; changing business models, 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; 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 Activision Blizzard’s most recent annual report on Form 10-K. Additional information regarding forward-looking statements related to acquisition of King announced today are set for in the press release announcing the acquisition.

The forward-looking statements in this presentation are based on information available to the Company as of the date of this press release and, while believed to be true when made, may ultimately prove to be incorrect. The Company may change its intention, belief or expectation, at any time and without notice, based upon any changes in such factors, in the Company’s assumptions or otherwise. The Company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the original date of this press release, August 4, 2015, or to reflect the occurrence of unanticipated events.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in millions, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2015 2014 2015 2014
Net revenues
Product sales $ 425 $ 337 $ 1,736 $ 1,693
Subscription, licensing and other revenues1 565 416 1,576 1,140
Total net revenues 990 753 3,312 2,833
Costs and expenses
Cost of sales - product costs 195 156 560 568
Cost of sales - online 56 56 161 170
Cost of sales - software royalties and amortization 81 34 314 136
Cost of sales - intellectual property licenses 5 7 12 20
Product development 159 131 453 387
Sales and marketing 189 221 445 465
General and administrative 109 140 297 342
Total costs and expenses 794 745 2,242 2,088
Operating income 196 8 1,070 745
Interest and other expense, net 51 51 151 152
Income (loss) before income tax expense (benefit) 145 (43 ) 919 593
Income tax expense (benefit) 18 (20 ) 186 119
Net income (loss) $ 127 $ (23 ) $ 733 $ 474

Basic earnings (loss) per common share 2

$ 0.17 $ (0.03 ) $ 0.99 $ 0.65
Weighted average common shares outstanding 730 718 727 714

Diluted earnings (loss) per common share 2

$ 0.17

$

(0.03

)

$ 0.98 $ 0.64
Weighted average common shares outstanding assuming dilution 739 718 736 725

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, 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 8 million and 9 million for the three and nine months ended September 30, 2015, respectively, and 14 million and 16 million for the three and nine months ended September 30, 2014, respectively. 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 periods. For the three and nine months ended September 30, 2014, net income (loss) attributable to Activision Blizzard, Inc. common shareholders used to calculate earnings per common share, assuming dilution, was $(23) million and $462 million, respectively, as compared to total net income (loss) of $(23) million and $474 million, respectively, for the same periods.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in millions)
September 30, December 31,
2015 2014
Assets
Current assets
Cash and cash equivalents $ 4,365 $ 4,848
Short-term investments 154 10
Accounts receivable, net 503 659
Inventories, net 238 123
Software development 342 452
Intellectual property licenses 27 5
Deferred income taxes, net 373 368
Other current assets 307 444
Total current assets 6,309 6,909
Long-term investments 9 9
Software development 73 20
Intellectual property licenses — 18
Property and equipment, net 200 157
Other assets 171 85
Intangible assets, net 24 29
Trademark and trade names 433 433
Goodwill 7,083 7,086
Total assets $ 14,302 $ 14,746
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 309 $ 325
Deferred revenues 907 1,797
Accrued expenses and other liabilities 394 592
Total current liabilities 1,610 2,714
Long-term debt, net 4,078 4,324
Deferred income taxes, net 110 114
Other liabilities 515 361
Total liabilities 6,313 7,513
Shareholders' equity
Common stock — —
Additional paid-in capital 10,209 9,924
Treasury stock (5,613 ) (5,762 )
Retained earnings 3,937 3,374
Accumulated other comprehensive loss (544 ) (303 )
Total shareholders’ equity 7,989 7,233
Total liabilities and shareholders’ equity $ 14,302 $ 14,746
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 Net Revenues Cost of Sales - Product Costs Cost of Sales - Online

Cost of Sales - Software Royalties and Amortization

Cost of Sales - Intellectual Property Licenses Product Development Sales and Marketing General and Administrative Total Costs and Expenses
GAAP Measurement $ 990 $ 195 $ 56 $ 81 $ 5 $ 159 $ 189 $ 109 $ 794
Less: Net effect from deferral of net revenues and related cost of sales1 50 7 — 17 — — — — 24
Less: Stock-based compensation2 — — (1 ) (4 ) — (6 ) (2 ) (15 ) (28 )
Less: Amortization of intangible assets3 — — — — (1 ) — — — (1 )
Non-GAAP Measurement $ 1,040 $ 202 $ 55 $ 94 $ 4 $ 153 $ 187 $ 94 $ 789

Operating Income Net Income Basic Earnings per Share Diluted Earnings per Share
GAAP Measurement $ 196 $ 127 $ 0.17 $ 0.17
Less: Net effect from deferral of net revenues and related cost of sales 26 11 0.01 0.01
Less: Stock-based compensation 28 19 0.03 0.03
Less: Amortization of intangible assets 1 1 — —
Non-GAAP Measurement $ 251 $ 158 $ 0.21 $ 0.21
Nine Months Ended September 30, 2015 Net Revenues Cost of Sales - Product Costs Cost of Sales - Online

Cost of Sales - Software Royalties and Amortization

Cost of Sales - Intellectual Property Licenses

Product Development Sales and Marketing General and Administrative Total Costs and Expenses
GAAP Measurement $ 3,312 $ 560 $ 161 $ 314 $ 12 $ 453 $ 445 $ 297 $ 2,242
Less: Net effect from deferral of net revenues and related cost of sales1 (809 ) (165 ) — (128 ) 1 — — — (292 )
Less: Stock-based compensation2 — — — (10 ) — (20 ) (7 ) (33 ) (70 )
Less: Amortization of intangible assets3 — — — — (4 ) — — — (4 )
Non-GAAP Measurement $ 2,503 $ 395 $ 161 $ 176 $ 9 $ 433 $ 438 $ 264 $ 1,876
Operating Income Net Income Basic Earnings per Share Diluted Earnings per Share
GAAP Measurement $ 1,070 $ 733 $ 0.99 $ 0.98
Less: Net effect from deferral of net revenues and related cost of sales (517 ) (419 ) (0.57 ) (0.56 )
Less: Stock-based compensation 70 50 0.07 0.07
Less: Amortization of intangible assets 4 3 — —
Non-GAAP Measurement $ 627 $ 367 $ 0.50 $ 0.49

1 Reflects the net change in deferred revenues and related cost of sales.

2 Includes expenses related to stock-based compensation.

3 Reflects amortization of intangible assets from purchase price accounting.

The per share adjustments and the GAAP and non-GAAP earnings per share information are 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 and nine months ended September 30, 2015, net income attributable to Activision Blizzard, Inc. common shareholders used to calculate non-GAAP earnings per common share, assuming dilution, was $156 million and $361 million, respectively, as compared to total net income of $158 million and $367 million, respectively, for the same periods. 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. 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
RECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES
(Amounts in millions, except per share data)
Three Months Ended September 30, 2014 Net Revenues Cost of Sales - Product Costs Cost of Sales - Online

Cost of Sales - Software Royalties and Amortization

Cost of Sales - Intellectual Property Licenses Product Development Sales and Marketing General and Administrative Total Costs and Expenses
GAAP Measurement $ 753 $ 156 $ 56 $ 34 $ 7 $ 131 $ 221 $ 140 $ 745
Less: Net effect from deferral of net revenues and related cost of sales1 417 80 — 157 — — — — 237
Less: Stock-based compensation2 — — — (1 ) — (5 ) (3 ) (13 ) (22 )
Less: Amortization of intangible assets3 — — — — (2 ) — — — (2 )
Less: Fees and other expenses related to the Purchase Transaction and related debt financings4 — — — — — — — (48 ) (48 )
Non-GAAP Measurement $ 1,170 $ 236 $ 56 $ 190 $ 5 $ 126 $ 218 $ 79 $ 910
Operating Income Net Income Basic Earnings per Share Diluted Earnings per Share
GAAP Measurement $ 8 $ (23 ) $ (0.03 ) $ (0.03 )
Less: Net effect from deferral of net revenues and related cost of sales 180 133 0.18 0.18
Less: Stock-based compensation 22 14 0.02 0.02
Less: Amortization of intangible assets 2 1 — —
Less: Fees and other expenses related to the Purchase Transaction and related debt financings4 48 48 0.07 0.07
Non-GAAP Measurement $ 260 $ 173 $ 0.24 $ 0.23
Nine Months Ended September 30, 2014 Net Revenues Cost of Sales - Product Costs Cost of Sales - Online

Cost of Sales - Software Royalties and Amortization

Cost of Sales - Intellectual Property Licenses Product Development Sales and Marketing General and Administrative Total Costs and Expenses
GAAP Measurement $ 2,833 $ 568 $ 170 $ 136 $ 20 $ 387 $ 465 $ 342 $ 2,088
Less: Net effect from deferral of net revenues and related cost of sales1 (233 ) (83 ) — 109 1 — — — 27
Less: Stock-based compensation2 — — — (12 ) — (17 ) (6 ) (41 ) (76 )
Less: Amortization of intangible assets3 — — — — (4 ) — — — (4 )
Less: Fees and other expenses related to the Purchase Transaction and related debt financings4 — — — — — — — (48 ) (48 )
Non-GAAP Measurement $ 2,600 $ 485 $ 170 $ 233 $ 17 $ 370 $ 459 $ 253 $ 1,987
Operating Income Net Income Basic Earnings per Share Diluted Earnings per Share
GAAP Measurement $ 745 $ 474 $ 0.65 $ 0.64
Less: Net effect from deferral of net revenues and related cost of sales (260 ) (212 ) (0.29 ) (0.29 )
Less: Stock-based compensation 76 46 0.06 0.06
Less: Amortization of intangible assets 4 3 — —
Less: Fees and other expenses related to the Purchase Transaction and related debt financings4 48 48 0.07 0.07
Non-GAAP Measurement $ 613 $ 359 $ 0.49 $ 0.48

1 Reflects the net change in deferred revenues and related cost of sales.

2 Includes expenses related to stock-based compensation.

3 Reflects amortization of intangible assets from purchase price accounting.

4 Reflects fees and other expenses (including legal fees, costs, expenses and accruals) related to the repurchase of 429 million shares of our common stock from Vivendi (the "Purchase Transaction") completed on October 11, 2013 and related debt financings.

The per share adjustments and the GAAP and non-GAAP earnings per share information are 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 and nine months ended September 30, 2014, net income attributable to Activision Blizzard, Inc. common shareholders used to calculate non-GAAP earnings per common share, assuming dilution, was $170 million and $350 million, respectively, as compared to total net income of $173 million and $359 million, respectively, for the same periods. For purposes of calculating earnings per share, we had, on a weighted-average basis, common shares outstanding of 718 million, participating securities of approximately 14 million, and dilutive shares of 10 million during the three months ended September 30, 2014. For purposes of calculating earnings per share, we had, on a weighted-average basis, common shares outstanding of 714 million, participating securities of approximately 16 million, and dilutive shares of 11 million during the nine months ended September 30, 2014.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
For the Three and Nine Months Ended September 30, 2015 and 2014
(Amounts in millions)
Three Months Ended
September 30, 2015 September 30, 2014

$ Increase (Decrease)

% Increase (Decrease)

Amount % of Total1 Amount % of Total1
GAAP Net Revenues by Distribution Channel
Retail channels $

281

28

% $ 171 23 % $

110

64

%
Digital online channels2

629

64

504 67

125

25

Total Activision and Blizzard 910 92 675 90 235 35
Distribution 80 8 78 10 2 3
Total consolidated GAAP net revenues 990 100 753 100 237 31
Change in Deferred Revenues3
Retail channels

(18

) 416
Digital online channels2

68

1
Total changes in deferred revenues 50 417
Non-GAAP Net Revenues by Distribution Channel
Retail channels 263 25 587 50 (324 ) (55 )
Digital online channels2 697 67 505 43 192 38
Total Activision and Blizzard 960 92 1,092 93 (132 ) (12 )
Distribution 80 8 78 7 2 3
Total non-GAAP net revenues4 $ 1,040 100 % $ 1,170 100 % $ (130 ) (11 )%
Nine Months Ended
September 30, 2015 September 30, 2014

$ Increase (Decrease)

% Increase (Decrease)

Amount % of Total1 Amount % of Total1
GAAP Net Revenues by Distribution Channel
Retail channels $

1,344

41 % $ 1,257 44 % $

87

7 %
Digital online channels2

1,779

54 1,358 48

421

31

Total Activision and Blizzard 3,123 94 2,615 92 508 19
Distribution 189 6 218 8 (29 ) (13 )
Total consolidated GAAP net revenues 3,312 100 2,833 100 479 17
Change in Deferred Revenues3
Retail channels

(876

) (388 )
Digital online channels2

67

155
Total changes in deferred revenues (809 ) (233 )
Non-GAAP Net Revenues by Distribution Channel
Retail channels 468 19 869 33 (401 ) (46 )
Digital online channels2 1,846 74 1,513 58 333 22
Total Activision and Blizzard 2,314 92 2,382 92 (68 ) (3 )
Distribution 189 8 218 8 (29 ) (13 )
Total non-GAAP net revenues4 $ 2,503 100 % $ 2,600 100 % $ (97 ) (4 )%

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, micro-transactions, and products.

3 We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred revenues.

4 Total non-GAAP net revenues presented also represents our total operating segment net revenues.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
For the Three Months Ended September 30, 2015 and 2014
(Amounts in millions)
Three Months Ended
September 30, 2015 September 30, 2014

$ Increase (Decrease)

% Increase (Decrease)

Amount % of Total1 Amount % of Total1
GAAP Net Revenues by Segment/Platform Mix
Activision and Blizzard:
Online2 $ 195 20 % $ 205 27 % $ (10 ) (5 )%
PC 164 17 165 22 (1 ) (1 )
Next-generation (PS4, Xbox One, Wii U) 245 25 109 14 136 125
Prior-generation (PS3, Xbox 360, Wii) 175 18 161 21 14 9
Total console3 420 42 270 36 150 56
Mobile and other4 131 13 35 5 96 NM
Total Activision and Blizzard 910 92 675 90 235 35
Distribution:
Total Distribution 80 8 78 10 2 3
Total consolidated GAAP net revenues 990 100 753 100 237 31
Change in Deferred Revenues5
Activision and Blizzard:
Online2 (40 ) 4
PC 4 (69 )
Next-generation (PS4, Xbox One, Wii U) 88 359
Prior-generation (PS3, Xbox 360, Wii) (8 ) 123
Total console3 80 482
Mobile and other4 6 —
Total changes in deferred revenues 50 417
Non-GAAP Net Revenues by Segment/Platform Mix
Activision and Blizzard:
Online2 155 15 209 18 (54 ) (26 )
PC 168 16 96 8 72 75
Next-generation (PS4, Xbox One, Wii U) 333 32 468 40 (135 ) (29 )
Prior-generation (PS3, Xbox 360, Wii) 167 16 284 24 (117 ) (41 )
Total console3 500 48 752 64 (252 ) (34 )
Mobile and other4 137 13 35 3 102 NM
Total Activision and Blizzard 960 92 1,092 93 (132 ) (12 )
Distribution:
Total Distribution 80 8 78 7 2 3
Total consolidated non-GAAP net revenues6 $ 1,040 100 % $ 1,170 100 % $ (130 ) (11 )%

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 Revenues from online consists of revenues from all World of Warcraft products, including subscriptions, boxed products, expansion packs, licensing royalties, and value-added services.

3 Downloadable content and their related revenues are included in each respective console platforms and total console.

4 Revenues from mobile and other includes revenues from handheld and mobile devices, as well as non-platform specific game related revenues, such as standalone sales of toys and accessories products from the Skylanders franchise and other physical merchandise and accessories.

5 We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred net revenues.

6 Total non-GAAP net revenues presented also represents our total operating segment net revenues.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
For the Nine Months Ended September 30, 2015 and 2014
(Amounts in millions)
Nine Months Ended
September 30, 2015 September 30, 2014

$ Increase (Decrease)

% Increase (Decrease)

Amount % of Total1 Amount % of Total1
GAAP Net Revenues by Segment/Platform Mix
Activision and Blizzard:
Online2 $ 687 21 % $ 601 21 % $ 86 14 %
PC 427 13 447 16 (20 ) (4 )
Next-generation (PS4, Xbox One, Wii U) 996 30 353 12 643 182
Prior-generation (PS3, Xbox 360, Wii) 741 22 1,049 37 (308 ) (29 )
Total console3 1,737 52 1,402 49 335 24
Mobile and other4 272 8 165 6 107 65
Total Activision and Blizzard 3,123 94 2,615 92 508 19
Distribution:
Total Distribution 189 6 218 8 (29 ) (13 )
Total consolidated GAAP net revenues 3,312 100 2,833 100 479 17
Change in Deferred Revenues5
Activision and Blizzard:
Online2 (165 ) 36
PC 52 18
Next-generation (PS4, Xbox One, Wii U) (365 ) 214
Prior-generation (PS3, Xbox 360, Wii) (363 ) (513 )
Total console3 (728 ) (299 )
Mobile and other4 32 12
Total changes in deferred revenues (809 ) (233 )
Non-GAAP Net Revenues by Segment/Platform Mix
Activision and Blizzard:
Online2 522 21 637 25 (115 ) (18 )
PC 479 19 465 18 14 3
Next-generation (PS4, Xbox One, Wii U) 631 25 567 22 64 11
Prior-generation (PS3, Xbox 360, Wii) 378 15 536 21 (158 ) (29 )
Total console3 1,009 40 1,103 42 (94 ) (9 )
Mobile and other4 304 12 177 7 127 72
Total Activision and Blizzard 2,314 92 2,382 92 (68 ) (3 )
Distribution:
Total Distribution 189 8 218 8 (29 ) (13 )
Total consolidated non-GAAP net revenues6 $ 2,503 100 % $ 2,600 100 % $ (97 ) (4 )%

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 Revenues from online consists of revenues from all World of Warcraft products, including subscriptions, boxed products, expansion packs, licensing royalties, and value-added services.

3 Downloadable content and their related revenues are included in each respective console platforms and total console.

4 Revenues from mobile and other includes revenues from handheld and mobile devices, as well as non-platform specific game related revenues, such as standalone sales of toys and accessories products from the Skylanders franchise and other physical merchandise and accessories.

5 We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred net revenues.

6 Total non-GAAP net revenues presented also represents our total operating segment net revenues.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
For the Three and Nine Months Ended September 30, 2015 and 2014
(Amounts in millions)
Three Months Ended
September 30, 2015 September 30, 2014

$ Increase (Decrease)

% Increase (Decrease)

Amount % of Total1 Amount % of Total1
GAAP Net Revenues by Geographic Region
North America $ 495 50 % $ 350 46 % $ 145 41 %
Europe 367 37 316 42 51 16
Asia Pacific 128 13 87 12 41 47
Total consolidated GAAP net revenues 990 100 753 100 237 31
Change in Deferred Revenues2
North America 45 274
Europe 11 135
Asia Pacific (6 ) 8
Total changes in net revenues 50 417
Non-GAAP Net Revenues by Geographic Region
North America 540 52 624 53 (84 ) (13 )
Europe 378 36 451 39 (73 ) (16 )
Asia Pacific 122 12 95 8 27 28
Total non-GAAP net revenues3 $ 1,040 100 % $ 1,170 100 % $ (130 ) (11 )%
Nine Months Ended
September 30, 2015 September 30, 2014

$ Increase (Decrease)

% Increase (Decrease)

Amount % of Total1 Amount % of Total1
GAAP Net Revenues by Geographic Region
North America $ 1,750 53 % $ 1,384 49 % $ 366 26 %
Europe 1,219 37 1,172 41 47 4
Asia Pacific 343 10 277 10 66 24
Total consolidated GAAP net revenues 3,312 100 2,833 100 479 17
Change in Deferred Revenues2
North America (502 ) (136 )
Europe (298 ) (102 )
Asia Pacific (9 ) 5
Total changes in net revenues (809 ) (233 )
Non-GAAP Net Revenues by Geographic Region
North America 1,248 50 1,248 48 — —
Europe 921 37 1,070 41 (149 ) (14 )
Asia Pacific 334 13 282 11 52 18
Total non-GAAP net revenues3 $ 2,503 100 % $ 2,600 100 % $ (97 ) (4 )%

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 We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred net revenues.

3 Total non-GAAP net revenues presented also represents our total operating segment net revenues.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
For the Three and Nine Months Ended September 30, 2015 and 2014
(Amounts in millions)
Three Months Ended
September 30, 2015 September 30, 2014

$ Increase (Decrease)

% Increase (Decrease)

Amount % of Total1 Amount % of Total1
Segment net revenues:
Activision2 $ 591 57 % $ 704 60 % $ (113 ) (16 )%
Blizzard3 369 35 388 33 (19 ) (5 )
Distribution4 80 8 78 7 2 3
Operating segment total 1,040 100 % 1,170 100 % (130 ) (11 )
Reconciliation to consolidated net revenues:
Net effect from deferral of net revenues (50 ) (417 )
Consolidated net revenues $ 990 $ 753 237 31 %
Segment income from operations:
Activision2 $ 122 $ 95 $ 27 28 %
Blizzard3 128 164 (36 ) (22 )
Distribution4 1 1 — —
Operating segment total 251 260 (9 ) (3 )
Reconciliation to consolidated operating income and consolidated income (loss) before income tax expense (benefit)
Net effect from deferral of net revenues and related cost of sales (26 ) (180 )
Stock-based compensation expense (28 ) (22 )
Amortization of intangible assets (1 ) (2 )
Fees and other expenses related to the Purchase Transaction and related debt financings5 — (48 )
Consolidated operating income 196 8 188 NM
Interest and other expense, net 51 51
Consolidated income (loss) before income tax expense (benefit) $ 145 $ (43 ) 188 NM
Operating margin from total operating segments 24.1 % 22.2 %
Nine Months Ended
September 30, 2015 September 30, 2014

$ Increase (Decrease)

% Increase (Decrease)

Amount % of Total1 Amount % of Total1
Segment net revenues:
Activision2 $ 1,208 48 % $ 1,193 46 % $ 15 1 %
Blizzard3 1,106 44 1,189 46 (83 ) (7 )
Distribution4 189 8 218 8 (29 ) (13 )
Operating segment total 2,503 100 % 2,600 100 % (97 ) (4 )
Reconciliation to consolidated net revenues:
Net effect from deferral of net revenues 809 233
Consolidated net revenues $ 3,312 $ 2,833 479 17 %
Segment income (loss) from operations:
Activision2 $ 244 $ 66 $ 178 NM
Blizzard3 383 548 (165 ) (30 )
Distribution4 — (1 ) 1 (100 )
Operating segment total 627 613 14 2
Reconciliation to consolidated operating income and consolidated income before income tax expense
Net effect from deferral of net revenues and related cost of sales 517 260
Stock-based compensation expense (70 ) (76 )
Amortization of intangible assets (4 ) (4 )
Fees and other expenses related to the Purchase Transaction and related debt financings5 — (48 )
Consolidated operating income 1,070 745 325 44
Interest and other expense, net 151 152
Consolidated income before income tax expense $ 919 $ 593 326 55 %
Operating margin from total operating segments 25.1 % 23.6 %

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 PC games and online subscription-based games in the MMORPG category.

4 Activision Blizzard Distribution (“Distribution”) — distributes interactive entertainment software and hardware products.

5 Reflects fees and other expenses (including legal fees, costs, expenses and accruals) related to the repurchase of 429 million shares of our common stock from Vivendi (the "Purchase Transaction") completed on October 11, 2013 and related debt financings.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
EBITDA and Adjusted EBITDA
For the Trailing Twelve Months Ended September 30, 2015
(Amounts in millions)
Trailing Twelve
Months Ended
December 31, March 31, June 30, September 30, September 30,
2014 2015 2015 2015 2015
GAAP Net Income $ 361 $ 394 $ 212 $ 127 $ 1,094
Interest Expense, net 51 50 50 51 202
Provision for income taxes 27 98 70 18 213
Depreciation and amortization 29 20 21 25 94
EBITDA 468 562 353 221 1,603
Deferral of net revenues and related cost of sales1 475 (362 ) (181 ) 26 (42 )
Stock-based compensation expense2 29 23 21 28 101
Fees and other expenses related to the Purchase Transaction and related debt financings3 (36 ) — — — (36 )
Adjusted EBITDA $ 936 $ 223 $ 193 $ 275 $ 1,626

1 Reflects the net change in deferred revenues and related cost of sales.

2 Includes expenses related to stock-based compensation.

3 Reflects fees and other expenses (including legal fees, costs, expenses and accruals) related to the repurchase of 429 million shares of our common stock from Vivendi (the "Purchase Transaction") completed on October 11, 2013 and related debt financings.

Trailing twelve months amounts are presented as calculated. Therefore the sum of the four quarters, as presented, may differ due to the impact of rounding.

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
Outlook for the Three Months and Year Ending December 31, 2015
GAAP to Non-GAAP Reconciliation
(Amounts in millions, except per share data)
Outlook for the Outlook for the
Three Months Ending Year Ending
December 31, 2015 December 31, 2015
Net Revenues (GAAP) $ 1,218 $ 4,530
Excluding the impact of:
Change in deferred revenues1

930

120

Net Revenues (Non-GAAP) $

2,148

$

4,650

Earnings Per Diluted Share (GAAP) $ 0.09 $ 1.07
Excluding the impact of:
Deferral of net revenues and related cost of sales2 0.68 0.12
Stock-based compensation3 0.03 0.10
Amortization of intangible assets4 0.01 0.01

Fees and other expenses related to acquisitions5

0.01 0.01
Earnings Per Diluted Share (Non-GAAP) $ 0.82 $ 1.31

1 Reflects the net change in deferred revenues.

2 Reflects the net change in deferred revenues and related cost of sales.

3 Reflects expenses related to stock-based compensation.

4 Reflects amortization of intangible assets from purchase price accounting.

5 Reflects fees and other expenses related to the proposed acquisition of King Digital Entertainment plc and the debt financings related thereto.

The per share adjustments and the GAAP and non-GAAP earnings (loss) 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.

Amrita Ahuja

SVP, Investor Relations

310-255-2075

[email protected]

or

Mary Osako

SVP, Global Communications

424-322-5166

[email protected]

Source: Activision Blizzard, Inc.

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