Activision Blizzard, Inc.
Activision Blizzard, Inc. (Form: 10-Q, Received: 11/09/2011 06:02:34)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2011

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to            

 

Commission File Number 1-15839

 

 

ACTIVISION BLIZZARD, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-4803544

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

3100 Ocean Park Boulevard, Santa Monica, CA

 

90405

(Address of principal executive offices)

 

(Zip Code)

 

(310) 255-2000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer  x

 

Accelerated Filer  o

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

The number of shares of the registrant’s Common Stock outstanding at November 1, 2011 was 1,144,219,705.

 

 

 



Table of Contents

 

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

 

Table of Contents

 

 

Cautionary Statement

3

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010

4

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and September 30, 2010

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and September 30, 2010

6

 

 

 

 

Condensed Consolidated Statement of Changes in Shareholders’ Equity for the nine months ended September 30, 2011

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

 

 

 

Item 4.

Controls and Procedures

42

 

 

 

PART II.

OTHER INFORMATION

42

 

 

 

Item 1.

Legal Proceedings

42

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

 

 

 

Item 5.

Other Information

44

 

 

 

Item 6.

Exhibits

44

 

 

 

SIGNATURE

 

45

 

 

 

EXHIBIT INDEX

 

46

 

 

 

CERTIFICATIONS

 

 

 

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Table of Contents

 

CAUTIONARY STATEMENT

 

This Quarterly Report on Form 10-Q contains, or incorporates by reference, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements consist of any statement other than a recitation of historical fact and include, but are not limited to: (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 relating to product releases; (3) statements of future economic performance; and (4) statements of assumptions underlying such statements. We generally use words such as “outlook,” “forecast,” “will,” “could,” “should,” “would,” “to be,” “plans,” “believes,” “may,” “expects,” “intends,” “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. Our actual results could differ materially. Risks and uncertainties that may affect our future results 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 and market conditions within the video game industry, 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, adoption rate and availability of new hardware (including peripherals) and related software, rapid changes in technology and industry standards, 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 “Risk Factors” included in Part II, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010. The forward-looking statements contained herein are based upon information available to us as of the date of this Quarterly Report on Form 10-Q 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’s names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or trade names of Activision Blizzard. All other product or service names are the property of their respective owners.

 

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Part I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

 

ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in millions, except share data)

 

 

 

At September 30,
2011

 

At December 31,
2010

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

2,469

 

$

2,812

 

Short-term investments

 

432

 

696

 

Accounts receivable, net of allowances of $221 million and $377 million at September 30, 2011 and December 31, 2010, respectively

 

139

 

640

 

Inventories

 

207

 

112

 

Software development

 

150

 

147

 

Intellectual property licenses

 

42

 

45

 

Deferred income taxes, net

 

507

 

648

 

Other current assets

 

136

 

299

 

Total current assets

 

4,082

 

5,399

 

 

 

 

 

 

 

Long-term investments

 

25

 

23

 

Software development

 

114

 

55

 

Intellectual property licenses

 

13

 

28

 

Property and equipment, net

 

167

 

169

 

Other assets

 

15

 

15

 

Intangible assets, net

 

138

 

160

 

Trademark and trade names

 

433

 

433

 

Goodwill

 

7,126

 

7,132

 

Total assets

 

$

12,113

 

$

13,414

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

250

 

$

363

 

Deferred revenues

 

487

 

1,726

 

Accrued expenses and other liabilities

 

542

 

838

 

Total current liabilities

 

1,279

 

2,927

 

Deferred income taxes, net

 

95

 

120

 

Other liabilities

 

168

 

164

 

Total liabilities

 

1,542

 

3,211

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,142,796,893 and 1,382,479,839 shares issued at September 30, 2011 and December 31, 2010, respectively

 

 

 

Additional paid-in capital

 

9,751

 

12,353

 

Less: Treasury stock, at cost, 0 and 199,159,987 shares at September 30, 2011 and December 31, 2010, respectively

 

 

(2,194

)

Retained earnings

 

849

 

57

 

Accumulated other comprehensive income (loss)

 

(29

)

(13

)

Total shareholders’ equity

 

10,571

 

10,203

 

Total liabilities and shareholders’ equity

 

$

12,113

 

$

13,414

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in millions, except per share data)

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

 

 

 

 

 

 

 

Product sales

 

$

369

 

$

397

 

$

2,197

 

$

2,025

 

Subscription, licensing, and other revenues

 

385

 

348

 

1,151

 

994

 

Total net revenues

 

754

 

745

 

3,348

 

3,019

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

Cost of sales — product costs

 

138

 

194

 

650

 

765

 

Cost of sales — massively multi-player online role-playing game (“MMORPG”)

 

59

 

61

 

181

 

168

 

Cost of sales — software royalties and amortization

 

24

 

61

 

133

 

211

 

Cost of sales — intellectual property licenses

 

16

 

33

 

69

 

105

 

Product development

 

133

 

118

 

390

 

361

 

Sales and marketing

 

115

 

110

 

264

 

291

 

General and administrative

 

104

 

113

 

333

 

253

 

Restructuring

 

3

 

 

24

 

 

Total costs and expenses

 

592

 

690

 

2,044

 

2,154

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

162

 

55

 

1,304

 

865

 

 

 

 

 

 

 

 

 

 

 

Investment and other income, net

 

3

 

14

 

7

 

15

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

165

 

69

 

1,311

 

880

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

17

 

18

 

325

 

229

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

148

 

$

51

 

$

986

 

$

651

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

$

0.04

 

$

0.84

 

$

0.53

 

Diluted

 

$

0.13

 

$

0.04

 

$

0.84

 

$

0.52

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

1,140

 

1,212

 

1,151

 

1,230

 

Diluted

 

1,148

 

1,227

 

1,160

 

1,245

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

 

$

 

$

 

$

0.165

 

$

0.15

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in millions)

 

 

 

For the Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

986

 

$

651

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Deferred income taxes

 

124

 

51

 

Depreciation and amortization

 

77

 

97

 

Loss on disposal of property and equipment

 

1

 

 

Amortization and write-off of capitalized software development costs and intellectual property licenses (1)

 

151

 

182

 

Stock-based compensation expense (2)

 

61

 

94

 

Excess tax benefits from stock option exercises

 

(21

)

(11

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

516

 

471

 

Inventories

 

(96

)

(19

)

Software development and intellectual property licenses

 

(181

)

(238

)

Other assets

 

170

 

218

 

Deferred revenues

 

(1,268

)

(810

)

Accounts payable

 

(117

)

(60

)

Accrued expenses and other liabilities

 

(301

)

(243

)

Net cash provided by operating activities

 

102

 

383

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from maturities of investments

 

603

 

473

 

Payment of contingent consideration

 

(3

)

(4

)

Purchases of short-term investments

 

(325

)

(681

)

Capital expenditures

 

(47

)

(76

)

Increase in restricted cash

 

(18

)

(35

)

Net cash provided by (used in) investing activities

 

210

 

(323

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock to employees

 

39

 

54

 

Repurchase of common stock

 

(524

)

(613

)

Dividends paid

 

(194

)

(187

)

Excess tax benefits from stock option exercises

 

21

 

11

 

Net cash used in financing activities

 

(658

)

(735

)

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

3

 

30

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(343

)

(645

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

2,812

 

2,768

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

2,469

 

$

2,123

 

 


(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.

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2011

(Unaudited)

(Amounts in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Paid-In

 

Treasury Stock

 

Retained

 

Comprehensive

 

Shareholders’

 

 

 

Shares

 

Amount

 

Capital

 

Shares

 

Amount

 

Earnings

 

Income (Loss)

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2010

 

1,382

 

$

 

$

12,353

 

(199

)

$

(2,194

)

$

57

 

$

(13

)

$

10,203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

986

 

 

986

 

Unrealized appreciation on investments, net of taxes

 

 

 

 

 

 

 

2

 

2

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

(18

)

(18

)

Total comprehensive income

 

 

 

 

 

 

 

 

970

 

Issuance of common stock pursuant to employee stock options and restricted stock rights

 

7

 

 

39

 

 

 

 

 

39

 

Stock-based compensation expense related to employee stock options and restricted stock rights

 

 

 

77

 

 

 

 

 

77

 

Dividends ($0.165 per common share) (See Note 13)

 

 

 

 

 

 

(194

)

 

(194

)

Shares repurchased (See Note 13)

 

 

 

 

(47

)

(524

)

 

 

(524

)

Retirement of treasury shares

 

(246

)

 

(2,718

)

246

 

2,718

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2011

 

1,143

 

$

 

$

9,751

 

 

$

 

$

849

 

$

(29

)

$

10,571

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.               Description of business and basis of consolidation and presentation

 

Description of Business

 

Activision Blizzard, Inc. is a worldwide online, personal computer (“PC”), console, handheld and mobile game publisher. The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries.

 

The common stock of Activision Blizzard is traded on The NASDAQ Stock Market under the ticker symbol “ATVI.” Vivendi S.A. (“Vivendi”) owned approximately 63% of Activision Blizzard’s outstanding common stock at September 30, 2011.

 

We maintain significant operations in the United States, Canada, the United Kingdom, France, Germany, Ireland, Italy, Sweden, Spain, the Netherlands, Australia, South Korea and China.

 

Basis of Consolidation and Presentation

 

Activision Blizzard prepared the accompanying unaudited condensed consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission for interim reporting. As permitted under those rules and regulations, certain notes or other information that are normally required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted if they substantially duplicate the disclosures contained in the annual audited consolidated financial statements. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair statement of our financial position and results of operations in accordance with U.S. GAAP have been included in the accompanying unaudited condensed consolidated financial statements.

 

The accompanying unaudited condensed consolidated financial statements include the accounts and operations of Activision Blizzard. All intercompany accounts and transactions have been eliminated. The condensed consolidated financial statements have been prepared in conformity with U.S. GAAP. The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates and assumptions.

 

Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

 

The Company considers events or transactions that occur after the balance sheet date, but before the financial statements are issued, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures.

 

2.               Summary of significant accounting policies

 

Revenue Recognition

 

Revenue Arrangements with Multiple Deliverables

 

On January 1, 2011, we adopted amendments to an accounting standard related to revenue recognition for arrangements with multiple deliverables (which standard, as amended, is referred to herein as the “new accounting principles”).  The new accounting principles establish a selling price hierarchy for determining the selling price of a deliverable and require the application of the relative selling price method to allocate the arrangement consideration to each deliverable in a multiple deliverables revenue arrangement. Certain of our revenue arrangements have multiple deliverables and, as such, are accounted for under the new accounting principles. These revenue arrangements include product sales consisting of both software and hardware deliverables (such as peripherals or other ancillary collectors’ items sold together with physical “boxed” software) and our sales of World of Warcraft boxed products, expansion packs and value-added services, each of which is considered with the related subscription

 

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services for these purposes.  Our assessment of deliverables and units of accounting does not change under the new accounting principles.

 

Pursuant to the guidance of ASU 2009-13, when a revenue arrangement contains multiple elements, such as hardware and software products, licenses and/or services, we allocate revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor-specific-objective-evidence (“VSOE”) if it is available, third-party evidence (“TPE”) if VSOE is not available, or best estimated selling price (“BESP”) if neither VSOE nor TPE is available. In multiple element arrangements where more-than-incidental software deliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then allocated to each software deliverable using the guidance for recognizing software revenue.

 

As noted above, when neither VSOE nor TPE is available for a deliverable, we use BESP. We do not have significant revenue arrangements that require BESP for the three or nine months ended September 30, 2011.  The inputs we use to determine the selling price of our significant deliverables include the actual price charged by the Company for a deliverable that the Company sells separately, which represents the VSOE, and the wholesale prices of the same or similar products, which represents TPE. The pattern and timing of revenue recognition for deliverables and allocation of the arrangement consideration did not change upon the adoption of the new accounting principles. Also, we do not expect the adoption of the new accounting principles to have a material effect on our financial statements in the periods after our initial adoption.

 

Product Sales

 

We recognize revenue from the sale of our products upon the transfer of title and risk of loss to our customers and once any performance obligations have been completed. Certain products are sold to customers with a street date ( i.e.,  the earliest date these products may be sold by retailers). For these products, we recognize revenue on the later of the street date and the sale date. Revenue from product sales is recognized after deducting the estimated allowance for returns and price protection.

 

For our software products with online functionality, we evaluate whether those features or functionality are more than an inconsequential separate deliverable in addition to the software product. This evaluation is performed for each software product and any online transaction, such as a digital download of a title or product add-ons, when it is released.

 

When we determine that a software title contains online functionality that constitutes a more-than-inconsequential separate service deliverable in addition to the product, principally because of its importance to gameplay, we consider our performance obligations for this title to extend beyond the sale of the game. VSOE of fair value does not exist for the online functionality, as we do not separately charge for this component of the title. As a result, we recognize all of the software-related revenue from the sale of the title ratably over the estimated service period, which is estimated to begin the month after the later of the sale date and the street date of the title. In addition, we initially defer the costs of sales for the title (excluding intangible asset amortization), and recognize the costs of sales as the related revenues are recognized. Cost of sales includes manufacturing costs, software royalties and amortization, and intellectual property licenses costs.

 

We recognize revenues from World of Warcraft boxed product, expansion packs and value-added services, in each case with the related subscription service revenue, ratably over the estimated service periods beginning upon activation of the software and delivery of the related services. Revenues attributed to the sale of World of Warcraft boxed software and related expansion packs are classified as product sales and revenues attributable to subscriptions and other value-added services are classified as subscription, licensing and other revenues.

 

Revenues for software products with more-than-inconsequential separate service deliverables and World of Warcraft products are recognized over the estimated service periods, which range from a minimum of five months to a maximum of less than a year.

 

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For our software products with features we consider to be incidental to the overall product offering and an inconsequential deliverable, such as products which provide limited online features at no additional cost to the consumer, we recognize the related revenue from them upon the transfer of title and risk of loss of the product to our customer.

 

With respect to online transactions, such as online downloads of titles or product add-ons that do not include a more-than-inconsequential separate service deliverable, revenue is recognized when the fee is paid by the online customer to purchase online content, the product is available for download and is activated for gameplay. In addition, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable.

 

Sales incentives and other consideration given by us to our customers, such as rebates and product replacement fees, are considered adjustments of the selling price of our products and are reflected as reductions to revenue. Sales incentives and other consideration that represent costs incurred by us for assets or services received, such as the appearance of our products in a customer’s national circular ad, are reflected as sales and marketing expenses when the benefit from the sales incentive is separable from sales to the same customer and we can reasonably estimate the fair value of the benefit.

 

Subscription Revenues

 

Subscription revenues are derived from World of Warcraft , a game that is playable through Blizzard’s servers on a subscription-only basis. After the first month of free usage that is included with the World of Warcraft boxed software, the World of Warcraft end user may enter into a subscription agreement for additional future access. Revenues associated with the sale of subscriptions via boxed software and prepaid subscription cards, as well as prepaid subscriptions sales, are deferred until the subscription service is activated by the consumer and recognized ratably over the subscription period. Revenue from internet gaming rooms in Asia is recognized upon usage of the time packages sold. Value-added service revenues associated with subscriptions are recognized ratably over the estimated service periods.

 

Licensing Revenues

 

Third-party licensees in Russia, China and Taiwan distribute and host Blizzard’s World of Warcraft game in their respective countries under license agreements with Blizzard. We receive royalties from the licensees as a result. We recognize these royalties as revenues based on the end users’ activation of the underlying prepaid time, if all other performance obligations have been completed, or based on usage by the end user when we have continuing service obligations. We recognize any upfront licensing fee received over the term of the contracts.

 

With respect to license agreements that provide customers the right to make multiple copies in exchange for guaranteed amounts, revenue is generally recognized upon delivery of a master copy. Per copy royalties on sales that exceed the guarantee are recognized as earned. In addition, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable.

 

Breakage Revenues

 

World of Warcraft boxed product sales and subscription revenues are recognized upon activation of the game. We analyze historical activation patterns over time to determine when the likelihood of activation ever occurring becomes remote. We recognize revenues from subscriptions that have not yet been activated, prepaid subscription cards, as well as prepaid subscription sales, when the likelihood of future activation occurring is remote (defined as “breakage revenues”).

 

Other Revenues

 

Other revenues primarily include licensing activity of intellectual property other than software to third-parties. Revenue is recorded upon receipt of licensee statements, or upon the receipt of cash, provided the license period has begun.

 

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3.               Inventories

 

Our inventories consist of the following (amounts in millions):

 

 

 

At September 30, 2011

 

At December 31, 2010

 

Finished goods

 

$

143

 

$

98

 

Purchased parts and components

 

64

 

14

 

 

 

 

 

 

 

Inventories

 

$

207

 

$

112

 

 

4.               Intangible assets, net

 

Intangible assets, net consist of the following (amounts in millions):

 

 

 

At September 30, 2011

 

 

 

Estimated

 

Gross

 

 

 

 

 

 

 

useful

 

carrying

 

Accumulated

 

Net carrying

 

 

 

lives

 

amount

 

amortization

 

amount

 

Acquired definite-lived intangible assets:

 

 

 

 

 

 

 

 

 

License agreements

 

3 - 10 years

 

$

88

 

$

(77

)

$

11

 

Game engines

 

2 - 5 years

 

32

 

(32

)

 

Internally-developed franchises

 

11 - 12 years

 

309

 

(184

)

125

 

Distribution agreements

 

4 years

 

18

 

(16

)

2

 

Acquired indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

Activision trademark

 

Indefinite

 

386

 

 

386

 

Acquired trade names

 

Indefinite

 

47

 

 

47

 

Total

 

 

 

$

880

 

$

(309

)

$

571

 

 

 

 

At December 31, 2010

 

 

 

Estimated

 

Gross

 

 

 

 

 

 

 

useful

 

carrying

 

Accumulated

 

Net carrying

 

 

 

lives

 

amount

 

amortization

 

amount

 

Acquired definite-lived intangible assets:

 

 

 

 

 

 

 

 

 

License agreements

 

3 - 10 years

 

$

88

 

$

(74

)

$

14

 

Game engines

 

2 - 5 years

 

32

 

(30

)

2

 

Internally-developed franchises

 

11 - 12 years

 

309

 

(167

)

142

 

Distribution agreements

 

4 years

 

18

 

(16

)

2

 

Acquired indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

Activision trademark

 

Indefinite

 

386

 

 

386

 

Acquired trade names

 

Indefinite

 

47

 

 

47

 

Total

 

 

 

$

880

 

$

(287

)

$

593

 

 

Amortization expense of intangible assets was $7 million and $22 million for the three and nine months ended September 30, 2011, respectively.  Amortization expense of intangible assets was $21 million and $50 million for the three and nine months ended September 30, 2010, respectively.

 

The carrying amounts as of September 30, 2011 and December 31, 2010 in the tables above reflect a new cost basis for license agreements, game engines and internally-developed franchises due to impairment charges taken for the year ended December 31, 2010.  The new cost basis represents the original gross carrying amount, less accumulated amortization and impairment charges of the impaired assets as of December 31, 2010.

 

At September 30, 2011, future amortization of definite-lived intangible assets is estimated as follows (amounts in millions):

 

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2011 (remaining three months)

 

$

48

 

2012

 

36

 

2013

 

18

 

2014

 

10

 

2015

 

8

 

Thereafter

 

18

 

 

 

 

 

Total

 

$

138

 

 

5.               Income taxes

 

The income tax expense of $17 million for the three months ended September 30, 2011 reflected an effective tax rate of 10.7%. The effective tax rate of 10.7% for the three months ended September 30, 2011 differed from the statutory rate of 35.0%, primarily due to foreign income taxes levied at relatively lower rates, geographic mix in profitability, recognition of federal and California research and development credits and federal domestic production deductions and the beneficial impact from certain discrete items recognized in the quarter as we filed our tax returns.

 

For the nine months ended September 30, 2011, the tax rate was based on our projected annual effective tax rate for 2011, and also included certain discrete tax items recorded during the period. Our tax expense of $325 million for the nine months ended September 30, 2011 reflected an effective tax rate of 24.8%, which was slightly lower than the effective tax rate of 26.0% for the nine months ended September 30, 2010, primarily due to the recognition of federal research and development credits and lower taxes in certain states.

 

The overall effective income tax rate for the year could be different from the effective tax rate for the three and nine months ended September 30, 2011 and will be dependent, in part, on our profitability for the remainder of the year. In addition, our effective income tax rates for the remainder of 2011 and future periods will depend on a variety of factors, such as changes in the mix of income by tax jurisdiction, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audits and other matters, and variations in the estimated and actual level of annual pre-tax income or loss.  Further, the effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected by the extent that income (loss) before income tax expenses (benefit) is lower than anticipated in foreign regions where taxes are levied at lower statutory rates and/or higher than anticipated in our domestic region where taxes are levied at higher statutory rates.

 

The Internal Revenue Service (“IRS”) is currently examining the Company’s federal tax returns for the 2009 tax year. The Company also has several state and non-U.S. audits pending   Although the final resolution of the Company’s global tax disputes is uncertain, based on current information, in the opinion of the Company’s management, the ultimate resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. However, an unfavorable resolution of the Company’s global tax disputes could have a material adverse effect on the Company’s business and results of operations in an interim period in which the matters are ultimately resolved.

 

6.               Software development and intellectual property licenses

 

The following table summarizes the components of our software development costs and intellectual property licenses (amounts in millions):

 

 

 

At

 

At

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Internally developed software costs

 

$

172

 

$

142

 

Payments made to third-party software developers

 

92

 

60

 

Total software development costs

 

$

264

 

$

202

 

 

 

 

 

 

 

Intellectual property licenses

 

$

55

 

$

73

 

 

Amortization, write-offs and impairments are comprised of the following (amounts in millions):

 

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Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Amortization of capitalized software development costs and intellectual property licenses

 

$

28

 

$

50

 

$

158

 

$

217

 

Write-offs and impairments

 

 

1

 

 

16

 

 

7.     Comprehensive income and accumulated other comprehensive income (loss)

 

Comprehensive Income

 

The components of comprehensive income were as follows (amounts in millions):

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

148

 

$

51

 

$

986

 

$

651

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(58

)

48

 

(18

)

15

 

Unrealized appreciation on investments, net of taxes

 

 

 

2

 

 

Other comprehensive income (loss)

 

(58

)

48

 

(16

)

15

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

90

 

$

99

 

$

970

 

$

666

 

 

The components of accumulated other comprehensive income (loss) were as follows (amounts in millions):

 

 

 

At

 

At

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Foreign currency translation adjustment

 

$

(29

)

$

(11

)

Unrealized depreciation on investments, net of deferred income taxes of $0 at September 30, 2011 and $(1) at December 31, 2010

 

 

(2

)

Accumulated other comprehensive income (loss)

 

$

(29

)

$

(13

)

 

Income taxes were not provided for foreign currency translation items as these are considered indefinite investments in non-U.S. subsidiaries.

 

8.                  Fair value measurements

 

Fair Value Measurements on a Recurring Basis

 

Financial Accounting Standards Board (“FASB”) literature regarding fair value measurements for financial and non-financial assets and liabilities establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value are as follows:

 

·                   Level 1—Quoted prices in active markets for identical assets or liabilities.

 

·                   Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data.

 

·                   Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

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The table below segregates all assets that are measured at fair value on a recurring basis (which means they are so measured at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date (amounts in millions):

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

 

September 30, 2011 Using

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

Active

 

 

 

 

 

 

 

 

 

 

 

Markets for

 

Significant

 

 

 

 

 

 

 

 

 

Identical

 

Other

 

Significant

 

 

 

 

 

As of

 

Financial

 

Observable

 

Unobservable

 

 

 

 

 

September 30,

 

Instruments

 

Inputs

 

Inputs

 

Balance Sheet

 

 

 

2011

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Classification

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

2,329

 

$

2,329

 

$

 

$

 

Cash and cash equivalents

 

U.S. treasuries with original maturities of three months or less

 

11

 

11

 

 

 

Cash and cash equivalents

 

U.S. treasuries and government agency securities

 

391

 

391

 

 

 

Short-term investments

 

ARS held through Morgan Stanley Smith Barney LLC

 

25

 

 

 

25

 

Long-term investments

 

Total financial assets at fair value

 

$

2,756

 

$

2,731

 

$

 

$

25

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

 

December 31, 2010 Using

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

Active

 

 

 

 

 

 

 

 

 

 

 

Markets for

 

Significant

 

 

 

 

 

 

 

 

 

Identical

 

Other

 

Significant

 

 

 

 

 

As of

 

Financial

 

Observable

 

Unobservable

 

 

 

 

 

December 31,

 

Instruments

 

Inputs

 

Inputs

 

Balance Sheet

 

 

 

2010

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Classification

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

2,216

 

$

2,216

 

$

 

$

 

Cash and cash equivalents

 

U.S. treasuries and foreign government bonds with original maturities of three months or less

 

332

 

332

 

 

 

Cash and cash equivalents

 

U.S. treasuries and government agency securities

 

672

 

672

 

 

 

Short-term investments

 

ARS held through Morgan Stanley Smith Barney LLC

 

23

 

 

 

23

 

Long-term investments

 

Foreign exchange contract derivatives

 

1

 

 

1

 

 

Other assets—current

 

Total financial assets at fair value

 

$

3,244

 

$

3,220

 

$

1

 

$

23

 

 

 

 

The following tables provide a reconciliation of the beginning and ending balances of our financial assets and financial liabilities classified as Level 3 by major categories (amounts in millions) at September 30, 2011 and 2010, respectively:

 

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Level 3

 

 

 

 

 

Total

 

 

 

 

 

financial

 

 

 

 

 

assets at

 

 

 

ARS

 

fair

 

 

 

(a)

 

value

 

Balance at January 1, 2011

 

$

23

 

$

23

 

Total unrealized gains included in other comprehensive income

 

2

 

2

 

Balance at September 30, 2011

 

$

25

 

$

25

 

 

 

 

Level 3

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

financial

 

 

 

 

 

 

 

ARS rights

 

assets at

 

 

 

 

 

ARS

 

from UBS

 

fair

 

Other financial

 

 

 

(a)

 

(b)

 

value

 

liabilities

 

Balance at January 1, 2010

 

$

77

 

$

7

 

$

84

 

$

(23

)

Total gains (losses) (realized/unrealized) included in investment and other income, net

 

7

 

(7

)

 

13

 

Purchases of acquired sales, issuances and settlements

 

(61

)

 

(61

)

 

Balance at September 30, 2010

 

$

23

 

$

 

$

23

 

$

(10

)

 

 

 

 

 

 

 

 

 

 

The amount of total gains(losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2010

 

$

 

$

 

$

 

$

13

 

 


(a)                                   Fair value measurements of the auction rate securities (“ARS”) have been estimated using an income-approach model (specifically, discounted cash-flow analysis). When estimating the fair value, we consider both observable market data and non-observable factors, including credit quality, duration, insurance wraps, collateral composition, maximum rate formulas, comparable trading instruments and the likelihood of redemption. Significant assumptions used in the analysis include estimates for interest rates, spreads, cash flow timing and amounts, and holding periods of the securities. Assets measured at fair value using significant unobservable inputs (Level 3) represent 1% of our financial assets measured at fair value on a recurring basis at September 30, 2011.

 

In June 2010, we sold the remainder of our ARS held with UBS at par and recognized a gain of $7 million, which is included within investment and other income, net in our condensed consolidated statement of operations for the nine months ended September 30, 2010.

 

(b)                                  ARS rights from UBS represented an offer from UBS providing us with the right to require UBS to purchase our ARS held through UBS at par value. To value the ARS rights, we considered the intrinsic value, time value of money, and our assessment of the credit worthiness of UBS. We exercised our ARS rights with UBS on June 30, 2010 and recorded a loss of $7 million, which is included within investment and other income, net in our condensed consolidated statement of operations for the nine months ended September 30, 2010.

 

Foreign Currency Forward Contracts Not Designated as Hedges

 

We transact business in various currencies other than the U.S. dollar and have significant international sales and expenses denominated in currencies other than the U.S. dollar, subjecting us to currency exchange rate risks. To mitigate our risk from foreign currency fluctuations we periodically enter into currency derivative contracts, primarily swaps and forward contracts with maturities of twelve months or less, with Vivendi as our principal counterparty. We do not hold or purchase any foreign currency contracts for trading or speculative purposes and we do not designate these forward contracts or swaps as hedging instruments.

 

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Accordingly, we report the fair value of these contracts in our condensed consolidated balance sheet with changes in fair value recorded in our condensed consolidated statement of operations. The fair value of foreign currency contracts is estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period.

 

Fair Value Measurements on a Non-Recurring Basis

 

We measure the fair value of certain assets on a non-recurring basis, generally annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.  For the nine-month period ended September 30, 2011, there were no impairment charges related to assets that are measured on a non-recurring basis.

 

The table below presents intangible assets that are not subject to recurring fair value measurement at December 31, 2010 (amounts in millions):

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

 

December 31, 2010 Using

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

Active

 

 

 

 

 

 

 

 

 

 

 

Markets for

 

Significant

 

 

 

 

 

 

 

 

 

Identical

 

Other

 

Significant

 

 

 

 

 

As of

 

Financial

 

Observable

 

Unobservable

 

 

 

 

 

December 31,

 

Instruments

 

Inputs

 

Inputs

 

 

 

 

 

2010

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total Losses

 

Non-financial assets:

 

 

 

 

 

 

 

 

 

 

 

Intangible assets, net

 

$

 

$

 

$

 

$

 

$

326

 

Total non-financial assets at fair value

 

$

 

$

 

$

 

$

 

$

326

 

 

We considered the continued economic downturn within our industry in 2010 and the change in the buying habits of casual consumers while planning for 2011 during the fourth quarter of 2010.  This resulted in a significant revision of our outlook for retail sales of software and a strategy change to, among other things, focus on fewer title releases in the casual genre and discontinue the development of music-based titles. As we considered this change in strategy to be an indicator of a potential impairment of our intangible assets, we updated our future projected revenue streams for certain franchises in the casual games and music genres. We performed recoverability tests and, where applicable, measured the impairment of the related intangible assets in accordance with ASC Subtopic 360-10.

 

Determining whether an impairment has occurred requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the estimated remaining useful life over which these cash flows will occur, the amount of these cash flows and the asset’s residual value, if any. For intangible assets that do not pass the recoverability test, the measurement of an impairment loss requires a determination of fair value, which is based on the best information available. Based on the characteristics of the assets being valued and the availability of information, the Company used the income approach, which presumes that the value of an asset can be estimated by the net economic benefit to be received over the estimated remaining useful life of the asset, discounted to present value. We derived the required cash flow estimates from our historical experience and our internal business plans and applied an appropriate discount rate. Based on this analysis, we recorded impairment charges of $67 million, $9 million and $250 million to license agreements, game engines and internally-developed franchises intangible assets, respectively, for the year ended December 31, 2010 within our Activision Publishing Inc. segment.

 

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9.  Restructuring

 

On February 3, 2011, the Board of Directors of the Company approved a restructuring plan (the “2011 Restructuring”) involving a focus on the development and publication of a reduced slate of titles on a going-forward basis, including the discontinuation of the development of music-based games, the closure of the related business unit and the cancellation of other titles then in production, along with a related reduction in studio headcount and corporate overhead.

 

The following table details the amount of the 2011 Restructuring reserves included in accrued expenses and other liabilities in the condensed consolidated balance sheet at September 30, 2011 (amounts in millions):

 

 

 

 

 

 

 

Contract

 

 

 

 

 

 

 

Facilities

 

termination

 

 

 

 

 

Severance

 

costs

 

costs

 

Total

 

Balance at December 31, 2010

 

$

 

$

 

$

 

$

 

Costs charged to expense

 

19

 

4

 

1

 

24

 

Costs paid or otherwise settled

 

(14

)

 

(1

)

(15

)

Balance at September 30, 2011

 

$

5

 

$

4

 

$

 

$

9

 

 

The 2011 Restructuring charges for the three and nine months ended September 30, 2011 were $3 million and $24 million, respectively.  These charges, as well as the 2011 Restructuring reserve balances at September 30, 2011, were recorded within our Activision Publishing, Inc. segment. We have substantially completed the 2011 Restructuring and we do not expect to incur significant additional restructuring expenses relating thereto.

 

We have completed our implementation of our organizational restructuring plan as a result of the business combination (the “Business Combination”) by and among the Company (then known as Activision, Inc.), Sego Merger Corporation, a wholly-owned subsidiary of the Company, Vivendi S.A. (“Vivendi”), VGAC LLC, a wholly-owned subsidiary of Vivendi, and Vivendi Games, Inc., a wholly-owned subsidiary of VGAC LLC, consummated in July 2008. There were minimal cash payments and no additional charges in our condensed consolidated statement of operations for the three and nine months ended September 30, 2011 relating to that restructuring and we do not expect to incur additional restructuring expenses relating thereto.

 

10.  Operating segments and geographic region

 

Our operating segments are consistent with our internal organizational structure, the manner in which our operations are reviewed and managed by our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), the manner in which operating performance is assessed and resources are allocated, and the availability of separate financial information. We do not aggregate operating segments.

 

Currently, we operate under three operating segments:

 

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 it develops 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 (“DS”) handheld game systems; the PC; Apple iOS devices and other handheld and mobile devices.

 

Blizzard Entertainment, Inc.

 

Blizzard Entertainment, Inc. (“Blizzard”) develops, markets and sells role-playing action and strategy PC-based computer games, including games in the multiple-award winning Diablo and StarCraft franchises.  Blizzard also develops, hosts, and supports its online subscription-based games in the massively multi-player online role-playing game (“MMORPG”) category in which it is a leader in terms of both subscriber base and revenues generated through its World of Warcraft franchise. Blizzard also maintains a proprietary online-game related service, Battle.net.  Blizzard distributes its products and generates revenues

 

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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 the 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 and StarCraft II .

 

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.

 

The CODM reviews segment performance exclusive of the impact of the change in deferred net revenues and related cost of sales with respect to certain of our online-enabled games, stock-based compensation expense, restructuring expense, amortization of intangible assets, and impairment of intangible assets. The CODM does not review any information regarding total assets on an operating segment basis, and accordingly, no disclosure is made with respect thereto.  Information on the operating segments and reconciliations of total segment net revenues from external customers and total segment income (loss) from operations to consolidated net revenues and income before income tax expense for the three and nine months ended September 30, 2011 and 2010 are presented below (amounts in millions):

 

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Three months ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

Income from operations

 

 

 

Net revenues

 

before income tax expense

 

Activision

 

$

253

 

$

314

 

$

(36

)

$

(43

)

Blizzard

 

297

 

481

 

120

 

246

 

Distribution

 

77

 

62

 

1

 

1

 

Operating segments total

 

627

 

857

 

85

 

204

 

 

 

 

 

 

 

 

 

 

 

Reconciliation to consolidated net revenues / operating income and consolidated income before income tax expense:

 

 

 

 

 

 

 

 

 

Net effect from deferral of net revenues and related cost of sales

 

127

 

(112

)

105

 

(97

)

Stock-based compensation expense

 

 

 

(18

)

(34

)

Restructuring

 

 

 

(3

)

 

Amortization of intangible assets

 

 

 

(7

)

(18

)

Consolidated net revenues / operating income

 

$

754

 

$

745

 

162

 

55

 

Investment and other income, net

 

 

 

 

 

3

 

14

 

Consolidated income before income tax expense

 

 

 

 

 

$

165

 

$

69

 

 

 

 

Nine months ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

Income from operations

 

 

 

Net revenues

 

before income tax expense

 

Activision

 

$

898

 

$

983

 

$

42

 

$

(88

)

Blizzard

 

968

 

1,086

 

425

 

559

 

Distribution

 

214

 

185

 

1

 

(1

)

Operating segments total

 

2,080

 

2,254

 

468

 

470

 

 

 

 

 

 

 

 

 

 

 

Reconciliation to consolidated net revenues / operating income and consolidated income before income tax expense:

 

 

 

 

 

 

 

 

 

Net effect from deferral of net revenues and related cost of sales

 

1,268

 

765

 

943

 

539

 

Stock-based compensation expense

 

 

 

(61

)

(94

)

Restructuring

 

 

 

(24

)

(3

)

Amortization of intangible assets

 

 

 

(22

)

(47

)

Consolidated net revenues / operating income

 

$

3,348

 

$

3,019

 

$

1,304

 

$

865

 

Investment and other income, net

 

 

 

 

 

7

 

15

 

Consolidated income before income tax expense

 

 

 

 

 

$

1,311

 

$

880

 

 

Geographic information for the three and nine months ended September 30, 2011 and 2010 is based on the location of the selling entity.  Net revenues from external customers by geographic region were as follows (amounts in millions):

 

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Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Net revenues by geographic region:

 

 

 

 

 

 

 

 

 

North America

 

$

360

 

$

406

 

$

1,687

 

$

1,675

 

Europe

 

323

 

281

 

1,385

 

1,142

 

Asia Pacific

 

71

 

58

 

276

 

202

 

Total consolidated net revenues

 

$

754

 

$

745

 

$

3,348

 

$

3,019

 

 

Net revenues by platform were as follows (amounts in millions):

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Net revenues by platform:

 

 

 

 

 

 

 

 

 

Online subscriptions*

 

$

336

 

$

289

 

$

1,090

 

$

890

 

Console

 

277

 

298

 

1,711

 

1,642

 

Hand-held

 

19

 

23

 

82

 

101

 

PC and Other

 

45

 

73

 

251

 

201

 

Total platform net revenues

 

677

 

683

 

3,134

 

2,834

 

Distribution

 

77

 

62

 

214

 

185

 

Total consolidated net revenues

 

$

754

 

$

745

 

$

3,348

 

$

3,019

 

 


*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.

 

We did not have any single external customer that accounted for 10% or more of net revenues for the three or nine months ended September 30, 2011 and 2010.

 

11.  Goodwill

 

The changes in the carrying amount of goodwill by operating segment for the nine months ended September 30, 2011 are as follows (amounts in millions):

 

 

 

Activision

 

Blizzard

 

Distribution

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2010

 

$

6,942

 

$

178

 

$

12

 

$

7,132

 

Tax benefit credited to goodwill

 

(8

)

 

 

(8

)

Issuance of contingent consideration

 

3

 

 

 

3

 

Foreign exchange

 

(1

)

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2011

 

$

6,936

 

$

178

 

$

12

 

$

7,126

 

 

The tax benefit credited to goodwill represents the tax deduction resulting from the exercise of stock options that were outstanding and vested at the consummation of the Business Combination and included in the purchase price of the Company, to the extent that the tax deduction did not exceed the fair value of those options. Conversely, to the extent that the tax deduction did exceed the fair value of those options, the tax benefit is credited to additional paid-in capital.

 

Issuance of contingent consideration consists of additional purchase consideration paid during 2011 in relation to a previous acquisition.

 

12.  Computation of basic/diluted earnings per common share

 

The following table sets forth the computation of basic and diluted earnings per common share (amounts in millions, except per share data):

 

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Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Numerator: