Activision 2014 Annual Report Download - page 12

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collectively referred to as “prior- generation”); the personal computer (“PC”); the Nintendo 3DS, Nintendo Dual Screen,
and Sony PlayStation Vita handheld game systems; and mobile and tablet devices.
(ii) 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
games for the PC, console, mobile and tablet platforms, including games in the multiple-award winning Diablo®,
StarCraft®, and Hearthstone®: Heroes of Warcraft™ 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; value-added services, such as in-game purchases and
services; retail sales of physical “boxed” products; online download sales of PC products; purchases and downloads via
third-party console, mobile and tablet platforms; and licensing of software to third-party or related-party companies that
distribute World of Warcraft,Diablo III and StarCraft II products. In addition, Blizzard is the creator of Heroes of the
Storm™, a new free-to-play online hero brawler that is currently in closed beta testing.
(iii) Activision Blizzard Distribution
Our distribution segment (“Distribution”) consists of operations in Europe that provide warehousing, logistical and sales
distribution services to third- party publishers of interactive entertainment software, our own publishing operations, and
manufacturers of interactive entertainment hardware.
Business Results and Highlights
In 2014, Activision Blizzard’s consolidated net revenues were $4.4 billion and consolidated operating income was
$1.2 billion, as compared to consolidated net revenues of $4.6 billion and consolidated operating income of $1.4 billion in
2013. Despite lower net revenues and operating income in 2014, as compared to 2013, we generated comparable cash flows
from operating activities of approximately $1.3 billion in both 2014 and 2013.
As a result of the Purchase Transaction on October 11, 2013, we incurred interest and amortization expenses related to the
Term Loan and Notes of $208 million in 2014 (in each case, as defined below), which reflects a full year of interest
expense, as compared to a partial year of interest and amortization expenses of $58 million in 2013. The increase in interest
and amortization expenses contributed to a lower consolidated net income of $835 million in 2014, as compared to
$1 billion in 2013. Despite lower net income, our diluted earnings per common share increased from $0.95 in 2013 to $1.13
in 2014. The increase was partially due to the reduction in our common shares outstanding by approximately 429 million
shares, as a result of the Purchase Transaction. Our weighted-average share count reflected this reduction in shares
outstanding for all of 2014, as compared to 2013, when the weighted-average share count reflected the reduction for only a
portion of the year.
According to The NPD Group with respect to North America, GfK Chart-Track with respect to Europe, and Activision
Blizzard internal estimates, including toys and accessories, during 2014:
• In North America and Europe combined, Activision was the #1 publisher and had three of the top five
best-selling new releases for the calendar year—#1 Call of Duty: Advanced Warfare, #3 Destiny, and #5
Skylanders Trap Team.
• Activision’s Call of Duty: Advanced Warfare was the #1 top-selling console game globally for the calendar
year. Additionally, in 2014, Call of Duty was the #1 franchise in North America for the sixth year in a row.
• Activision’s Destiny was the #1 top-selling new video game IP and the #3 top-selling new release in North
America and Europe combined for 2014.
• Activision’s Skylanders Trap Team was the #1 top-selling kids console game globally for the calendar year.
For the third consecutive year, Skylanders was the #1 kids video game franchise of the year in the U.S. and
globally.
Product Release Highlights
Games and digital downloadable content released during the year ended December 31, 2014 included:
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Call of Duty: Ghosts Onslaught
(digital downloadable content)
•Call of Duty: Ghosts Devastation (digital downloadable content)
•Call of Duty: Ghosts Invasion (digital downloadable content)
•Call of Duty: Ghosts Nemesis (digital downloadable content)
•Call of Duty: Advanced Warfare
•Curse of Naxxramas™: A Hearthstone Adventure
•Destiny
•Destiny Expansion I: The Dark Below
•Diablo III: Reaper of Souls™
•Diablo III : Reaper of Souls—Ultimate Evil Edition™
•Geometry Wars 3: Dimensions
•Hearthstone: Heroes of Warcraft
•Hearthstone: Heroes of Warcraft—Goblins vs Gnomes™
•Skylanders Trap Team
•The Amazing Spider-Man™ 2
•Transformers™: Rise of the Dark Spark
•World of Warcraft: Warlords of Draenor™
On January 11, 2015, Activision launched a public open beta for Call of Duty Online, a free-to-play game available in
China.
On January 13, 2015, Blizzard began the closed beta test for Heroes of the Storm, its upcoming free-to-play online team
brawler featuring iconic heroes from Blizzard games.
On January 27, 2015, Activision released Call of Duty: Advanced Warfare Havoc, the first downloadable content pack for
Call of Duty: Advanced Warfare on certain platforms.
International Operations
International sales are a fundamental part of our business. Net revenues from international sales accounted for
approximately 50%, 47%, and 50% of our total consolidated net revenues for the years ended December 31, 2014, 2013 and
2012, respectively. In addition to our United States (“U.S.”) operations, we maintain significant operations in Canada, the
United Kingdom (“U.K.”), France, Germany, Ireland, Italy, Sweden, Spain, the Netherlands, Australia, South Korea and
China. An important element of our international strategy is to develop content that is specifically directed toward local
cultures and customs. Our international business is subject to risks typical of an international business, including, but not
limited to, foreign currency exchange rate volatility and changes in local economies. Accordingly, our future results could
be materially and adversely affected by changes in foreign currency exchange rates and changes in local economies.
Management’s Overview of Business Trends
Digital Online Channel Revenues
We provide our products through both retail and digital distribution channels. Many of our video games that are available
through retailers as physical “boxed” software products are also available digitally (from our websites and from websites
and digital distribution channels owned by third parties). In addition, we offer players digital 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 and other value- added services for World of Warcraft and microtransactions for Hearthstone:
Heroes of Warcraft, all of which are digitally delivered and hosted by Battle.net. We have further plans to introduce games
based on some of our most successful franchises which operate online on a free-to-play model with microtransactions,
including Blizzard’s Heroes of the Storm and Activision’s Call of Duty Online.