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ACTIVISION BLIZZARD, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Business Overview Activision Blizzard, Inc. is a worldwide online, personal computer ("PC"), video game console, handheld and mobile device game publisher. The terms "Activision Blizzard," the "Company," "we," "us," and "our" are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries. Based upon our organizational structure, we conduct our business through three operating segments as follows: Activision Publishing, Inc. Activision Publishing, Inc. ("Activision") is a leading international developer and publisher of interactive software products and content. Activision develops games based on both internally-developed and licensed intellectual property. Activision markets and sells games we develop and, through our affiliate label program, games developed by certain third-party publishers. We sell games both through retail channels and by digital download. Activision currently offers games that operate on the Sony Computer Entertainment, Inc. ("Sony") PlayStation 3 ("PS3"), Nintendo Co. Ltd. ("Nintendo") Wii ("Wii"), and Microsoft Corporation ("Microsoft") Xbox 360 ("Xbox 360") console systems; the Nintendo Dual Screen ("NDS") handheld game systems; the PC; and Apple iOS devices and other handheld and mobile devices. Blizzard Entertainment, Inc. Blizzard Entertainment, Inc. ("Blizzard") is a leader in the subscription-based massively multi-player online role-playing game ("MMORPG") category in terms of both subscriber base and revenues generated through its World of Warcraft® franchise, which it develops, hosts and supports. Blizzard also develops, markets and sells role-playing action and strategy PC-based computer games, including games in the multiple-award winning Diablo® and StarCraft® franchises. In addition, Blizzard maintains a proprietary online-game related service, Battle.net®. Blizzard distributes its products and generates revenues worldwide through various means, including: subscriptions (which consist of fees from individuals playing World of Warcraft, prepaid cards and other value-added service revenues such as realm transfers, faction changes, and other character customizations within World of Warcraft gameplay); retail sales of physical "boxed" products; online download sales of PC products; and licensing of software to third-party or related party companies that distribute World of Warcraft, StarCraft® II and Diablo® III. Activision Blizzard Distribution Activision Blizzard Distribution ("Distribution") consists of operations in Europe that provide warehousing, logistical and sales distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware. Business Highlights For the three months ended September 30, 2012, Activision Blizzard had net revenues of $841 million, as compared to net revenues of $754 million in the same period in 2011. For the three months ended September 30, 2012, Activision Blizzard's earnings per diluted share were $0.20, as compared to earnings per diluted share of $0.13 for the same period in 2011. For the nine months ended September 30, 2012, Activision Blizzard had net revenues of $3.1 billion, as compared to net revenues of $3.3 billion for the same period in 2011, and earnings per diluted share of $0.70, as compared to earnings per diluted share of $0.84 for the same period in 2011. According to The NPD Group, with respect to North American data, Chart-Track and GfK with respect to European data, and our internal estimates: † Activision Blizzard was the #1 PC publisher overall in North America and Europe for the three and nine months ended September 30, 2012; † Activision Publishing's Skylanders Spyro's Adventure™, including accessory packs and figures, was the #1 best-selling console and handheld game overall in dollars in North America and Europe for the nine months ended September 30, 2012; and † Blizzard Entertainment's latest expansion pack, World of Warcraft: Mists of Pandaria, which launched on September 25, 2012 (in all regions except for China, which launched on October 2, 2012), sold approximately 2.7 million copies in its first week of sales. 22 -------------------------------------------------------------------------------- Table of Contents Additionally, during the nine months ended September 30, 2012, Activision Publishing released Call of Duty: Modern Warfare 3 Content Collection #1, Call of Duty: Modern Warfare 3 Content Collection #2, Call of Duty: Modern Warfare 3 Content Collection #3, and Call of Duty: Modern Warfare 3 Content Collection #4. In addition, Activision Publishing released Transformers: Fall of Cybertron, Angry Birds Trilogy, Skylanders Cloud Patrol™, Prototype® 2, Battleship®, The Amazing Spider-Man™ and Men In Black: Alien Crisis™. Activision Publishing also released Ice Age™ Continental Drift Arctic Games in Europe and Asia Pacific. Recent and Upcoming Product Releases During October, Activision Publishing released several new titles including: 007™ Legends on October 16, 2012; Skylanders: Giants™, the sequel to its innovative new entertainment property Skylanders: Spyro's Adventure™, on October 22, 2012; Cabela's Dangerous Hunts 2013 and Cabela's Hunting Expeditions on October 23, 2012; and Transformers Prime™ on October 30, 2012. On November 13, 2012, Activision Publishing expects to release Call of Duty: Black Ops II. Additionally, Activision Publishing expects to release Wipeout 3 on November 18, 2012 and Family Guy: Back to the Multiverse on November 20, 2012. Management's Overview of Business Trends We provide our products through both retail channels and digital online delivery methods. Many of our video games that are available through retailers as physical "boxed" software products such as DVDs are also available by direct digital download over the Internet (both from websites that we own and from others owned by third parties). In addition, we offer players downloadable content as add-ons to our products (e.g., new multi-player content packs), generally for a one-time fee. We also offer subscription-based services for World of Warcraft, which are digitally delivered and hosted by Blizzard's proprietary online-game related service, Battle.net. In conjunction with the release of Call of Duty: Black Ops II, all of the Call of Duty Elite service features for that game will be free; this free service will not include downloadable content packs, which will be sold separately via a discounted season pass bundle and a la carte as individual content packs. Existing Call of Duty Elite premium members will continue to enjoy the Call of Duty Elite premium membership features for Call of Duty: Modern Warfare 3 through the end of their subscription period. Digital revenues remain an important part of our business, and we continue to focus on and develop products that can be delivered via digital online channels. The amount of our digital revenues in any period may fluctuate depending, in part, on the timing and nature of our specific product releases. Conditions in the retail channels of the video games industry have remained challenging for the first nine months of 2012. In the U.S. and Europe, retail sales within the industry experienced a combined overall decrease of approximately 21% for the first nine months of 2012, as compared to the same period in 2011, according to The NPD Group, Chart-Track and GfK. The declines in the U.S. and European retail channels were impacted by fewer releases and catalogue sales in the nine months ended September 30, 2012 as compared to the same period in 2011, as well as price declines over the prior year. In addition, the decline in sales to the retail channel continues to be more pronounced for casual titles on the Nintendo Wii and handheld platforms (down over 34% year-to-date), than titles on high-definition platforms (i.e., Xbox 360 and PS3). However, the industry's top five titles (including accessory packs and figures) grew 15% for the nine months ended September 30, 2012, as compared to the same period in 2011. This has resulted in the further concentration of revenues in the top titles, particularly for high-definition platforms, which experienced year-over-year growth, while non-premier titles experienced declines. The Company's results have been less impacted by the general declining trends in retail compared to our competitors because of our greater focus on premier top titles and a more focused overall slate of titles. 23 -------------------------------------------------------------------------------- Table of Contents |