Edgar Filing: Activision Blizzard, Inc.

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 March 31, 2013

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 May 1, 2013 was 1,117,541,849.

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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

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	Cautionary Statement	3

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at March 31, 2013 and December 31, 2012	4

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and March 31, 2012	5

	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and March 31, 2012	6

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and March 31, 2012	7

	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2013	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	35

PART II.	OTHER INFORMATION	35

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 6.	Exhibits	36

SIGNATURE		37

EXHIBIT INDEX		38

CERTIFICATIONS

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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 financial or operating performance; and (4) statements of assumptions underlying such statements. Activision Blizzard, Inc. (“Activision Blizzard”) generally uses 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, 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, particularly during the expected console transition, 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, 2012, as amended. 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 Inc.’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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ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in millions, except share data)

	At March 31,			At December 31,
	2013			2012
Assets
Current assets:
Cash and cash equivalents	$	4,299		$	3,959
Short-term investments	319			416
Accounts receivable, net of allowances of $244 and $332 at March 31, 2013 and December 31, 2012, respectively	237			707
Inventories, net	159			209
Software development	143			164
Intellectual property licenses	11			11
Deferred income taxes, net	409			487
Other current assets	226			321
Total current assets	5,803			6,274

Long-term investments	9			8
Software development	160			129
Intellectual property licenses	10			30
Property and equipment, net	133			141
Other assets	10			11
Intangible assets, net	64			68
Trademark and trade names	433			433
Goodwill	7,103			7,106
Total assets	$	13,725		$	14,200

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	186		$	343
Deferred revenues	1,125			1,657
Accrued expenses and other liabilities	588			652
Total current liabilities	1,899			2,652
Deferred income taxes, net	83			25
Other liabilities	208			206
Total liabilities	2,190			2,883

Commitments and contingencies (Note 12)

Shareholders’ equity:
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,116,913,935 and 1,111,606,087 shares issued at March 31, 2013 and December 31, 2012, respectively	—			—
Additional paid-in capital	9,498			9,450
Retained earnings	2,132			1,893
Accumulated other comprehensive income (loss)	(95		)	(26		)
Total shareholders’ equity	11,535			11,317
Total liabilities and shareholders’ equity	$	13,725		$	14,200

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
	March 31,
	2013		2012

Net revenues
Product sales	$	990	$	874
Subscription, licensing, and other revenues	334		298
Total net revenues	1,324		1,172

Costs and expenses
Cost of sales – product costs	260		257
Cost of sales – online subscriptions	57		69
Cost of sales – software royalties and amortization	61		31
Cost of sales – intellectual property licenses	38		7
Product development	125		114
Sales and marketing	107		79
General and administrative	89		102
Total costs and expenses	737		659

Operating income	587		513

Investment and other income (expense), net	2		1

Income before income tax expense	589		514

Income tax expense	133		130

Net income	$	456	$	384

Earnings per common share
Basic	$	0.40	$	0.34
Diluted	$	0.40	$	0.33

Weighted-average number of shares outstanding
Basic	1,113		1,120
Diluted	1,120		1,127

Dividends per common share	$	0.19	$	0.18

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 COMPREHENSIVE INCOME

(Unaudited)

(Amounts in millions)

	For the Three Months Ended
	March 31,
	2013			2012

Net income	$	456		$	384

Other comprehensive income (loss):
Foreign currency translation adjustment	(70		)	38
Unrealized gains on investments, net of deferred income taxes of $0 million and $1 million for March 31, 2013 and 2012, respectively	1			1
Other comprehensive income (loss)	$	(69	)	$	39

Comprehensive income	$	387		$	423

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 Three Months Ended
	March 31,
	2013			2012
Cash flows from operating activities:
Net income	$	456		$	384
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	140			65
Depreciation and amortization	24			23
Amortization and write-off of capitalized software development costs and intellectual property licenses (1)	83			30
Stock-based compensation expense (2)	27			21
Excess tax benefits from stock option exercises	(4		)	(2		)
Changes in operating assets and liabilities:
Accounts receivable, net	465			553
Inventories, net	47			—
Software development and intellectual property licenses	(73		)	(67		)
Other assets	91			174
Deferred revenues	(511		)	(576		)
Accounts payable	(149		)	(215		)
Accrued expenses and other liabilities	(271		)	(237		)
Net cash provided by operating activities	325			153

Cash flows from investing activities:
Proceeds from maturities of available-for-sale investments	113			115
Purchases of available-for-sale investments	(26		)	(187		)
Capital expenditures	(17		)	(9		)
Decrease in restricted cash	10			4
Net cash provided by (used in) investing activities	80			(77		)

Cash flows from financing activities:
Proceeds from issuance of common stock to employees	33			15
Tax payment related to net share settlements of restricted stock rights	(14		)	(2		)
Repurchase of common stock	—			(261		)
Excess tax benefits from stock option exercises	4			2
Net cash provided by (used in) financing activities	23			(246		)

Effect of foreign exchange rate changes on cash and cash equivalents	(88		)	54

Net increase (decrease) in cash and cash equivalents	340			(116		)

Cash and cash equivalents at beginning of period	3,959			3,165

Cash and cash equivalents at end of period	$	4,299		$	3,049

(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 Three Months Ended March 31, 2013

(Unaudited)

(Amounts in millions)

											Accumulated
					Additional						Other			Total
	Common Stock				Paid-In			Retained			Comprehensive			Shareholders’
	Shares		Amount		Capital			Earnings			Income (Loss)			Equity

Balance at December 31, 2012	1,112		$	—	$	9,450		$	1,893		$	(26	)	$	11,317

Components of comprehensive income (loss):
Net income	—		—		—			456			—			456
Other comprehensive income (loss)	—		—		—			—			(69		)	(69		)
Issuance of common stock pursuant to employee stock options	3		—		33			—			—			33
Issuance of common stock pursuant to restricted stock rights	3		—		—			—			—			—
Restricted stock surrendered for employees’ tax liability	(1	)	—		(14		)	—			—			(14		)
Tax benefit associated with employee stock options	—		—		2			—			—			2
Stock-based compensation expense related to employee stock options and restricted stock rights	—		—		27			—			—			27
Dividends ($0.19 per common share) (See Note 11)	—		—		—			(217		)	—			(217		)

Balance at March 31, 2013	1,117		$	—	$	9,498		$	2,132		$	(95	)	$	11,535

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”), video game 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. 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.

Activision Blizzard is the result of the 2008 business combination (“Business Combination”) by and among Activision, Inc., Sego Merger Corporation, a wholly-owned subsidiary of Activision, Inc., Vivendi S.A. (“Vivendi”), VGAC LLC, a wholly-owned subsidiary of Vivendi, and Vivendi Games, Inc. (“Vivendi Games”), a wholly-owned subsidiary of VGAC LLC. In connection with the consummation of the Business Combination, Activision, Inc. was renamed Activision Blizzard, Inc.

The common stock of Activision Blizzard is traded on The NASDAQ Stock Market under the ticker symbol “ATVI.” Vivendi S.A. (“Vivendi”) owned approximately 61% of Activision Blizzard’s outstanding common stock at March 31, 2013.

Based upon our current organizational structure, we have 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 Nintendo Wii U (“Wii U”), and Microsoft Corporation (“Microsoft”) Xbox 360 (“Xbox 360”) console systems; the Nintendo Dual Screen (“DS”) and Nintendo 3DS (“3DS”) handheld game systems; the PC; 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; sales of prepaid subscription cards; revenue from value-added services 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, Diablo III, and StarCraft II products.

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.

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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, 2012, as amended. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for the 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 condensed consolidated financial statements include the accounts and operations of the Company. 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 and accompanying notes. 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. Inventories, net

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

	At March 31, 2013		At December 31, 2012
Finished goods	$	119	$	151
Purchased parts and components	40		58
Inventories, net	$	159	$	209

3. Intangible assets, net

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

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	At March 31, 2013
	Estimated	Gross
	useful	carrying		Accumulated			Net carrying
	lives	amount		amortization			amount
Acquired definite-lived intangible assets:
License agreements and other	3 - 10 years	$	98	$	(89	)	$	9
Internally-developed franchises	11 - 12 years	309		(254		)	55
Acquired indefinite-lived intangible assets:
Activision trademark	Indefinite	386		—			386
Acquired trade names	Indefinite	47		—			47
Total		$	840	$	(343	)	$	497

	At December 31, 2012
	Estimated	Gross
	useful	carrying		Accumulated			Net carrying
	lives	amount		amortization			amount
Acquired definite-lived intangible assets:
License agreements and other	3 - 10 years	$	98	$	(88	)	$	10
Internally-developed franchises	11 - 12 years	309		(251		)	58
Acquired indefinite-lived intangible assets:
Activision trademark	Indefinite	386		—			386
Acquired trade names	Indefinite	47		—			47
Total		$	840	$	(339	)	$	501

Amortization expense of intangible assets was $3 million for the three months ended March 31, 2013 and 2012.

At March 31, 2013, future amortization of definite-lived intangible assets is estimated as follows (amounts in millions):

2013 (remaining nine months)	$	21
2014	19
2015	10
2016	6
2017	4
Thereafter	4

Total	$	64

4. Income taxes

The income tax expense of $133 million for the three months ended March 31, 2013 reflected an effective tax rate of 22.6%, which is lower than the effective tax rate of 25.3% for the three months ended March 31, 2012. The lower rate is due to the recognition of the retroactive reinstatement of the federal research and development (“R&D”) tax credit for the tax year ended December 31, 2012, which was enacted in the first quarter of 2013. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law by the President of the United States. Under the provisions of the American Taxpayer Relief Act of 2012, the R&D tax credit that had expired on December 31, 2011 was retroactively reinstated to January 1, 2012 and is now scheduled to expire on December 31, 2013. The Company recorded a benefit of $12 million related to the R&D tax credit for the tax year ended December 31, 2012 as a discrete item in the first quarter of 2013.

The effective tax rate of 22.6% for the three months ended March 31, 2013 differed from the U.S. 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 R&D credits, and the federal domestic production deduction.

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The overall effective income tax rate for the year could be different from the effective tax rate for the three months ended March 31, 2013 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 2013 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 relatively lower statutory rates and/or higher than anticipated in the United States where taxes are levied at relatively higher statutory rates.

The Internal Revenue Service is currently examining Activision Blizzard’s federal tax returns for the 2008 and 2009 tax years and Vivendi Games’s tax returns for the 2005 through 2008 tax years. While Vivendi Games’s results for the period January 1, 2008 through July 9, 2008 are included in the consolidated federal and certain foreign, state and local income tax returns filed by Vivendi or its affiliates, Vivendi Games’s results for the period July 10, 2008 through December 31, 2008 are included in the consolidated federal and certain foreign, state and local income tax returns filed by Activision Blizzard. 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 our business and results of operations in the period in which the matters are ultimately resolved.

5. Software development and intellectual property licenses

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

	At		At
	March 31,		December 31,
	2013		2012
Internally developed software costs	$	152	$	159
Payments made to third-party software developers	151		134
Total software development costs	$	303	$	293

Intellectual property licenses	$	21	$	41

Amortization, write-offs and impairments of capitalized software development costs and intellectual property licenses are comprised of the following (amounts in millions):

	Three Months Ended March 31,
	2013		2012
Amortization of capitalized software development costs and intellectual property licenses	$	62	$	31
Write-offs and impairments	26		2

6. 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; and

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· 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, including certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The table below segregates all financial 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
			March 31, 2013 Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
	As of		Identical		Observable		Unobservable
	March 31,		Assets		Inputs		Inputs		Balance Sheet
	2013		(Level 1)		(Level 2)		(Level 3)		Classification
Recurring fair value measurements:
Money market funds	$	4,185	$	4,185	$	—	$	—	Cash and cash equivalents
U.S. treasuries and government agency securities	300		300		—		—		Short-term investments
Corporate bonds	11		11		—		—		Short-term investments
Auction rate securities (“ARS”)	9		—		—		9		Long-term investments
Total recurring fair value measurements	$	4,505	$	4,496	$	—	$	9

			Fair Value Measurements at
			December 31, 2012 Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
	As of		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs		Balance Sheet
	2012		(Level 1)		(Level 2)		(Level 3)		Classification
Recurring fair value measurements:
Money market funds	$	3,511	$	3,511	$	—	$	—	Cash and cash equivalents
U.S. treasuries and government agency securities	387		387		—		—		Short-term investments
Corporate bonds	11		11		—		—		Short-term investments
ARS	8		—		—		8		Long-term investments
Total recurring fair value measurements	$	3,917	$	3,909	$	—	$	8

The following tables provide a reconciliation of the beginning and ending balances of our financial assets classified as Level 3 by major categories (amounts in millions) at March 31, 2013 and 2012, respectively:

	Level 3
			Total
			financial
			assets at
	ARS		fair
	(a)		value
Balance at December 31, 2012	$	8	$	8
Total unrealized gains included in other comprehensive income	1		1
Balance at March 31, 2013	$	9	$	9

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	Level 3
			Total
			financial
			assets at
	ARS		fair
	(a)		value
Balance at December 31, 2011	$	16	$	16
Total unrealized gains included in other comprehensive income	1		1
Balance at March 31, 2012	$	17	$	17

(a) Fair value measurements 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. At March 31, 2013, assets measured at fair value using significant unobservable inputs (Level 3), all of which were ARS, represent less than 1% of our financial assets measured at fair value on a recurring basis.

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, principally 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 as hedging instruments. Accordingly, we report the fair value of these contracts in our condensed consolidated balance sheet within “Other current assets” or “Other current liabilities” and with changes in fair value recorded in our condensed consolidated statement of operations within “Investment and other income (expense), net” and “General and administrative expense.” 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 and was not material as of March 31, 2013 and December 31, 2012.

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 three months ended March 31, 2013 and 2012, there were no impairment charges related to assets that are measured on a non-recurring basis.

7. 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 we assess operating performance and allocate resources, and the availability of separate financial information. Currently, we operate under three operating segments: Activision, Blizzard and Distribution (see Note 1 of the Notes to the Condensed Consolidated Financial Statements). We do not aggregate operating segments.

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, and amortization of intangible assets as a result of purchase price accounting. 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 net revenues and total segment operating income to consolidated net revenues from external customers and consolidated income before income tax expense for the three months ended March 31, 2013 and 2012 are presented below (amounts in millions):

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	Three months ended March 31,
	2013		2012		2013			2012
					Income from operations
	Net revenues				before income tax expense
Activision	$	423	$	271	$	112		$	—
Blizzard	330		251		135			89
Distribution	51		65		—			1
Operating segments total	804		587		247			90

Reconciliation to consolidated net revenues / consolidated income before income tax expense:
Net effect from deferral of net revenues and related cost of sales	520		585		369			447
Stock-based compensation expense	—		—		(26		)	(21		)
Amortization of intangible assets	—		—		(3		)	(3		)
Consolidated net revenues / operating income	$	1,324	$	1,172	587			513
Investment and other income (expense), net					2			1
Consolidated income before income tax expense					$	589		$	514

Geographic information for the three months ended March 31, 2013 and 2012 is based on the location of the selling entity. Net revenues from external customers by geographic region were as follows (amounts in millions):

	Three months ended March 31,
	2013		2012
Net revenues by geographic region:
North America	$	738	$	601
Europe	487		485
Asia Pacific	99		86
Total consolidated net revenues	$	1,324	$	1,172

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

	Three months ended March 31,
	2013		2012
Net revenues by platform:
Console	$	749	$	688
Online subscriptions(1)	275		256
Other(2)	156		116
PC	93		47
Total platform net revenues	1,273		1,107
Distribution	51		65
Total consolidated net revenues	$	1,324	$	1,172

(1) Revenue from online subscriptions consists of revenue from all World of Warcraft products, including subscriptions, boxed products, expansion packs, licensing royalties, value-added services, and revenues from Call of Duty® Elite memberships.

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

Long-lived assets by geographic region at March 31, 2013 and December 31, 2012 were as follows (amounts in millions):

	At March 31, 2013		At December 31, 2012
Long-lived assets* by geographic region:
North America	$	89	$	90
Europe	35		40
Asia Pacific	9		11
Total long-lived assets by geographic region	$	133	$	141

*The only long-lived assets that we classify by region are our long term tangible fixed assets, which only include property, plant and equipment assets; all other long term assets are not allocated by location.

We did not have any single external customer that accounted for 10% or more of consolidated net revenues for the three months ended March 31, 2013 and 2012.

8. Goodwill

The changes in the carrying amount of goodwill by operating segment for the three months ended March 31, 2013 are as follows (amounts in millions):

	Activision			Blizzard		Total

Balance at December 31, 2012	$	6,928		$	178	$	7,106
Tax benefit credited to goodwill	(2		)	—		(2		)
Foreign exchange	(1		)	—		(1		)

Balance at March 31, 2013	$	6,925		$	178	$	7,103

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.

9. 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 March 31,
	2013			2012

Numerator:
Consolidated net income	$	456		$	384
Less: Distributed earnings to unvested stock-based awards that participate in earnings	(5		)	(4		)
Less: Undistributed earnings allocated to unvested stock-based awards that participate in earnings	(5		)	(3		)
Numerator for basic and diluted earnings per common share - net income available to common shareholders	446			377

Denominator:
Denominator for basic earnings per common share - weighted-average common shares outstanding	1,113			1,120

Effect of potential dilutive common shares under the treasury stock method: Employee stock options	7			7
Denominator for diluted earnings per common share - weighted-average common shares outstanding plus dilutive effect of employee stock options	1,120			1,127

Basic earnings per common share	$	0.40		$	0.34

Diluted earnings per common share	$	0.40		$	0.33

Our unvested restricted stock rights, which consist of restricted stock units, restricted stock awards, and performance shares, are considered participating securities, as these securities have non-forfeitable rights to dividends or dividend equivalents during the contractual period of the award. Since the unvested restricted stock rights are considered participating securities, we are required to use the two-class method in our computation of basic and diluted earnings per common share. For the three months ended March 31, 2013 and 2012, we had outstanding unvested restricted stock rights with respect to 26 million and 19 million shares of common stock on a weighted-average basis, respectively.

Potential common shares are not included in the denominator of the diluted earnings per common share calculation when inclusion of such shares would be anti-dilutive. Therefore, options to acquire 14 million and 20 million shares of common stock were not included in the calculation of diluted earnings per common share for the three months ended March 31, 2013 and 2012, respectively.

10. Accumulated other comprehensive income (loss)

The components of accumulated other comprehensive income (loss) at March 31, 2013 and 2012, were as follows (amounts in millions):

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	For the three months ended March 31, 2013
	Foreign currency			Unrealized gain
	translation			on available-for-
	adjustments			sale securities		Total
Balance at December 31, 2012	$	(26	)	$	—	$	(26	)
Other comprehensive income (loss) before reclassifications	(70		)	1		(69		)
Amounts reclassified from accumulated other comprehensive income (loss)	—			—		—
Balance at March 31, 2013	$	(96	)	$	1	$	(95	)

	For the three months ended March 31, 2012
	Foreign currency			Unrealized gain
	translation			on available-for-
	adjustments			sale securities		Total
Balance at December 31, 2011	$	(72	)	$	—	$	(72	)
Other comprehensive income (loss) before reclassifications	38			1		39
Amounts reclassified from accumulated other comprehensive income (loss)	—			—		—
Balance at March 31, 2012	$	(34	)	$	1	$	(33	)

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

11. Capital transactions

Repurchase Program

On February 2, 2012, our Board of Directors authorized a stock repurchase program under which we were authorized to repurchase up to $1 billion of our common stock, on terms and conditions to be determined by the Company, during the period between April 1, 2012 and March 31, 2013. There were no repurchases pursuant to this stock repurchase program during the three months ended March 31, 2013.

On February 3, 2011, our Board of Directors authorized a stock repurchase program under which we were authorized to repurchase up to $1.5 billion of our common stock, on terms and conditions to be determined by the Company, until March 31, 2012. For the three months ended March 31, 2012, we repurchased 22 million shares of our common stock for an aggregate purchase price of $261 million pursuant to this stock repurchase program.

Dividend

On February 7, 2013, our Board of Directors declared a cash dividend of $0.19 per common share payable on May 15, 2013 to shareholders of record at the close of business on March 20, 2013. As such, we have included $217 million of dividends payable in “Accrued expense and other liabilities” on our condensed consolidated balance sheet as of March 31, 2013.

On February 9, 2012, our Board of Directors declared a cash dividend of $0.18 per common share to be paid on May 16, 2012 to shareholders of record at the close of business on March 21, 2012. On May 16, 2012, we made an aggregate cash dividend payment of $201 million to such shareholders. On June 1, 2012, the Company made dividend equivalent payments of $3 million related to that cash dividend to the holders of restricted stock units.

12. Commitments and contingencies

At March 31, 2013, we did not have any significant changes to our commitments since December 31, 2012. See Note 17 of the Notes to Consolidated Financial Statements included in Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2012, as amended, for more information regarding our commitments.

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Legal Proceedings

The Company is subject to various legal proceedings and claims. FASB Accounting Standards Codification (“ASC”) Topic 450 governs the disclosure of loss contingencies and accrual of loss contingencies in respect to litigation and other claims. The Company records an accrual for a potential loss when it is probable that a loss will occur and the amount of the loss can be reasonably estimated. When the reasonable estimate of the potential loss is within a range of amounts, the minimum of the range of potential loss is accrued, unless a higher amount within the range is a better estimate than any other amount within the range. Moreover, even if an accrual is not required, the Company provides additional disclosure related to litigation and other claims when it is reasonably possible (i.e., more than remote) that the outcomes of such litigation and other claims include potential material adverse impacts on the Company.

The outcomes of legal proceedings and other claims are subject to significant uncertainties, many of which are outside the Company’s control. There is significant judgment required in the analysis of these matters, including the probability determination and whether a potential exposure can be reasonably estimated. In making these determinations, the Company, in consultation with outside counsel, examines the relevant facts and circumstances on a quarterly basis assuming, as applicable, a combination of settlement and litigated outcomes and strategies. Moreover, legal matters are inherently unpredictable and the timing of development of factors on which reasonable judgments and estimates can be based can be slow. As such, there can be no assurance that the final outcome of any legal matter will not materially and adversely affect our business, financial condition, results of operations, or liquidity.

We are party to routine claims, suits, investigations, audits and other proceedings arising from the ordinary course of business, including with respect to intellectual property rights, contractual claims, labor and employment matters, regulatory matters, tax matters, unclaimed property matters, compliance matters, and collection matters. In the opinion of management, after consultation with legal counsel, such routine claims and lawsuits are not significant and we do not expect them to have a material adverse effect on our business, financial condition, results of operations, or liquidity.

13. Related party transactions

Treasury

Our foreign currency risk management program seeks to reduce risks arising from foreign currency fluctuations. We use derivative financial instruments, primarily forward contracts, with Vivendi as our principal counterparty. The gross notional amount of outstanding foreign exchange forward contracts was $171 million and $355 million at March 31, 2013 and December 31, 2012, respectively. Unrealized and realized gains and losses were not material for the three months ended March 31, 2013 and 2012.

Other

Activision Blizzard has entered into various transactions and agreements, including cash management services, investor agreement, music royalty agreements, and music distribution agreements, with Vivendi and its subsidiaries and other affiliates. None of these services, transactions and agreements with Vivendi and its affiliates is material, either individually or in the aggregate, to the condensed consolidated financial statements as a whole.

14. Recently issued accounting pronouncements

Indefinite-lived intangible assets impairment

In July 2012, the FASB issued an update to the authoritative guidance related to testing indefinite-lived intangible assets for impairment. This update gives an entity the option to first consider certain qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative impairment test. This update is effective for the indefinite-lived intangible asset impairment test performed for fiscal years beginning after September 15, 2012. The adoption of this guidance did not have a material impact on our consolidated financial statements.

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Balance sheet offsetting disclosures

In December 2011, the FASB issued authoritative guidance on the disclosure of financial instruments and derivative instruments that are either offset or subject to an enforceable master netting arrangement or similar agreement and should be applied retrospectively for all comparative periods presented for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Reclassification of accumulated other comprehensive loss

In February 2013, the FASB issued an accounting standards update requiring new disclosures about reclassifications from accumulated other comprehensive loss to net income. These disclosures may be presented on the face of the statements or in the notes to the consolidated financial statements. This update is effective for fiscal years beginning after December 15, 2012. We adopted this guidance and provided the required disclosures in Note 10 of the Notes to Condensed Consolidated Financial Statements.

Accounting for cumulative translation adjustments

In February 2013, the FASB issued an update to the authoritative guidance related to the release of cumulative translation adjustments into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a foreign entity. This update will be effective for fiscal years beginning after December 15, 2013. We are currently evaluating the impact on our consolidated financial statements from the adoption of this guidance.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

Activision Blizzard, Inc. is a worldwide online, personal computer (“PC”), video game 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. Based upon our organizational structure, we conduct our business through three operating segments as follows:

Activision Publishing, Inc.

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; sales of prepaid subscription cards; revenue from value-added services 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, Diablo III and StarCraft II products.

Activision Blizzard Distribution

Business Highlights

For the three months ended March 31, 2013, Activision Blizzard had net revenues of $1.3 billion, as compared to net revenues of $1.2 billion for the same period in 2012, and earnings per diluted share of $0.40, as compared to earnings per diluted share of $0.33 for the same period in 2012.

According to The NPD Group, for U.S. data, Gfk Chart-Track, for Europe data, and internal estimates, for the first quarter of 2013:

· In North America and Europe combined, Activision Publishing was the #1 publisher overall for the quarter, including accessory packs and figures, with the #1 and #2 best-selling franchises — Skylanders and Call of Duty;

· Skylanders Giants™ (including accessory packs and figures) was the #1 best-selling game overall in dollars in both North America and Europe;

· In North America and Europe combined, Call of Duty®: Black Ops II was the #2 best-selling title in dollars; and

· Activision Blizzard had two top-10 PC titles, with Blizzard Entertainment’s StarCraft II: Heart of the Swarm™ and Diablo III, in both North America and Europe.

Additionally, during the three months ended March 31, 2013, Activision Publishing released, among other titles, the first downloadable map pack, Call of Duty: Black Ops II Revolution (“Revolution”), on the Xbox 360 on January 29, 2013, and on other platforms on February 28, 2013, and The Walking Dead: Survival Instinct on Xbox 360, PS3, PC and Wii U on March 19, 2013.

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On March 12, 2013, Blizzard released StarCraft II: Heart of the Swarm, the first expansion to Blizzard’s real-time strategy PC game StarCraft II: Wings of Liberty®. As of the end of its first two days of sales, Heart of the Swarm had sold through approximately 1.1 million copies worldwide, including both retail and digital sales.

Activision Blizzard Recent and Upcoming Product Releases

We have announced and expect to release the following titles and games, among other titles:

· On February 5, 2013, Activision announced Skylanders SWAP Force™, the newest installment in the popular Skylanders franchise.

· On March 22, 2013, Blizzard announced Hearthstone ™: Heroes of Warcraft ™, a new cross-platform free-to-play game for the PC and mobile devices.

· On April 16, 2013, Activision released the second downloadable map pack for Call of Duty: Black Ops II Uprising (“Uprising”) for the Xbox 360. We expect to release Uprising on other platforms later in the second quarter of 2013.

· On April 29, 2013, Blizzard announced that it will release Diablo III for the PS3 later this year. As announced previously, Blizzard also plans to adapt the game for the PlayStation®4, Sony’s next-generation console system.

· On May 1, 2013, Activision announced that it will release its new Call of Duty game, Call of Duty: Ghosts on November 5, 2013.

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. Digital revenues have become an increasingly important part of our business, and we continue to focus on and develop products that can be delivered via digital online channels.

Net revenues from digital online channels represented 28% of the total consolidated net revenues for the three months ended March 31, 2013, as compared to 27% for the same period in 2012. On a non-GAAP basis, which excludes the impact of the change in deferred net revenues, net revenues from digital online channels represented 53% of the total consolidated net revenues for the three months ended March 31, 2013, as compared to 51% for the same period in 2012. The increases in non-GAAP digital online channels were primarily due to the stronger current quarter release of Revolution, as compared to Call of Duty: Modern Warfare® 3 Content Collection #1, and the release of StarCraft II: Heart of the Swarm.

Please refer to the reconciliation between GAAP and non-GAAP financial measures later in this document for further discussions of retail and digital online channels.

Conditions in the retail channels of the video games industry have remained challenging during the first three months of 2013. In the U.S. and Europe, retail sales of video games were flat as compared to the same period in 2012, according to The NPD Group and Gfk Chart-Track. In addition, in the first three months of 2013, the video game industry was benefited by the addition of an extra week as compared to the first three months of 2012, and with Easter sales falling into the first quarter of 2013 as opposed to the second quarter of 2012.

Despite the challenges in the retail channels, the industry’s top five titles (including accessory packs and figures) grew 24% for the three months ended March 31, 2013, as compared to the same period in 2012. This has resulted in the further concentration of revenues in the top titles, particularly for high-definition platforms, which experienced year-over-year growth with a higher number of premier releases during the period as compared to the first three months of 2012. The Company’s results have been more favorable as compared to the overall trends in retail because of our greater focus on premier top titles and a more focused overall slate of titles.

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Consolidated Statements of Operations Data

The following table sets forth consolidated statements of operations data for the periods indicated in dollars and as a percentage of total net revenues (amounts in millions):

	Three months ended March 31,
	2013				2012

Net revenues:
Product sales	$	990	75	%	$	874	75	%
Subscription, licensing, and other revenues	334		25		298		25
Total net revenues	1,324		100		1,172		100

Costs and expenses:
Cost of sales — product costs	260		20		257		22
Cost of sales — online subscriptions	57		4		69		5
Cost of sales — software royalties and amortization	61		5		31		3
Cost of sales — intellectual property licenses	38		3		7		—
Product development	125		9		114		10
Sales and marketing	107		8		79		7
General and administrative	89		7		102		9

Total costs and expenses	737		56		659		56

Operating income	587		44		513		44

Investment and other income (expense), net	2		—		1		—

Income before income tax expense	589		44		514		44

Income tax expense	133		10		130		11

Net income	$	456	34	%	$	384	33	%

Operating Segment Results

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	Three months ended March 31,
							Increase
	2013			2012			(Decrease)

Segment net revenues:
Activision	$	423		$	271		$	152
Blizzard	330			251			79
Distribution	51			65			(14		)
Operating segment net revenue total	804			587			217

Reconciliation to consolidated net revenues:
Net effect from deferral of net revenues	520			585
Consolidated net revenues	$	1,324		$	1,172

Segment income from operations:
Activision	$	112		$	—		$	112
Blizzard	135			89			46
Distribution	—			1			(1		)
Operating segment income from operations total	247			90			157

Reconciliation to consolidated operating income and consolidated income before income tax expense:
Net effect from deferral of net revenues and related cost of sales	369			447
Stock-based compensation expense	(26		)	(21		)
Amortization of intangible assets	(3		)	(3		)

Consolidated operating income	587			513
Investment and other income (expense), net	2			1
Consolidated income before income tax expense	$	589		$	514

Segment Net Revenues

Activision

Activision’s net revenues increased for the three months ended March 31, 2013, as compared to the same period in 2012, primarily due to stronger performances of the Call of Duty and Skylanders franchises, including catalog sales of titles from both franchises. Revolution generated higher revenues than Call of Duty: Modern Warfare 3 Content Collection #1, due to our renewed focus on downloadable map packs, sold a la carte or as part of a season pass. Compared to the same period in the prior year, the stronger performance of Call of Duty: Black Ops II, as compared to Call of Duty: Modern Warfare 3, and stronger sales of Skylanders Giants and Skylanders Spyro’s Adventure® toys and accessories, as compared to Skylanders Spyro’s Adventure alone in the prior year, also contributed to the increase.

Blizzard

Blizzard’s net revenues increased for the three months ended March 31, 2013, as compared to the same period in 2012, primarily due to the release of StarCraft II: Heart of the Swarm on March 12, 2013, and revenues from sales of Diablo III, which was released in May 2012. The increase was partially offset by lower value-added services revenues and lower World of Warcraft subscription revenues resulting from a lower number of subscribers.

At March 31, 2013, the worldwide subscriber* base for World of Warcraft was 8.3 million, compared to a subscriber base of 9.6 million at December 31, 2012, and 10.2 million at March 31, 2012. The subscriber decline was primarily attributable to the East, with a smaller relative decrease in the West (where the “East” includes China, Taiwan, and South Korea, and the “West” includes North America, Europe, Australia, New Zealand, and Latin America). Subscribership has declined since the September 2012 release of the latest expansion pack, World of Warcraft: Mists of Pandaria®, with casual players in the East playing less. In general, the average revenue per subscriber is lower in the East than in the West. Looking forward, our objective is to deliver new game content for World of Warcraft in all regions to further appeal to the gaming community.

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

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Distribution

Distribution’s net revenues decreased for the three months ended March 31, 2013, as compared to the same period in 2012, which was largely due to the continued weakness in video games retail sales, particularly in the United Kingdom.

Segment Income from Operations

Activision

For the three months ended March 31, 2013, Activision’s operating income increased, as compared to the same period in 2012, primarily driven by higher net revenues as previously described and lower product development costs because of higher capitalization of product development costs and a more focused slate from our value business. The increase was partially offset by higher costs of sales (consistent with higher net revenues), higher intellectual property expenses related to a write-down of capitalized costs, and higher sales and marketing expense in connection with the Skylanders franchise and the reveal of Destiny™, Bungie’s next big action game universe.

Blizzard

Blizzard’s operating income increased for the three months ended March 31, 2013, as compared to the same period in 2012, primarily as a result of the increase in net revenues previously described. The increase was partially offset by higher cost of sales (consistent with higher net revenues), higher software development costs, as more costs were capitalized in the first quarter of 2012 due to the releases of Diablo III in May 2012 and World of Warcraft: Mists of Pandaria in September 2012, and marketing efforts for the release of StarCraft II: Heart of the Swarm.

Non-GAAP Financial Measures

The analysis of revenues by distribution channel is presented both on a GAAP (including the impact from change in deferred revenues) and non-GAAP (excluding the impact from change in deferred revenues) basis. We use this non-GAAP measure internally when evaluating our operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of our management team. We believe this is appropriate because this non-GAAP measure enables an analysis of performance based on the timing of actual transactions with our customers, which is consistent with the way the Company is measured by investment analysts and industry data sources, and facilitates comparison of operating performance between periods. In addition, excluding the impact from change in deferred net revenue provides a much more timely indication of trends in our sales and other operating results. While we believe that this non-GAAP measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation from, as a substitute for, or as more important than, the related financial information prepared in accordance with GAAP. In addition, this non-GAAP financial measure may not be the same as any non-GAAP measure presented by another company. This non-GAAP financial measure has limitations in that it does not reflect all of the items associated with our GAAP revenues. We compensate for the limitations resulting from the exclusion of the change in deferred revenues by considering the impact of that item separately and by considering our GAAP, as well as non-GAAP, revenues.

The following table provides a reconciliation between GAAP and non-GAAP net revenues by distribution channel for the three months ended March 31, 2013 and 2012 (amounts in millions):

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	Three months ended March 31,						Increase
	2013			2012			(Decrease)
GAAP net revenues by distribution channel
Retail channels	$	896		$	793		$	103
Digital online channels(1)	377			314			63
Total Activision and Blizzard	1,273			1,107			166

Distribution	51			65			(14		)
Total consolidated GAAP net revenues	1,324			1,172			152

Change in deferred net revenues(2)
Retail channels	(572		)	(569		)
Digital online channels(1)	52			(16		)
Total changes in deferred net revenues	(520		)	(585		)

Non-GAAP net revenues by distribution channel
Retail channels	324			224			100
Digital online channels(1)	429			298			131
Total Activision and Blizzard	753			522			231

Distribution	51			65			(14		)
Total non-GAAP net revenues (3)	$	804		$	587		$	217

(1) We currently define revenues from digital online channels as revenues from subscriptions and memberships, licensing royalties, value-added services, downloadable content, and digitally distributed products.

(2) We have determined that some of our games’ online functionality represents an essential component of gameplay and as a result, represents a more-than-inconsequential separate deliverable. As such, we are required to recognize the revenues of these game titles over the estimated service periods, which may range from a minimum of five months to a maximum of less than a year. In the table above, we present the amount of net revenues for each period as a result of this accounting treatment.

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

The increase in GAAP net revenues from retail channels for the three months ended March 31, 2013, as compared to the same period in 2012, was primarily due to stronger sales of Call of Duty: Black Ops II, as compared to Call of Duty: Modern Warfare 3, revenues from Diablo III, which was released in May 2012, stronger sales of Skylanders Giants and Skylanders Spyro’s Adventure (including toys and accessories), as compared to sales from only Skylanders Spyro’s Adventure (as the initial title in the franchise) in the prior year, revenues from World of Warcraft: Mists of Pandaria, which was released in September 2012, and revenues from StarCraft II: Heart of the Swarm, which was released in March 2013. The increase was partially reduced by the deferral of revenues from the current quarter release of StarCraft II: Heart of the Swarm.

The increase in non-GAAP net revenues from retail channels for the three months ended March 31, 2013, as compared to the same period in 2012, was primarily due to revenues from the release of StarCraft II: Heart of the Swarm in March 2013, stronger sales of Call of Duty: Black Ops II, as compared to Call of Duty: Modern Warfare 3, and stronger sales of Skylanders Giants and Skylanders Spyro’s Adventure (including toys and accessories), as compared to sales from only Skylanders Spyro’s Adventure (as the initial title in the franchise) in the prior year, and catalog sales of Diablo III, which was released in May 2012.

The increase in GAAP net revenues from digital online channels for the three months ended March 31, 2013, as compared to the same period in 2012, was primarily due to revenues from World of Warcraft: Mists of Pandaria, which was released in September 2012, stronger sales of Call of Duty: Black Ops II, as compared to Call of Duty: Modern Warfare 3, the stronger revenues from the current quarter release of Revolution than revenues from Call of Duty: Modern Warfare 3 Content Collection #1 released in the first quarter of 2012, Diablo III, which was released in May 2012, and revenues from StarCraft II: Heart of the Swarm released in March 2013. The increase in GAAP net revenues from digital online channels for the three months ended March 31, 2013 was partially reduced by the deferral of revenues from the current quarter releases of Revolution and StarCraft II: Heart of the Swarm.

The increase in non-GAAP net revenues from digital online channels for the three months ended March 31, 2013, as compared to the same period in 2012, was primarily due to the stronger revenues from the current quarter release of Revolution than revenues from Call of Duty: Modern Warfare 3 Content Collection #1 released in the first quarter of 2012, and revenues from StarCraft II: Heart of the Swarm. The increase was partially offset by lower revenues from value-added services and subscriptions from our World of Warcraft franchise.

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Consolidated Results

Net Revenues by Geographic Region

The following table details our consolidated net revenues by geographic region for the three months ended March 31, 2013 and 2012 (amounts in millions):

	Three months ended March 31,				Increase
	2013		2012		(Decrease)
Geographic region net revenues:
North America	$	738	$	601	$	137
Europe	487		485		2
Asia Pacific	99		86		13
Consolidated net revenues	$	1,324	$	1,172	$	152

The increase / (decrease) in deferred revenues recognized by geographic region for the three months ended March 31, 2013 and 2012 was as follows (amounts in millions):

	Three months ended March 31,				Increase /
	2013		2012		(Decrease)
Increase/(decrease) in deferred revenues recognized by geographic region:
North America	$	315	$	331	$	(16	)
Europe	169		225		(56		)
Asia Pacific	36		29		7
Total impact on consolidated net revenues	$	520	$	585	$	(65	)

As previously discussed, the Company’s net revenues for the three months ended March 31, 2013 were positively impacted by the revenues from higher Call of Duty catalog and downloadable map pack sales, higher Skylanders catalog sales than the same period in 2012, revenues from Diablo III, which was released in May 2012, and revenues from StarCraft II: Heart of the Swarm, which was released in March 2013. These positive impacts were partially offset by the lower recognition of revenues from catalog sales from our value business as compared to same period in 2012. Additionally, in Europe, the positive impact was partially offset by year-over-year revenue decreases from our distribution segment, and in the Asia Pacific region, the positive impact was partially offset by lower World of Warcraft revenues resulting from a lower number of subscribers.

In the North America and Europe regions, the decrease in deferred revenues recognized was primarily attributable to the revenues deferred from the current quarter releases of Revolution and StarCraft II: Heart of the Swarm, partially offset by the recognition of revenues deferred from Call of Duty titles, as well as Diablo III and World of Warcraft: Mists of Pandaria, which were released in 2012.

In the Asia Pacific region, the increase in deferred revenues recognized was primarily attributable to the recognition of revenues deferred from Diablo III and the World of Warcraft franchise (primarily related to value-added services) partially offset by higher revenues deferred from the current quarter release of Star Craft II: Heart of the Swarm.

Net Revenues by Platform

The following tables detail our net revenues by platform and as a percentage of total consolidated net revenues for the three months ended March 31, 2013 and 2012 (amounts in millions):

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Three months

% of total(3)