Activision Blizzard Conference Call Highlights

Activision Blizzard, Inc. ATVI reported its third quarter earnings on Wednesday. Shares are down 1 percent.

Below are some key highlights from its conference call.

Performance:

• We've never produced as much great content in one year as we have in 2014.
• In terms of entirely new franchises, we successfully launched two major franchises.
• Our unyielding commitment to excellence resulted in launching Destiny as the most successful new IP in gaming history and Hearthstone now has over 20 million registered users.
• This year, we're delivering some of the best content in our company's history for some of the world's strongest and most recognizable entertainment franchises, including Skylanders Trap Team and Diablo III: Reaper of Souls.
• We remain committed to delivering the best quality entertainment experience to our audiences.
• Call of Duty: Advanced Warfare is the most ambitious Call of Duty release to date, and Blizzard's Warlords of Draeno is on track to be a great success.
• We expect to deliver double-digit non-GAAP revenue growth, record earnings per share, and strong cash flow in 2014.
• Most importantly, we continue to deliver to our audiences the types of experiences that they love and expect while strengthening and expanding our franchise portfolio.
• Demand for great premium content is only increasing.
• We have a more than 20-year track record of creating some of the world's most iconic entertainment brands with some of the largest and most engaged player communities in the world.
• Over the next few years, we'll continue to expand our franchise portfolio andto invest in our rich franchise library.
• Blizzard brought iconic World of Warcraft characters to a digital card game optimized for PCs, tablets, and soon mobile devices around the world with free to play access for our audiences.
• In the next year, we expect to release two more new free to play franchises, Blizzard's Heroes of the Storm and Activision's Call of Duty Online.
• Our opportunities have never been greater, and I have never been more excited than I am now about our future.

Financial Metrics:

• For the quarter, on a GAAP basis, we generated better than expected results with revenues of $753 million and a loss per share of $0.03.
• On a non-GAAP basis for the quarter, we generated better than expected and record results with revenues of $1.17 billion, including 43% from digital channels and record Q3 EPS of $0.23., $0.12 better than our previous guidance.
• During the quarter, we successfully expanded our content portfolio with the launch of Destiny, which generated better than expected non-GAAP revenues of over $500 million and achieved non-GAAP profitability in the quarter.
• In addition to Destiny, Call of Duty and Skylanders drove the Activision Publishing business.
• We saw strong contribution from Blizzard Entertainment's World of Warcraft, Diablo III, and Hearthstone's first expansion, the Curse of Naxxramas.
• For the first time, six major franchises contributed during the quarter, highlighting the increasing breadth and depth of our expanding content portfolio with recurring revenue streams.
• Within our six franchises, we saw did strong digital demand in subscriptions, paid extra content, value added services, and full game downloads.
• For Destiny and Diablo III on console, full game downloads drove a high-teens percentage of total console volume.
• Through September, on a year-to-date basis, we generated non-GAAP revenues of over $1.15 billion from digital channels up 25% year-over-year. Obviously, the migration of our business to digital is happening rapidly, and we expect this trend to provide long-term operating benefits in the future.
• Our non-GAAP tax rate was 17%.
• Please note that about half of our Q3 over-performance was due to the timing of revenues and expenses.
• In Q3, we generated non-GAAP adjusted EBITDA of $280 million, which we define as non-GAAP operating income and then add back depreciation.
• Our adjusted EBITDA margin was 24% in the quarter.
• We generated approximately $1 billion of operating cash flow.
• Turning to the balance sheet, as of September 30 we had over $3.8 billion in cash and investments.
• We held over $550 million of that amount domestically.
• In summary, Q3 was a record quarter for Activision Blizzard, driven by the record-setting launch of Destiny, the resurgence of World of Warcraft subscribers.
• Our increasingly broad and diversified portfolio, which generated strong digital demand across multiple titles, platforms and models.
• Turning to Q4, our major launches include Activision Publishing's, Skylanders Trap Team, Call of Duty: Advanced Warfare, and Destiny's first expansion, as well as Blizzard Entertainment's upcoming World of Warcraft expansion, Warlords of Draenor.

Guidance:

• In the December quarter on a GAAP basis, we expect net revenues of approximately $1.5 billion, product costs of 31%, and operating expenses of 47%.
• We expect GAAP and non-GAAP interest expense of $51 million, GAAP tax rate of 23%, and EPS of $0.28, based on a fully diluted weighted average share count of 748 million shares.
• We expect net revenues of $2.2 billion, product cost of 27%, operating expenses of 32%, and an operating margin of 41%.
• We expect a non-GAAP tax rate of 25% and non-GAAP EPS of $0.86.
• We expect net revenues of $4.33 billion, product costs of 28%, and operating expenses of 48%.