Activision Blizzard Announces Fourth-Quarter and 2018 Financial Results

Record Q4 and Full Year Results

SANTA MONICA, Calif.–(BUSINESS WIRE)–Activision Blizzard, Inc. (Nasdaq: ATVI) today announced fourth-quarter
2018 results.


Financial Metrics




 


 


Q4


 


 


CY


(in millions, except EPS)


 


 


2018


 


 


Prior Outlook*


 


 


2017






2018


 


 


2017


GAAP Net Revenues






$2,381


 


 


$2,236


 


 


$2,043






$7,500


 


 


$7,017


Impact of GAAP deferralsA





$454






$812






$597






($238)






$139
































 


GAAP EPS**






$0.84






$0.43






($0.77)






$2.35






$0.36


Non-GAAP EPS






$0.90






$0.64






$0.49






$2.72






$2.21


Impact of GAAP deferralsA





$0.39






$0.63






$0.45






($0.12)






$0.07


* Prior outlook was provided by the company on November 8, 2018 in its
earnings release.** GAAP EPS includes the impact of significant
discrete tax related items. Refer to the tables at the end of this press
release for details.


For the year ended December 31, 2018, Activision Blizzard’s net revenues
presented in accordance with GAAP were a record $7.50 billion, as
compared with $7.02 billion for 2017. GAAP net revenues from digital
channels were a record $5.79 billion. GAAP operating margin was 27%.
GAAP earnings per diluted share were a record $2.35, as compared with
$0.36 for 2017. On a non-GAAP basis, Activision Blizzard’s operating
margin was 34% and earnings per diluted share were a record $2.72, as
compared with $2.21 for 2017.


For the quarter ended December 31, 2018, Activision Blizzard’s net
revenues presented in accordance with GAAP were a record $2.38 billion,
as compared with $2.04 billion for the fourth quarter of 2017. GAAP net
revenues from digital channels were a record $1.79 billion. GAAP
operating margin was a Q4 record of 29%. GAAP earnings per diluted share
were a record $0.84, as compared with loss per share of $0.77 for the
fourth quarter of 2017. On a non-GAAP basis, Activision Blizzard’s
operating margin was a Q4 record of 35% and earnings per diluted share
were a record $0.90, as compared with $0.49 for the fourth quarter of
2017.


Activision Blizzard generated $1.79 billion in operating cash flow for
the year ended December 31, 2018, as compared to $2.21 billion for 2017.
For the quarter, operating cash flow was $999 million.


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 “While
our financial results for 2018 were the best in our history, we didn’t
realize our full potential. To help us reach our full potential, we have
made a number of important leadership changes. These changes should
enable us to achieve the many opportunities our industry affords us,
especially with our powerful owned franchises, our strong commercial
capabilities, our direct digital connections to hundreds of millions of
players, and our extraordinarily talented employees.”


Operating Metrics


For the year ended December 31, 2018, Activision Blizzard’s net bookingsB
were a record $7.26 billion, as compared with $7.16 billion for
2017, below our prior outlook. Net bookingsB from digital
channels were a record $5.72 billion, as compared with $5.43 billion for
2017, and in-game net bookingsB were a record of $4.2 billion.


For the quarter ended December 31, 2018, Activision Blizzard’s net
bookingsB were a record $2.84 billion, compared with $2.64
billion for the fourth quarter of 2017, below our prior outlook. Net
bookingsB from digital channels were a record $1.88 billion,
as compared with $1.62 billion for the fourth quarter of 2017, and
in-game net bookingsB were a record of $1.2 billion.


Selected Business Highlights


Activision


Activision had 53 million Monthly Active Users (MAUs)C in
the quarter, growing double-digits quarter-over-quarter. Fourth
quarter segment revenues grew 6% year-over-year to $1.41 billion and
operating income increased 14% year-over-year to $723 million.


Call of Duty® was
again the number-one selling console franchise worldwide for the year,
a franchise feat accomplished for nine of the last 10 years.1 In
its launch quarter, Call of Duty: Black Ops 4
sold-through more units than Call of Duty: Black Ops III,
with PC units more than tripling. Full-game downloads were over 40% of Call
of Duty: Black Ops 4 console sell-through, versus
approximately 30% for the prior release, Call of Duty: WWII.


The successful launch of Spyro® Reignited
Trilogy in the fourth quarter and the ongoing contribution of Crash
Bandicoot N. Sane Trilogy, which has sold-in over 10
million units since its 2017 release, highlight the enduring nature of
Activision’s classic franchises.


Blizzard


Blizzard had 35 million MAUsC in the quarter, as Overwatch®
and Hearthstone® saw sequential
stability and World of Warcraft®
saw expected declines post-expansion-launch. Fourth quarter segment
revenues grew 15% year-over-year to $686 million and operating income
increased 51% year-over-year to $241 million.


Building on an 11-year partnership, Blizzard extended its joint
venture with NetEase to publish its games in China through January
2023.


King


King had 268 million MAUsC in the quarter, growing
sequentially, driven by the successful launch of Candy Crush
Friends SagaTM. Fourth quarter
segment revenues grew 5% year-over-year to $543 million and operating
income increased 28% year-over-year to $207 million.


Candy Crush Friends Saga saw strong monetization and
retention trends, contributing incremental growth for the Candy
CrushTM franchise, which grew net
bookingsB and MAUsC year-over-year and
quarter-over-quarter. This quarter, King had two of the top-10
highest-grossing titles in the U.S. mobile app stores for twenty-one
quarters in a row, with Candy Crush SagaTM
at #1 again.2

Advertising in the King network was again profitable with net bookingsB
growing over 50% sequentially.


Company Outlook


In 2019, the company will increase development investment in its biggest
franchises, enabling teams to accelerate the pace and quality of content
for their communities and supporting a number of new product
initiatives. The number of developers working on Call of Duty,
Candy Crush, Overwatch, Warcraft®,
Hearthstone and Diablo®
in aggregate will increase approximately 20% over the course of 2019.
The company will fund this greater investment by de-prioritizing
initiatives that are not meeting expectations and reducing certain
non-development and administrative-related costs across the business.
The company is also integrating its global and regional sales and
go-to-market, partnerships, and sponsorships capabilities. As part of
these restructuring actions, the company expects to incur a GAAP-only
pre-tax charge of approximately $150 million, the majority of which is
expected to be incurred this year.


(in millions, except EPS)


 


 


GAAP Outlook


 


 


Non-GAAP Outlook


 


 


Impact of GAAP deferralsA

CY 2019


 


 




 


 




 


 




Net Revenues






$6,025






$6,025






$275


EPS






$1.18






$1.85






$0.25


Fully Diluted Shares






775






775


























 


Q1 2019




















Net Revenues






$1,715






$1,715






($540)


EPS






$0.39






$0.63






($0.43)


Fully Diluted Shares






772






772








Net bookingsB are expected to be $6.30 billion for 2019 and
$1.18 billion for the first quarter of 2019.


Currency Assumptions for 2019 Outlook:


$1.13 USD/Euro for current outlook (vs. average of $1.12 for 2018,
$1.12 for 2017, and $1.11 for 2016); and


$1.26 USD/British Pound Sterling for current outlook (vs. average of
$1.30 for 2018, $1.30 for 2017 and $1.36 for 2016).


Note: Our financial guidance includes the forecasted impact of our FX
hedging program.


Capital Allocation


The Board of Directors declared a cash dividend of $0.37 per common
share, payable on May 9, 2019 to shareholders of record at the close of
business on March 28, 2019, which represents a 9% increase from 2018.
Additionally, the Board of Directors authorized a new two-year stock
repurchase program under which the company is authorized to repurchase
up to $1.5 billion of its outstanding common stock during the period.


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 ended December 31, 2018 and management’s outlook for the
remainder of the calendar year. The company welcomes all members of the
financial and media communities and other interested parties to visit https://investor.activision.com
to listen to the conference call via live Webcast or to listen to the
call live by dialing into 866-548-4713 in the U.S. with passcode
9678578. A replay of the call will also be available after the call’s
conclusion and archived for one year at https://investor.activision.com/events.cfm.


About Activision Blizzard


Activision Blizzard, Inc., a member of the Fortune 500 and S&P 500, is
the world’s most successful standalone interactive entertainment
company. We delight hundreds of millions of monthly active users around
the world through franchises including Activision’s Call of Duty®,
Spyro, and Crash, Blizzard Entertainment’s World of Warcraft®,
Overwatch®, Hearthstone®, Diablo®, StarCraft®, and Heroes of the Storm®,
and King’s Candy Crush, Bubble Witch, and Farm Heroes. The company is
one of the Fortune “100 Best Companies To Work For®.” Headquartered in
Santa Monica, California, Activision Blizzard has operations throughout
the world. More information about Activision Blizzard and its products
can be found on the company’s website, www.activisionblizzard.com.


1 The NPD Group, GfK, GSD and internal estimates, based on
dollar sales of front line games.


2 U.S. ranking for Apple App Store and Google Play Store
combined, per App Annie Intelligence for fourth quarter of 2018.


A Net effect of accounting treatment from revenue deferrals
on certain of our online-enabled products. Since certain of our games
are hosted online or include significant online functionality that
represents a separate performance obligation, we defer the transaction
price allocable to the online functionality from the sale of these games
and recognize the attributable revenues over the relevant estimated
service periods, which are generally less than a year. The related cost
of revenues is deferred and recognized as an expense as the related
revenues are recognized. Impact from changes in deferrals refers to the
net effect from revenue deferrals accounting treatment for the purposes
of revenues, along with, for the purposes of EPS, the related cost of
revenues deferrals treatment and the related tax impacts. Internally,
management excludes the impact of this change in deferred revenues and
related cost of revenues when evaluating the company’s operating
performance, when planning, forecasting and analyzing future periods,
and when assessing the performance of its management team. Management
believes this is appropriate because doing so enables an analysis of
performance based on the timing of actual transactions with our
customers. In addition, management believes excluding the change in
deferred revenues and the related cost of revenues provides a much more
timely indication of trends in our operating results.


B Net bookings is an operating metric that is defined
as the net amount of products and services sold digitally or sold-in
physically in the period, and includes license fees, merchandise, and
publisher incentives, among others, and is equal to net revenues
excluding the impact from deferrals.


C Monthly Active User (“MAU”) Definition: We monitor
MAUs as a key measure of the overall size of our user base. MAUs are the
number of individuals who accessed a particular game in a given month.
We calculate average MAUs in a period by adding the total number of MAUs
in each of the months in a given period and dividing that total by the
number of months in the period. An individual who accesses two of our
games would be counted as two users. In addition, due to technical
limitations, for Activision and King, an individual who accesses the
same game on two platforms or devices in the relevant period would be
counted as two users. For Blizzard, an individual who accesses the same
game on two platforms or devices in the relevant period would generally
be counted as a single user.


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 income (loss), earnings (loss) per
share, and operating margin data and guidance both including (in
accordance with GAAP) and excluding (non-GAAP) certain items. When
relevant, the company also provides constant FX information to provide a
framework for assessing how our underlying businesses performed
excluding the effect of foreign currency rate fluctuations. In addition,
Activision Blizzard provides EBITDA (defined as GAAP net income (loss)
before interest (income) expense, income taxes, depreciation, and
amortization) and adjusted EBITDA (defined as non-GAAP operating margin
(see non-GAAP financial measure below) before depreciation). The
non-GAAP financial measures exclude the following items, as applicable
in any given reporting period and our outlook:


expenses related to stock-based compensation;


the amortization of intangibles from purchase price accounting;


fees and other expenses related to the King acquisition, including
related debt financings, and refinancing of long-term debt, including
penalties and the write off of unamortized discount and deferred
financing costs;


restructuring charges;


other non-cash charges from reclassification of certain cumulative
translation adjustments into earnings as required by GAAP;


the income tax adjustments associated with any of the above items (tax
impact on non-GAAP pre-tax income is calculated under the same
accounting principles applied to the GAAP pre-tax income under ASC
740, which employs an annual effective tax rate method to the
results); and


significant discrete tax-related items, including amounts related to
changes in tax laws (including the Tax Cuts and Jobs Act enacted in
December 2017), amounts related to the potential or final resolution
of tax positions, and other unusual or unique tax-related items and
activities.


In the future, Activision Blizzard may also consider whether other items
should also be excluded in calculating the non-GAAP financial measures
used by the company. Management believes that the presentation of these
non-GAAP financial measures provides investors with additional useful
information to measure 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. Additionally, we consider
quantitative and qualitative factors in assessing whether to adjust for
the impact of items that may be significant or that could affect an
understanding of our ongoing financial and business performance or
trends. Internally, management uses these non-GAAP financial measures,
along with others, in assessing the company’s operating results, and
measuring compliance with the requirements of the company’s debt
financing agreements, as well as in planning and forecasting.


Activision Blizzard’s non-GAAP financial measures are not based on a
comprehensive set of accounting rules or principles, and the terms
non-GAAP net income, non-GAAP earnings per share, non-GAAP operating
margin, and non-GAAP or adjusted EBITDA do not have a standardized
meaning. Therefore, other companies may use the same or similarly named
measures, but exclude different items, which may not provide investors a
comparable view of Activision Blizzard’s performance in relation to
other companies.


Management compensates for the limitations resulting from the exclusion
of these items by considering the impact of the items separately and by
considering Activision Blizzard’s GAAP, as well as non-GAAP, results and
outlook, and by presenting the most comparable GAAP measures directly
ahead of non-GAAP measures, and by providing a reconciliation that
indicates and describes the adjustments made.


Cautionary Note Regarding Forward-looking Statements: The
statements contained herein that are not historical facts are
forward-looking statements, including, but not limited to, statements
about: (1) projections of revenues, expenses, income or loss, earnings
or loss per share, cash flow or other financial items; (2) statements of
our plans and objectives, including those related to releases of
products and services and restructuring activities; (3) statements of
future financial or operating performance, including the impact of tax
items thereon; and (4) statements of assumptions underlying such
statements. The company 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 risks, 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, products, and
services; concentration of revenue among a small number of titles;
Activision Blizzard’s ability to predict consumer preferences, including
interest in specific genres and modes, and preferences among platforms;
the continued growth in the scope and complexity of our business,
including the diversion of management time and attention to issues
relating to the operations of our newly acquired or started businesses
and the potential impact of our expansion into new businesses on our
existing businesses; the execution of our restructuring activities; the
amount of our debt and the limitations imposed by the covenants in the
agreements governing our debt; 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 motivate key personnel and
developers that can create high-quality titles, products, and services;
changing business models within the video game industry, including
digital delivery of content and the increased prevalence of free-to-play
games; product delays or defects; competition, including from other
forms of entertainment; rapid changes in technology and industry
standards; possible declines in software pricing; product returns and
price protection; the identification of suitable future acquisition
opportunities and potential challenges associated with geographic
expansion; the seasonal and cyclical nature of the interactive
entertainment market; the outcome of current or future tax disputes;
litigation risks and associated costs; protection of proprietary rights;
potential data breaches and other cybersecurity risks; shifts in
consumer spending trends; capital market risks; the impact of applicable
laws, rules, and regulations, including changes in those laws, rules,
and regulations; domestic and international economic, financial, and
political conditions and policies; tax rates and foreign exchange rates;
the impact of the current macroeconomic environment; and the other
factors identified in “Risk Factors” included in Part I, Item 1A of our
Annual Report on Form 10-K for the year ended December 31, 2017.


The forward-looking statements in this press release are based on
information available to the company at this time and we assume no
obligation to update any such forward-looking statements. Although these
forward-looking statements are believed to be true when made, they may
ultimately prove to be incorrect. These statements are not guarantees of
our future performance and are subject to risks, uncertainties, and
other factors, some of which are beyond our control and may cause actual
results to differ materially from current expectations.




 


 


 




 


 


 




ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


(Amounts in millions, except per share data)


















 










Three Months Ended December 31,








Year Ended December 31,










20181

 


 


 


2017








20181

 


 


 


2017


































 


Net revenues


































Product sales








$


808










$


737










$


2,255










$


2,110


Subscription, licensing, and other revenues2







1,573


 








1,306


 








5,245


 








4,907


Total net revenues








2,381










2,043










7,500










7,017


































 


Costs and expenses


































Cost of revenues—product sales:


































Product costs








303










310










719










733


Software royalties, amortization, and intellectual property licenses








157










101










371










300


Cost of revenues—subscription, licensing, and other:


































Game operations and distribution costs








251










268










1,028










984


Software royalties, amortization, and intellectual property licenses








121










124










399










484


Product development








325










318










1,101










1,069


Sales and marketing








321










479










1,062










1,378


General and administrative








209


 








222


 








832


 








760


Total costs and expenses








1,687


 








1,822


 








5,512


 








5,708


































 


Operating income








694










221










1,988










1,309


































 


Interest and other expense (income), net








4










36










71










146


Loss on extinguishment of debt








—


 








—


 








40


 








12


Income before income tax expense








690










185










1,877










1,151


































 


Income tax expense








40










769










64










878










 








 








 








 


Net income (loss)








$


650


 








$


(584


)








$


1,813


 








$


273


































 


Basic earnings (loss) per common share








$


0.85










$


(0.77


)








$


2.38










$


0.36


Weighted average common shares outstanding








763










757










762










754


































 


Diluted earnings (loss) per common share








$


0.84










$


(0.77


)








$


2.35










$


0.36


Weighted average common shares outstanding assuming dilution








771










757










771










766








































 


1

 


 


We adopted a new revenue accounting standard in the first quarter
of 2018. The impacts of the new revenue accounting standard are
reflected in our financial information as of and for the three
months and year ended December 31, 2018. Prior period results have
not been restated to reflect this change in accounting standards.
Refer to our forthcoming Form 10-K for the year ending December
31, 2018 for additional information.


2





Subscription, licensing, and other revenues represent revenues from
World of Warcraft subscriptions, licensing royalties from our
products and franchises, downloadable content, microtransactions,
and other miscellaneous revenues.








 








 




 


 


 


 


 


 


 


 




 


 


 


 


 




ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited)


(Amounts in millions)
































 




















December 31, 20181











December 31, 2017


Assets
































Current assets
































Cash and cash equivalents


















$


4,225














$


4,713




Accounts receivable, net


















1,035














918




Inventories, net


















43














46




Software development


















264














367




Other current assets


















539


 












476


 


Total current assets


















6,106














6,520




Software development


















65














86




Property and equipment, net


















282














294




Deferred income taxes, net


















403














459




Other assets


















482














440




Intangible assets, net


















735














1,106




Goodwill


















9,762


 












9,763


 


Total assets


















$


17,835


 












$


18,668


 
































 


Liabilities and Shareholders’ Equity
































Current liabilities
































Accounts payable


















$


253














$


323




Deferred revenues


















1,493














1,929




Accrued expenses and other liabilities


















896


 












1,411


 


Total current liabilities