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Press release from Business Wire

Activision Blizzard Announces Better-Than-Expected Fourth Quarter and Calendar Year 2012 Results

<p class='bwalignc'> <i><b>Full Year Non-GAAP EPS Increased 27% to a Record $1.18 Company Generated More Than $1.3 Billion in Operating Cash Flow Company Increases Cash Dividend to $0.19 per Common Share</b></i> </p>

Thursday, February 07, 2013

Activision Blizzard Announces Better-Than-Expected Fourth Quarter and Calendar Year 2012 Results16:05 EST Thursday, February 07, 2013 SANTA MONICA, Calif. (Business Wire) -- Activision Blizzard, Inc. (Nasdaq: ATVI) today announced better-than-expected financial results for the fourth quarter and calendar year 2012. Fourth Quarter   Calendar Year(in millions, except EPS)2012   PriorOutlook*   2011     2012     2011GAAP       Net Revenues$1,768$1,485$1,407$4,856$4,755EPS$0.31   $0.19   $0.08   $1.01   $0.92Non-GAAPNet Revenues$2,595$2,412$2,408$4,987$4,489EPS$0.78   $0.70   $0.62   $1.18   $0.93*Prior Outlook was provided by the company on November 7, 2012 in its earnings release For calendar year 2012, Activision Blizzard delivered record GAAP net revenues of $4.86 billion, as compared with $4.76 billion for 2011. On a non-GAAP basis, the company's net revenues were $4.99 billion, as compared with $4.49 billion for 2011. For the calendar year 2012, GAAP net revenues from digital channels were $1.54 billion and represented 32% of the company's total revenues. On a non-GAAP-basis, for the calendar year 2012, net revenues from digital channels were a record $1.60 billion and represented 32% of the company's total net revenues. For calendar year 2012, Activision Blizzard delivered record GAAP earnings per diluted share of $1.01, as compared with $0.92 per diluted share for 2011. On a non-GAAP basis, the company also delivered record earnings per diluted share of $1.18, as compared with $0.93 per diluted share for 2011. For the quarter ended December 31, 2012, the company delivered record GAAP net revenues of $1.77 billion, as compared with $1.41 billion for the fourth quarter of 2011. On a non-GAAP basis, the company's net revenues were a record $2.60 billion, as compared with $2.41 billion for the fourth quarter of 2011. For the quarter ended December 31, 2012, Activision Blizzard's GAAP earnings per diluted share set a fourth quarter record of $0.31, as compared with earnings per diluted share of $0.08 for the fourth quarter of 2011. On a non-GAAP basis, the company's earnings per diluted share were a record $0.78, as compared with $0.62 for the fourth quarter of 2011. The company reports results on both a GAAP and a non-GAAP basis. Please refer to the tables at the back of this press release for a reconciliation of the company's GAAP and non-GAAP results. Bobby Kotick, Chief Executive Officer, Activision Blizzard, said, “We are very pleased to report that Activision Blizzard delivered the best performance in its history. With better-than-expected net revenues, record operating margins and record earnings, and over $1.3 billion in operating cash flow, we continue to set the industry success bar. I would like to thank our incredibly talented employees around the world for their passion, drive and creativity, which continues to fuel our success.” Kotick added, “As we look to 2013, we will continue to invest in our established franchises, as well as several new properties. We expect these investments to drive our growth over the long term and to enable us to deliver superior returns to our shareholders in the years to come. In the short-term, we expect to continue delivering strong profitability, but below our record setting 2012 performance, due to a challenged global economy, the ongoing console transition and a difficult year-over-year comparison because of Blizzard's record-shattering Diablo® III success in 2012.” Selected Business Highlights: In North America and Europe combined Activision Publishing was the #1 console and handheld publisher for the calendar year with the #1 and #3 best-selling franchises—Call of Duty and Skylanders.1 Activision Blizzard reported record digital revenues for the calendar year and was the #1 third-party interactive entertainment Western digital publisher.2 For the calendar year, in aggregate across all platforms in the U.S. and Europe, Activision Publishing's Black Ops II was the #1 best-selling title in dollars and Modern Warfare 3®was the #9 best-selling title in dollars.1 In November 2012, Black Ops II became the first video game ever to cross the $1 billion mark in 15-days, eclipsing “Avatar's” 17-day movie record.4 In both North America and Europe, Skylanders Giants™ was the #1 best-selling kids' title in dollars for the fourth quarter.¹ Additionally, for the calendar year, in North America and Europe combined, Skylanders Giants was the #5 best-selling game in dollars, and Skylanders Spyro's Adventure® was the #4 best-selling game in dollars.1 As of December 31, 2012, the Skylanders franchise has generated, life-to-date, more than $1 billion in worldwide sales,¹ and through January 2013, Activision has sold more than 100 million Skylanders toys worldwide.2 For the calendar year, Blizzard Entertainment had two top-10 PC games in North America and Europe. Diablo III was the #1 best-selling PC game at retail, breaking PC-game sales records with more than 12 million copies sold worldwide through December 31, 2012,and World of Warcraft®: Mists of Pandaria® wasthe #3 best-selling PC game at retail.5 As of December 31, 2012, Blizzard Entertainment's World of Warcraft remains the #1 subscription-based MMORPG, with more than 9.6 million subscribers.2Company Outlook On January 29, 2013, Activision Publishing released Revolution, the first downloadable map pack for Black Ops II, on the Xbox 360 video game and entertainment system from Microsoft. The company expects to release Revolution on other platforms during the first quarter. Additionally, on March 12, 2013, Blizzard Entertainment expects to release StarCraft® II: Heart of the Swarm™, the first expansion to Blizzard's award-winning real-time strategy game StarCraft II: Wings of Liberty®. The company is considering or may consider during 2013, substantial stock repurchases, dividends, acquisitions, licensing or other non-ordinary course transactions, and significant debt financings relating thereto. The company's first quarter and full year 2013 outlooks do not take into account any such transactions or financings that may or may not occur during the year, with the exception of the $0.19 cent per share cash dividend announced below. (in millions, except EPS)   GAAP Outlook     Non-GAAP OutlookCY 2013     Net Revenues $ 4,085 $ 4,175 EPS $ 0.68 $ 0.80 Q1 2013 Net Revenues $ 1,160 $ 690 EPS $ 0.29 $ 0.10 Board Declares Cash Dividend The Board of Directors declared a cash dividend of $0.19 per common share payable on May 15, 2013 to shareholders of record at the close of business on March 20, 2013. Conference Call Today at 4:30 p.m. EST, Activision Blizzard's management will host a conference call and Webcast to discuss the company's results for the quarter and year ended December 31, 2012 and management's outlook for 2013. The company welcomes all members of the financial and media communities and other interested parties to visit the “Investor Relations” area of www.activisionblizzard.comto listen to the conference call via live Webcast or to listen to the call live by dialing into 888-427-9414 in the U.S. with passcode 3168482.About Activision Blizzard Headquartered in Santa Monica, California, Activision Blizzard, Inc. is a worldwide online, PC, console, handheld and mobile device game publisher with leading positions across the major categories of the interactive entertainment software industry. Activision Blizzard maintains operations in the U.S., Canada, the United Kingdom, France, Germany, Ireland, Italy, Sweden, Spain, the Netherlands, Australia, South Korea and China. More information about Activision Blizzard and its products can be found on the company's website, www.activisionblizzard.com. 1According to The NPD Group, GfK Chart-Track and Activision Blizzard internal estimates, including toys and accessories 2According to Activision Blizzard internal estimates 3According to The NPD Group and Gfk Chart-Track 4According to Chart-Track retail customer sell-through information, internal company estimates and screenrant.com 5According to The NPD Group, GfK Chart-Track and Activision Blizzard internal estimates 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. The non-GAAP financial measures exclude the following items, as applicable in any given reporting period: the change in deferred net revenue and related cost of sales with respect to certain of the company's online-enabled games; expenses related to stock-based compensation; expenses related to restructuring; the amortization of intangibles, and impairment of intangible assets and goodwill; and the income tax adjustments associated with any of the above items. In the future, Activision Blizzard may also consider whether other significant non-recurring items should also be excluded in calculating the non-GAAP financial measures used by the company. Management believes that the presentation of these non-GAAP financial measures provides investors with additional useful information to measure Activision Blizzard's financial and operating performance. In particular, the measures facilitate comparison of operating performance between periods and help investors to better understand the operating results of Activision Blizzard by excluding certain items that may not be indicative of the company's core business, operating results or future outlook. Internally, management uses these non-GAAP financial measures in assessing the company's operating results, as well as in planning and forecasting. Activision Blizzard's non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles, and the terms non-GAAP net revenues, non-GAAP net income, non-GAAP earnings per share, and non-GAAP operating margin do not have a standardized meaning. Therefore, other companies may use the same or similarly named measures, but exclude different items, which may not provide investors a comparable view of Activision Blizzard's performance in relation to other companies. Management compensates for the limitations resulting from the exclusion of these items by considering the impact of the items separately and by considering Activision Blizzard's GAAP, as well as non-GAAP, results and outlook, and by presenting the most comparable GAAP measures directly ahead of non-GAAP measures, and by providing a reconciliation that indicates and describes the adjustments made. In addition to the reasons stated above, which are generally applicable to each of the items Activision Blizzard excludes from its non-GAAP financial measures, there are additional specific reasons why the company believes it is appropriate to exclude the change in deferred net revenue and related cost of sales with respect to certain of the company's online-enabled games. Since Activision Blizzard has determined that some of our games' online functionality represents an essential component of gameplay and, as a result, a more-than-inconsequential separate deliverable, we recognize revenue attributed to these game titles over their estimated service periods, which may range from five months to a maximum of less than a year. The related cost of sales is deferred and recognized as the related revenues are recognized. Internally, management excludes the impact of this change in deferred net revenue and related cost of sales in its non-GAAP financial measures when evaluating the company's operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team. Management believes this is appropriate because doing so enables an analysis of performance based on the timing of actual transactions with our customers, which is consistent with the way the company is measured by investment analysts and industry data sources. In addition, excluding the change in deferred net revenue and the related cost of sales provides a much more timely indication of trends in our operating results. Cautionary Note Regarding Forward-looking Statements: Information in this press release that involves Activision Blizzard's expectations, plans, intentions or strategies regarding the future, including statements under the heading “Company Outlook,” are forward-looking statements that are not facts and involve a number of risks and uncertainties. Activision Blizzard generally uses words such as “outlook,” “will,” “could,” “should,” “would,” “might,” “to be,” “plans,” “believes,” “may,” “expects,” “intends,” "anticipates," "estimate," “future," "plan," "positioned," "potential," "project," "remain," "scheduled," "set to," "subject to," "upcoming" and similar expressions to identify forward-looking statements. Factors that could cause Activision Blizzard's actual future results to differ materially from those expressed in the forward-looking statements set forth in this release include, but are not limited to, sales levels of Activision Blizzard's titles, increasing concentration of titles, shifts in consumer spending trends, the impact of the current macroeconomic environment, Activision Blizzard's ability to predict consumer preferences, including interest in specific genres such as first-person action and massively multiplayer online games and preferences among competing hardware platforms, the seasonal and cyclical nature of the interactive game market, changing business models including digital delivery of content, competition, including from used games and other forms of entertainment, possible declines in software pricing, product returns and price protection, product delays, the console transition, adoption rate and availability of new hardware (including peripherals) and related software, rapid changes in technology and industry standards, the current regulatory environment, litigation risks and associated costs, protection of proprietary rights, maintenance of relationships with key personnel, customers, licensees, licensors, vendors, and third-party developers, including the ability to attract, retain and develop key personnel and developers that can create high quality "hit" titles, counterparty risks relating to customers, licensees, licensors and manufacturers, domestic and international economic, financial and political conditions and policies, foreign exchange rates and tax rates, and the identification of suitable future acquisition opportunities and potential challenges associated with geographic expansion, and the other factors identified in the risk factors section of Activision Blizzard's most recent annual report on Form 10-K. The forward-looking statements in this release are based upon information available to Activision Blizzard as of the date of this release, and Activision Blizzard assumes no obligation to update any such forward-looking statements. Although these forward-looking statements are believed to be true when made, they may ultimately prove to be incorrect. These statements are not guarantees of the future performance of Activision Blizzard and are subject to risks, uncertainties and other factors, some of which are beyond its control and may cause actual results to differ materially from current expectations. ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)(Amounts in millions, except per share data)       Three Months Ended December 31,     Year Ended December 31,   2012     2011 2012     2011 Net revenues:   Product sales $ 1,413 $ 1,060 $ 3,620 $ 3,257   Subscription, licensing and other revenues1   355   347     1,236   1,498   Total net revenues   1,768   1,407     4,856   4,755 Costs and expenses: Cost of sales - product costs 483 483 1,116 1,134 Cost of sales - online subscriptions 60 65 263 255 Cost of sales - software royalties and amortization 87 85 194 218 Cost of sales - intellectual property licenses 52 96 89 165 Product development 222 249 604 629 Sales and marketing 232 281 578 545 General and administrative 148 122 561 456   Restructuring   -   1     -   25   Total costs and expenses   1,284   1,382     3,405   3,427 Operating income 484 25 1,451 1,328 Investment and other income (expense), net   3   (5 )   7   3 Income before income tax expense 487 20 1,458 1,331 Income tax expense   133   (79 )   309   246 Net income $ 354 $ 99   $ 1,149 $ 1,085                   Basic earnings per common share $ 0.31 $ 0.09 $ 1.01 $ 0.93 Weighted average common shares outstanding   1,111   1,139     1,112   1,148                   Diluted earnings per common share2 $ 0.31 $ 0.08 $ 1.01 $ 0.92 Weighted average common shares outstanding assuming dilution   1,115   1,147     1,118   1,156   1   Subscription, licensing and other revenues represents revenues from World of Warcraft subscriptions, Call of Duty Elite memberships, licensing royalties from our products and franchises, value-added services, downloadable content, and other miscellaneous revenues.   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 27 million and 24 million for the three months and year ended December 31, 2012, respectively, and we had, on a weighted-average basis, participating securities of approximately 17 million for the three months and year ended December 31, 2011. Net income attributable to Activision Blizzard Inc. common shareholders used to calculate earnings per common share assuming dilution was $345 million and $1,125 million for the three months and year ended December 31, 2012, as compared to the total net income of $354 million and $1,149 million for the same periods, respectively. Net income attributable to Activision Blizzard Inc. common shareholders used to calculate earnings per common share assuming dilution was $97 million and $1,069 million for the three months and year ended December 31, 2011, as compared to total net income of $99 million and $1,085 million for the same periods, respectively.     ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)(Amounts in millions)       December 31,     December 31,   2012 2011 ASSETS           Current assets:   Cash and cash equivalents $ 3,959 $ 3,165 Short-term investments 416 360 Accounts receivable, net 707 649 Inventories, net 209 144 Software development 164 137 Intellectual property licenses 11 22 Deferred income taxes, net 487 507     Other current assets   321     396       Total current assets   6,274     5,380     Long-term investments 8 16   Software development 129 62   Intellectual property licenses 30 12   Property and equipment, net 141 163   Other assets 11 12   Intangible assets, net 68 88   Trademark and trade names 433 433     Goodwill   7,106     7,111       Total assets $ 14,200   $ 13,277             LIABILITIES AND SHAREHOLDERS' EQUITY         Current liabilities: Accounts payable $ 343 $ 390 Deferred revenues 1,657 1,472     Accrued expenses and other liabilities   652     694       Total current liabilities   2,652     2,556   Deferred income taxes, net 25 55     Other liabilities   206     174       Total liabilities   2,883     2,785     Shareholders' equity: Common stock --- --- Additional paid-in capital 9,450 9,616 Retained earnings 1,893 948     Accumulated other comprehensive income (loss)   (26 )   (72 )     Total shareholders' equity   11,317     10,492       Total liabilities and shareholders' equity $ 14,200   $ 13,277       ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(Amounts in millions)       Three Months Ended December 31,     Year Ended December 31,   2012     2011 2012     2011   Cash flows from operating activities: Net income $ 354 $ 99 $ 1,149 $ 1,085 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes (30 ) (49 ) (10 ) 75 Impairment of goodwill / intangible assets --- 12 --- 12 Depreciation and amortization 51 71 120 148 Loss on disposal of property and equipment 1 3 1 4 Amortization and write-off of capitalized software development costs and intellectual property licenses (1) 85 136 208 287 Stock-based compensation expense (2) 43 42 126 103 Excess tax benefits from stock options exercises (1 ) (3 ) (5 ) (24 ) Changes in operating assets and liabilities: Accounts receivable, net (496 ) (503 ) (46 ) 13 Inventories, net 83 62 (62 ) (34 ) Software development and intellectual property licenses (83 ) (73 ) (301 ) (254 ) Other assets (140 ) (237 ) 88 (67 ) Deferred revenues 792 1,020 153 (248 ) Accounts payable 87 148 (54 ) 31 Accrued expenses and other liabilities   230     122     (22 )   (179 ) Net cash provided by operating activities   976     850     1,345     952     Cash flows from investing activities: Proceeds from maturities of available-for-sale investments 139 137 444 740 Proceeds from auction rate securities ("ARS") called at par 10 10 10 10 Payment of contingent consideration --- --- --- (3 ) Purchases of available-for-sale investments (121 ) (92 ) (503 ) (417 ) Capital expenditures (27 ) (25 ) (73 ) (72 ) Decrease in restricted cash   20     26     (2 )   8   Net cash provided by (used in) investing activities   21     56     (124 )   266     Cash flows from financing activities: Proceeds from issuance of common stock to employees 3 27 33 69 Tax payment related to net share settlements of restricted stock awards (11 ) (12 ) (16 ) (15 ) Repurchase of common stock --- (168 ) (315 ) (692 ) Dividends paid --- --- (204 ) (194 ) Excess tax benefits from stock option exercises   1     3     5     24   Net cash used in financing activities   (7 )   (150 )   (497 )   (808 )   Effect of foreign exchange rate changes on cash and cash equivalents   60     (60 )   70     (57 ) Net increase in cash and cash equivalents 1,050 696 794 353   Cash and cash equivalents at beginning of period   2,909     2,469     3,165     2,812     Cash and cash equivalents at end of period $ 3,959   $ 3,165   $ 3,959   $ 3,165     (1)   Excludes deferral and amortization of stock-based compensation expense. (2) Includes the net effects of capitalization, deferral, and amortization of stock-based compensation expense.     ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESSUPPLEMENTAL FINANCIAL INFORMATION(Amounts in millions)       Three Months Ended   Year over Year     Three Months Ended   Year over YearDecember 31,   March 31,   June 30,   September 30,   December 31,% IncreaseMarch 31,   June 30,   September 30,   December 31,% Increase201020112011   20112011(Decrease)2012201220122012(Decrease)Cash Flow Data Operating Cash Flow $ 993 $ 134 $ (78 ) $ 46 $ 850 (14 )% $ 154 $ 93 $ 122 $ 976 15 % Capital Expenditures 21 4 14 29 25 19 8 17 21 27 8 Non-GAAP Free Cash Flow2 972 130 (92 ) 17 825 (15 ) 146 76 101 949 15   Operating Cash Flow - TTM1 1,376 1,283 1,231 1,095 952 (31 ) 972 1,143 1,219 1,345 41 Capital Expenditures - TTM1 97 89 76 68 72 (26 ) 76 79 71 73 1 Non-GAAP Free Cash Flow - TTM1 $ 1,279 $ 1,194 $ 1,155 $ 1,027 $ 880 (31 )% $ 896 $ 1,064 $ 1,148 $ 1,272 45 %   1   TTM represents trailing twelve months. Operating Cash Flow for the year ended December 31, 2010, three months ended September 30, 2010, three months ended June 30, 2010, and three months ended March 31, 2010 was $1,376 million, $182 million, $(26) million, and $227 million, respectively. Capital expenditures for the year ended December 31, 2010, three months ended September 30, 2010, three months ended June 30, 2010, and three months ended March 31, 2010 was $97 million, $37 million, $27 million, and $12 million, respectively. 2 Non-GAAP free cash flow represents operating cash flow minus capital expenditures (which includes payment for acquisition of intangible assets).     ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESRECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES(Amounts in millions, except earnings per share data)     Three Months Ended December 31, 2012   NetRevenues   Cost of Sales -Product Costs   Cost of Sales -OnlineSubscriptions   Cost of Sales -Software Royaltiesand Amortization   Cost of Sales -IntellectualProperty Licenses   ProductDevelopment   Sales andMarketing   General andAdministrative   Total Costsand Expenses GAAP Measurement   $ 1,768 $ 483 $ 60 $ 87 $ 52 $ 222 $ 232 $ 148 $ 1,284   Less: Net effect from deferral in net revenues and related cost of sales (a) 827 186 - 31 3 - - - 220 Less: Stock-based compensation (b) - - - (3 ) - (6 ) (2 ) (29 ) (40 ) Less: Amortization of intangible assets (c)   -   -   -   -     (23 )   -     -     -     (23 ) Non-GAAP Measurement $ 2,595 $ 669 $ 60 $ 115   $ 32   $ 216   $ 230   $ 119   $ 1,441                                                                                         Three Months Ended December 31, 2012 OperatingIncomeNet IncomeBasic Earningsper ShareDiluted Earningsper Share   GAAP Measurement $ 484 $ 354 $ 0.31 $ 0.31 Less: Net effect from deferral in net revenues and related cost of sales (a) 607 485 0.43 0.42 Less: Stock-based compensation (b) 40 38 0.03 0.03 Less: Amortization of intangible assets (c)   23   14   0.01   0.01   Non-GAAP Measurement $ 1,154 $ 891 $ 0.78 $ 0.78                                                                                           Year Ended December 31, 2012 NetRevenuesCost of Sales -Product CostsCost of Sales -OnlineSubscriptionsCost of Sales -Software Royaltiesand AmortizationCost of Sales -IntellectualProperty LicensesProductDevelopmentSales andMarketingGeneral andAdministrativeTotal Costsand Expenses GAAP Measurement $ 4,856 $ 1,116 $ 263 $ 194 $ 89 $ 604 $ 578 $ 561 $ 3,405 Less: Net effect from deferral in net revenues and related cost of sales (a) 131 - 1 36 3 - - - 40 Less: Stock-based compensation (b) - - - (9 ) - (20 ) (8 ) (89 ) (126 ) Less: Amortization of intangible assets (c)   -   -   -   -     (30 )   -     -     -     (30 ) Non-GAAP Measurement $ 4,987 $ 1,116 $ 264 $ 221   $ 62   $ 584   $ 570   $ 472   $ 3,289                                                                                         Year Ended December 31, 2012 OperatingIncomeNet IncomeBasic Earningsper ShareDiluted Earningsper Share GAAP Measurement $ 1,451 $ 1,149 $ 1.01 $ 1.01 Less: Net effect from deferral in net revenues and related cost of sales (a) 91 84 0.07 0.07 Less: Stock-based compensation (b) 126 98 0.09 0.09 Less: Amortization of intangible assets (c)   30   19   0.02   0.02   Non-GAAP Measurement $ 1,698 $ 1,350 $ 1.19 $ 1.18       (a)   Reflects the net change in deferred net revenues and related cost of sales. (b) Includes expense related to stock-based compensation. (c) Reflects amortization of intangible assets from purchase price accounting.     The company calculates earnings per share pursuant to the two-class method which requires the allocation of net income between common shareholders and participating security holders. Net income attributable to Activision Blizzard Inc. common shareholders used to calculate non-GAAP earnings per common share assuming dilution was $870 million and $1,322 million for the three months and year ended December 31, 2012 as compared to the total non-GAAP net income of $891 million and $1,350 million for the same periods, respectively.   The per share adjustments are presented as calculated, and the GAAP and non-GAAP earnings per share information is also presented as calculated. The sum of these measures, as presented, may differ due to the impact of rounding.     ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESRECONCILIATION OF GAAP NET INCOME TO NON-GAAP MEASURES(Amounts in millions, except earnings per share data)     Three Months Ended December 31, 2011   NetRevenues   Cost of Sales -Product Costs   Cost of Sales -OnlineSubscriptions   Cost of Sales -Software Royaltiesand Amortization   Cost of Sales -IntellectualProperty Licenses   ProductDevelopment   Sales andMarketing   General andAdministrative   Restructuring   Total Costsand Expenses GAAP Measurement   $ 1,407 $ 483 $ 65 $ 85 $ 96 $ 249 $ 281 $ 122 $ 1 $ 1,382   Less: Net effect from deferral in net revenues and related cost of sales (a) 1,001 209 - 37 (3 ) - - - - 243 Less: Stock-based compensation (b) - - - (3 ) - (25 ) (2 ) (13 ) - (43 ) Less: Restructuring (c) - - - - - - - (1 ) (1 ) (2 ) Less: Amortization of intangible assets (d) - (2 ) - - (48 ) - - - - (50 ) Less: Impairment of goodwill (e)   -     -     -     -     -     -     -     (12 )   -     (12 ) Non-GAAP Measurement $ 2,408   $ 690   $ 65   $ 119   $ 45   $ 224   $ 279   $ 96   $ -   $ 1,518                                                                                           Three Months Ended December 31, 2011 OperatingIncomeNet IncomeBasic Earningsper ShareDiluted Earningsper Share GAAP Measurement $ 25 $ 99 $ 0.09 $ 0.08 Less: Net effect from deferral in net revenues and related cost of sales (a) 758 549 0.47 0.47 Less: Stock-based compensation (b) 43 33 0.03 0.03 Less: Restructuring (c) 2 1 - - Less: Amortization of intangible assets (d) 50 31 0.03 0.03 Less: Impairment of goodwill (e)   12     12     0.01     0.01   Non-GAAP Measurement $ 890   $ 725   $ 0.63   $ 0.62                                                                                                       Year Ended December 31, 2011 NetRevenuesCost of Sales -Product CostsCost of Sales -OnlineSubscriptionsCost of Sales -Software Royaltiesand AmortizationCost of Sales -IntellectualProperty LicensesProductDevelopmentSales andMarketingGeneral andAdministrativeRestructuringTotal Costsand Expenses GAAP Measurement $ 4,755 $ 1,134 $ 255 $ 218 $ 165 $ 629 $ 545 $ 456 $ 25 $ 3,427 Less: Net effect from deferral in net revenues and related cost of sales (a) (266 ) (11 ) - (48 ) (24 ) - - - - (83 ) Less: Stock-based compensation (b) - - - (10 ) - (40 ) (6 ) (47 ) - (103 ) Less: Restructuring (c) - - - - - - - (1 ) (25 ) (26 ) Less: Amortization of intangible assets (d) - (2 ) - (1 ) (69 ) - - - - (72 ) Less: Impairment of goodwill (e)   -     -     -     -     -     -     -     (12 )   -     (12 ) Non-GAAP Measurement $ 4,489   $ 1,121   $ 255   $ 159   $ 72   $ 589   $ 539   $ 396   $ -   $ 3,131                                                                                                       Year Ended December 31, 2011 OperatingIncomeNet IncomeBasic Earningsper ShareDiluted Earningsper Share         GAAP Measurement $ 1,328 $ 1,085 $ 0.93 $ 0.92 Less: Net effect from deferral in net revenues and related cost of sales (a) (183 ) (151 ) (0.13 ) (0.13 ) Less: Stock-based compensation (b) 103 76 0.07 0.06 Less: Restructuring (c) 26 19 0.02 0.02 Less: Amortization of intangible assets (d) 72 46 0.04 0.04 Less: Impairment of goodwill (e)   12     12     0.01     0.01   Non-GAAP Measurement $ 1,358   $ 1,087   $ 0.93   $ 0.93       (a)   Reflects the net change in deferred net revenues and related cost of sales. (b) Includes expense related to stock-based compensation. (c) Reflects restructuring related to our Activision Publishing operations. (d) Reflects amortization of intangible assets from purchase price accounting. (e) Reflects impairment of goodwill.     The company calculates earnings per share pursuant to the two-class method which requires the allocation of net income between common shareholders and participating security holders. Net income attributable to Activision Blizzard Inc. common shareholders used to calculate non-GAAP earnings per common share assuming dilution was $715 million and $1,071 million for the three months and year ended December 31, 2011 as compared to the total non-GAAP net income of $725 million and $1,087 million for the same periods, respectively.   The per share adjustments are presented as calculated, and the GAAP and non-GAAP earnings per share information is also presented as calculated. The sum of these measures, as presented, may differ due to the impact of rounding.     ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESFINANCIAL INFORMATIONFor the Three Months and Year Ended December 31, 2012 and 2011 (Amounts in millions)     Three Months EndedDecember 31, 2012       December 31, 2011     $ Increase     % IncreaseAmount     % of TotalAmount   % of Total(Decrease)(Decrease)GAAP Net Revenues by Distribution Channel   Retail channel $ 1,177 67 % $ 841 60 % $ 336 40 % Digital online channels1   451   25     363   26     88   24 Total Activision and Blizzard 1,628 92 1,204 86 424 35   Distribution   140   8     203   14     (63 ) (31 ) Total consolidated GAAP net revenues   1,768   100     1,407   100     361   26   Change in Deferred Net Revenues2 Retail channel 900 1,055 Digital online channels1   (73 )   (54 ) Total changes in deferred net revenues   827     1,001     Non-GAAP Net Revenues by Distribution Channel Retail channel 2,077 80 1,896 79 181 10 Digital online channels1   378   15     309   13     69   22 Total Activision and Blizzard 2,455 95 2,205 92 250 11   Distribution   140   5     203   8     (63 ) (31 ) Total non-GAAP net revenues3 $ 2,595   100 % $ 2,408   100 % $ 187   8 %     Year EndedDecember 31, 2012December 31, 2011$ Increase% IncreaseAmount% of TotalAmount% of Total(Decrease)(Decrease)GAAP Net Revenues by Distribution Channel Retail channel $ 3,013 62 % $ 2,697 57 % $ 316 12 % Digital online channels1   1,537   32     1,640   34     (103 ) (6 ) Total Activision and Blizzard 4,550 94 4,337 91 213 5   Distribution   306   6     418   9     (112 ) (27 ) Total consolidated GAAP net revenues   4,856   100     4,755   100     101   2   Change in Deferred Net Revenues2 Retail channel 69 (185 ) Digital online channels1   62     (81 ) Total changes in deferred net revenues   131     (266 )   Non-GAAP Net Revenues by Distribution Channel Retail channel 3,082 62 2,512 56 570 23 Digital online channels1   1,599   32     1,559   35     40   3 Total Activision and Blizzard 4,681 94 4,071 91 610 15   Distribution   306   6     418   9     (112 ) (27 ) Total non-GAAP net revenues3 $ 4,987   100 % $ 4,489   100 % $ 498   11 %     1   Net revenues from digital online channel represent revenues from subscriptions and memberships, licensing royalties, value-added services, downloadable content, digitally distributed products, and wireless devices. 2 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 SUBSIDIARIESFINANCIAL INFORMATIONFor the Three Months Ended December 31, 2012 and 2011 (Amounts in millions)           Three Months EndedDecember 31, 2012     December 31, 2011     $ Increase     % IncreaseAmount     % of TotalAmount     % of Total(Decrease)(Decrease)GAAP Net Revenues by Segment/Platform Mix Activision and Blizzard: Online subscriptions1 $ 285 16 % $ 268 19 % $ 17 6 % PC and Other5 487 27 123 9 364 296 Sony PlayStation 3 259 15 262 19 (3 ) (1 ) Microsoft Xbox 360 314 18 300 21 14 5 Nintendo Wii and Wii U   183   10     166   12     17   10 Total console2 756 43 728 52 28 4 Sony PS Vita 18 1 3 --- 15 500 Nintendo 3DS and DS   82   5     82   6     -   - Total handheld   100   6     85   6     15   18 Total Activision and Blizzard   1,628   92     1,204   86     424   35   Distribution: Total Distribution   140   8     203   14     (63 ) (31 ) Total consolidated GAAP net revenues   1,768   100     1,407   100     361   26   Change in Deferred Net Revenues3 Activision and Blizzard: Online subscriptions1 (8 ) (18 ) PC and Other5 (89 ) 54 Sony PlayStation 3 441 453 Microsoft Xbox 360 467 483 Nintendo Wii and Wii U   16     24   Total console2   924     960   Nintendo 3DS and DS   ---     5   Total changes in deferred net revenues   827     1,001     Non-GAAP Net Revenues by Segment/Platform Mix Activision and Blizzard: Online subscriptions1 277 11 250 10 27 11 PC and Other5 398 15 177 7 221 125 Sony PlayStation 3 700 27 715 30 (15 ) (2 ) Microsoft Xbox 360 781 30 783 32 (2 ) - Nintendo Wii and Wii U   199   8     190   8     9   5 Total console2 1,680 65 1,688 70 (8 ) - Sony PS Vita 18 1 3 --- 15 500 Nintendo 3DS and DS   82   3     87   4     (5 ) (6 ) Total handheld   100   4   90   4     10   11 Total Activision and Blizzard   2,455   95   2,205   91     250   11   Total Distribution   140   5     203   9     (63 ) (31 ) Total non-GAAP net revenues4 $ 2,595   100 % $ 2,408   100 % $ 187   8 %     1   Revenue from online subscriptions consists of revenue from all World of Warcraft products, including subscriptions, boxed products, expansion packs, licensing royalties, and value-added services. It also includes revenues from Call of Duty Elite memberships. 2 Downloadable content and their related revenues are included in each respective console platforms and total console. 3 We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred net revenues. 4 Total non-GAAP net revenues presented also represents our total operating segment net revenues. 5 Other includes standalone sales of toys and accessories products from Skylanders franchise, mobile sales and other physical merchandise and accessories.     ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESFINANCIAL INFORMATIONFor the Year Ended December 31, 2012 and 2011 (Amounts in millions)           Year EndedDecember 31, 2012     December 31, 2011     $ Increase     % IncreaseAmount     % of TotalAmount     % of Total(Decrease)(Decrease)GAAP Net Revenues by Segment/Platform Mix Activision and Blizzard: Online subscriptions1 $ 986 20 % $ 1,357 29 % $ (371 ) (27 )% PC and Other5 1,214 25 374 8 840 225 Sony PlayStation 3 876 18 948 20 (72 ) (8 ) Microsoft Xbox 360 1,019 21 1,140 24 (121 ) (11 ) Nintendo Wii and Wii U   291   6     351   7     (60 ) (17 ) Total console2 2,186 45 2,439 51 (253 ) (10 ) Sony PS Vita 23 1 15 --- 8 53 Nintendo 3DS and DS   141   3     152   3     (11 ) (7 ) Total handheld   164   4     167   3     (3 ) (2 ) Total Activision and Blizzard   4,550   94     4,337   91     213   5   Distribution: Total Distribution   306   6     418   9     (112 ) (27 ) Total Activision and Blizzard   4,856   100     4,755   100     101   2   Change in Deferred Net Revenues3 Activision and Blizzard: Online subscriptions1 85 (202 ) PC and Other5 36 (75 ) Sony PlayStation 3 30 36 Microsoft Xbox 360 (3 ) 43 Nintendo Wii and Wii U   (12 )   (66 ) Total console2 15 13 Nintendo 3DS and DS   (5 )   (2 ) Total changes in deferred net revenues   131     (266 )   Non-GAAP Net Revenues by Segment/Platform Mix Activision and Blizzard: Online subscriptions1 1,071 22 1,155 26 (84 ) (7 ) PC and Other5 1,250 25 299 7 951 318 Sony PlayStation 3 906 18 984 22 (78 ) (8 ) Microsoft Xbox 360 1,016 20 1,183 26 (167 ) (14 ) Nintendo Wii and Wii U   279   6     285   6     (6 ) (2 ) Total console2 2,201 44 2,452 54 (251 ) (10 ) Sony PS Vita 23 --- 15 --- 8 53 Nintendo 3DS and DS   136   3     150   4     (14 ) (9 ) Total handheld   159   3     165   4     (6 ) (4 ) Total Activision and Blizzard   4,681   94     4,071   91     610   15   Distribution: Total Distribution   306   6     418   9     (112 ) (27 ) Total non-GAAP net revenues4 $ 4,987   100 % $ 4,489   100 % $ 498   11 %     1   Revenue from online subscriptions consists of revenue from all World of Warcraft products, including subscriptions, boxed products, expansion packs, licensing royalties, and value-added services. It also includes revenues from Call of Duty Elite memberships. 2 Downloadable content and their related revenues are included in each respective console platforms and total console. 3 We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred net revenues. 4 Total non-GAAP net revenues presented also represents our total operating segment net revenues. 5 Other includes standalone sales of toys and accessories products from Skylanders franchise, mobile sales and other physical merchandise and accessories.     ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESFINANCIAL INFORMATIONFor the Three Months And Year Ended December 31, 2012 and 2011 (Amounts in millions)       Three Months EndedDecember 31, 2012     December 31, 2011     $ Increase     % IncreaseAmount     % of TotalAmount     % of Total(Decrease)(Decrease)GAAP Net Revenues by Geographic Region North America $ 869 49 % $ 718 51 % $ 151 21 % Europe 748 42 605 43 143 24 Asia Pacific   151 9     84   6     67   80 Total consolidated GAAP net revenues   1,768 100     1,407   100     361   26   Change in Deferred Net Revenues1 North America 538 548 Europe 271 395 Asia Pacific   18   58   Total changes in net revenues   827   1,001     Non-GAAP Net Revenues by Geographic Region North America 1,407 54 1,266 53 141 11 Europe 1,019 39 1,000 41 19 2 Asia Pacific   169 7     142   6     27   19 Total non-GAAP net revenues2 $ 2,595 100 % $ 2,408   100 % $ 187   8 %     Year EndedDecember 31, 2012December 31, 2011$ Increase% IncreaseAmount% of TotalAmount% of Total   (Decrease)(Decrease)GAAP Net Revenues by Geographic Region North America $ 2,436 50 % $ 2,405 50 % $ 31 1 % Europe 1,968 41 1,990 42 (22 ) (1 ) Asia Pacific   452 9     360   8     92   26 Total consolidated GAAP net revenues   4,856 100     4,755   100     101   2   Change in Deferred Net Revenues1 North America 78 (154 ) Europe 28 (104 ) Asia Pacific   25   (8 ) Total changes in net revenues   131   (266 )   Non-GAAP Net Revenues by Geographic Region North America 2,514 50 2,251 50 263 12 Europe 1,996 40 1,886 42 110 6 Asia Pacific   477 10     352   8     125   36 Total non-GAAP net revenues2 $ 4,987 100 % $ 4,489   100 % $ 498   11 %     1   We provide net revenues including (in accordance with GAAP) and excluding (non-GAAP) the impact of changes in deferred net revenues. 2 Total non-GAAP net revenues presented also represents our total operating segment net revenues.     ACTIVISION BLIZZARD, INC. AND SUBSIDIARIESSEGMENT INFORMATIONFor the Three Months And Year Ended December 31, 2012 and 2011 (Amounts in millions)           Three Months EndedDecember 31, 2012     December 31, 2011     $ Increase     % IncreaseAmount     % of TotalAmount     % of Total(Decrease)(Decrease)Segment net revenues:   Activision1 $ 2,145 121 % $ 1,929 137 % $ 216 11 % Blizzard2 310 18 276 20 34 12 Distribution3   140   8     203   14     (63 ) (31 ) Operating segment total 2,595 147 2,408 171 187 8   Reconciliation to consolidated net revenues: Net effect from deferral of net revenues   (827 ) (47 )   (1,001 ) (71 ) Consolidated net revenues $ 1,768   100 % $ 1,407   100 % $ 361 26 %   Segment income from operations: Activision1 $ 1,055 $ 809 $ 246 30 % Blizzard2 88 71 17 24 Distribution3   11     10     1   10 Operating segment total 1,154 890 264 30   Reconciliation to consolidated operating income (loss) and consolidated income (loss) before income tax expense: Net effect from deferral of net revenues and related cost of sales (607 ) (758 ) Stock-based compensation expense (40 ) (43 ) Restructuring --- (2 ) Amortization of intangible assets (23 ) (50 ) Impairment of goodwill/intangible assets   ---     (12 ) Consolidated operating income (loss)   484   25 459 - Investment and other income (expense), net   3     (5 ) Consolidated income (loss) before income tax expense $ 487   $ 20   $ 467 -     Operating margin from total operating segments 44.5 % 37.0 %     Year EndedDecember 31, 2012December 31, 2011$ Increase% IncreaseAmount% of TotalAmount% of Total(Decrease)(Decrease)Segment net revenues: Activision1 $ 3,072 64 % $ 2,828 59 % $ 244 9 % Blizzard2 1,609 33 1,243 26 366 29 Distribution3   306   6     418   9     (112 ) (27 ) Operating segment total 4,987 103 4,489 94 498 11   Reconciliation to consolidated net revenues: Net effect from deferral of net revenues   (131 ) (3 )   266   6   Consolidated net revenues $ 4,856   100 % $ 4,755   100 % $ 101 2 %   Segment income from operations: Activision1 $ 970 $ 851 $ 119 14 % Blizzard2 717 496 221 45 Distribution3   11     11     -   - Operating segment total 1,698 1,358 340 25   Reconciliation to consolidated operating income (loss) and consolidated income (loss) before income tax expense: Net effect from deferral of net revenues and related cost of sales (91 ) 183 Stock-based compensation expense (126 ) (103 ) Restructuring --- (26 ) Amortization of intangible assets (30 ) (72 ) Impairment of goodwill/intangible assets   ---     (12 ) Consolidated operating income   1,451   1,328 123 9 Investment and other income (expense), net   7     3   Consolidated income before income tax expense $ 1,458   $ 1,331   $ 127 10 %   Operating margin from total operating segments 34.0 % 30.3 %     1   Activision Publishing (“Activision”) — publishes interactive entertainment products and contents. 2 Blizzard — Blizzard Entertainment, Inc. and its subsidiaries (“Blizzard”) publishes PC games and online subscription-based games in the MMORPG category. 3 Activision Blizzard Distribution (“Distribution”) — distributes interactive entertainment software and hardware products.     ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES OUTLOOKFor the Quarter Ending March 31, 2013 andYear Ending December 31, 2013GAAP to Non-GAAP Reconciliation(Amounts in millions, except per share data)         Outlook for     Outlook forThree Months EndingYear EndingMarch 31, 2013December 31, 2013   Net Revenues (GAAP) $ 1,160 $ 4,085   Excluding the impact of: Change in deferred net revenues (a)   (470 )   90   Non-GAAP Net Revenues $ 690 $ 4,175   Earnings Per Diluted Share (GAAP) $ 0.29 $ 0.68   Excluding the impact of: Net effect from deferral in net revenues and related cost of sales (b) (0.21 ) 0.02 Stock-based compensation (c) 0.02 0.09 Amortization of intangible assets (d) - 0.02         Non-GAAP Earnings Per Diluted Share $ 0.10 $ 0.80   (a)   Reflects the net change in deferred net revenues. (b) Reflects the net change in deferred net revenues and related cost of sales. (c) Reflects expense related to stock-based compensation. (d) Reflects amortization of intangible assets from purchase price accounting.   The per share adjustments are presented as calculated, and the GAAP and non-GAAP earnings (loss) per share information is also presented as calculated. The sum of these measures, as presented, may differ due to the impact of rounding. Activision Blizzard, Inc.Kristin SoutheySVP, Investor Relations(310) 255-2635ksouthey@activision.comorMaryanne LataifSVP, Corporate Communications(310) 255-2704mlataif@activision.com