動視暴雪 (ATVI) 2008 Q1 法說會逐字稿

Good day and welcome to the Activision First Quarter of Fiscal 2008 Financial Results Conference Call. Today's call is being recorded. (OPERATOR INSTRUCTIONS) At this time, for opening remarks and introductions, I would like to turn today's call over to the Vice-President of Investor Relations, Kristin Southey, go ahead, Kristin.

Good Afternoon and thank you shall for joining us today's for Activision's Q1 fiscal '08 conference call. As always, I will start the call with a review of our Safe Harbor disclosure, followed by comments from Bobby Kotick, Chairman and CEO, Thomas Tippl, Chief Financial Officer and Mike Griffith, President and CEO of Activision Publishing. With regard to the Safe Harbor disclosure, I would like to remind everyone that statements will be made during this call that are not historical facts and are forward-looking statements. These forward-looking are based on current expectations and assumptions that are subject to risk and uncertainties we caution that a number of important factors could cause Activision's actual future results and other future circumstances to differ materially from those expressed in any such forward-looking statements.

Such factors include without limitation, sales of the title, shift in consumer spending trends, the seasonal and cyclical nature of the interactive game market, our ability to predict consumer preferences and on competing hardware platforms including next generation hardware, declines in software pricing, product returns and price protection, product delays, retail acceptance of our product, adoption rate and availability of new hardware and related software, industry competition, rapid changes in technology and industry standards, protection of our proprietary rights, maintenance of relationships with key personnel, customer, vendors and third-party developers, International and economic and political conditions, natural disasters, integration of recently acquired subsidiaries and identification of suitable feature acquisition opportunities, limitation on our ability to issue stock and option of foreign exchange rates, other factors include the further implementation acceptance and effectiveness of the remedial measures recommended or adopted by special subcommittee of independent directors established in July 2006 to review our historical stock option granting practices, the board of Activision. The outcome of the SEC's formal investigation and the derivative litigation filed in July '06 against certain of our current and former directors and officers relating to Activision stock option granting practices and the possibility that additional planning and proceedings will be commenced, and other non-option related litigation. These important factors and other factors that potential could effect Activision's financial results are described in the filings with the SEC including our most recent 10K and cautionary statements there in and the exhibits thereto. Activision may change its intentions, belief or expectation at any time without notice based upon any changes in such factors and the Company's assumptions or otherwise . We undertake no obligation to release publicly any revisions to any forward-looking statements to reflect events, circumstances of other changes after the date here of or reflect the occupance of unanticipated events.

I would also like to highlight that certain financial commentary in the call will be made excluding the impact of equity based compensation and therefore certain financial measures discussed in this call will not be in accordance with GAAP. Please refer to our earnings release for a full reconciliation of these non-GAAP financial measure to GAAP measures. And now, I would like to introduce Bobby Kotick, our Chairman and

Thank you, Kristin. Today, we are pleased to share with you our record results fot the first quarter and our increased financial outlook for the fiscal year. For the quarter, we substantially exceeded our net revenue and earnings outlook due to the strong sales of the proven franchises, Guitar Hero, Spiderman 3 and Shrek the Third. And our newest intellectual property Transformers. And Company-wide focus on growth and operating margin expansion translated into the highest non-holiday quarterly revenues and earnings in our history. For the trailing 12 months revenues have already exceeded $1.8 billion. For the first time we ended the quarter and the first half of the calendar year as the number one U.S.third-party publisher. For the quarter, we had the number one and number three top selling titles in the market place, Guitar Hero 2 and Spiderman 3 and we also significantly strengthened that platform leadership. For the quarter we were the number one U.S. publisher overall on the two largest platforms, the PSP2 and the X-Box 360, in addition, we were the number one third-party publisher on the PS3 and the Nintendo platforms. WE also made excellent progress against two of our key strategic goals, growing our handheld and International presence.

In the U.S., we were the number one, third-party handheld publisher for MTD and overall we grew worldwide handheld revenues 113% year-over-year. Internationally, we continue to expand and strengthen our global presence and competitive position. For the quarter, International publishing revenues grew more than 240% driven by better execution in our largest markets. Both of our new releases, Shrek the Third and Guitar Hero 2, captured the top spots in the European markets, and for the quarter Spiderman 3 was the number one best selling title in the UK, Germany and France. Our performance clearly illustrates how Activision is expanding its global scale and competitive advantage. Our increasing scale provides cost leverage across all facets of our business and we are beginning to see the benefits of this leverage reflected in our operating results. We continue to deliver against all of our stated financial objectives. Our strong cash position, almost a billion dollars gives us the ability to make strategic investments that will expand our intelluctual property portfolio, extends our next generation development leadership and strengthen our global marketing and distribution footprint. Today, we have more opportunities to grow our franchises and increase our revenue and profitability than ever before. We are also seeing new consumers increasingly interested in gaming. These are consumers like females, older audiences and audiences in new geographic. The new physical interfaces used in Guitar Hero and Wii as well as the intervated use of new technologies like Wi-Fi and touch screen on the handheld, continue to expand our market.

The processing power contained in the PSP3 and the 360 are enabling new features, like realistic facial animation. The loudest spoken words that in the past would not be possible at an acceptable quality level. These changes along with more people playing video games over the Internet, whether casual or core, are making video gaming a more desirable leisure time activity. We see this trend continuing. While growth in the next few years will come from our continued focus on the core package goods business. New opportunities are emerging in areas of in-game advertising, downloadable content and online gaming. These opportunities will contribute to our long-term margin expansion goals. We remain focused on shareholder value creation as we have for the past 17 years. Our first quarter results and our updated fiscal '08 out look demonstrates that the investments we have made in intellectual property, develop and resources and human capital as well as our focus on operating margins are providing superior financial results for our stakeholder. Later in the call, Mike will share some more details of our plans for the remainder of the fiscal year but now Thomas will provide a review the operations for the quarter and our updated outlook for the year.

Thank you, Bobby and good afternoon. I'll start today with a review of the first quarter financial performance and close by covering our increased guidance for the fiscal year. For the June quarter net revenues were $495 million, $70 million higher than our prior outlook and up $307 million versus the prior year. Aforementioned, our regular performance was fueled by strong sales of our consumer franchises Guitar Hero II, Spiderman 3 and Shrek the Third, as well as our new intellectual property TRANSFORMERS. Before I continue with our financial review, I would like to note that certain numbers I will be giving you, including operating income, earnings per share and sales and marketing expansion and G&A spending will be made excluding the impact of the expenses relating to equity based compensation and in accordance with GAAP. Please refer to our earnings release for the reconciliation. For the June quarter, we delivered earnings per share of $0.11. This is higher than anticipated and significant improvement with the prior year. (Inaudible - highly accented language) The main drivers was more power performance and operating leverage. (Inaudible) And Spiderman 3 and Shrek the third and X-Box 360 and in the quarter, we should of TRANSFORMERS to U.S. for the July 4, movie release. In the June quarter, manufacturing and distribution expense was 44% of the net revenues with 58% in the prior year due to improved product mix. And as reviewed at our recent analyst day the disproportionate (inaudible) and the consumer share to higher price next generation product is generating significant gross margin expansion. Product creation cost for the quarter, were 28% of revenues in line with the prior year (Inaudible) and and the calls and the sum of sales (Inaudible) soft and sales with licenses and development expansion. Sales and marking expense for the quarter was 14% of net revenues and this compares favorably to our prior outlook and last years first quarter sales and marketing expense of 19%. We continue to see improvement in this area as we closely monitor the(Inaudible) programs and utilize more efficient spending vehicles by the internet to reach our consumers. (Inaudible - background noise) As a percentage of revenue was 7% compared to 10% last year. And as expected we are making progress with the prior year and however, the 7% still reflects the impact from legal and professional fees related to the stock option review and intangible amortization related to the (Inaudible - highly accented language) acquisition. For the quarter we generated high investment income due to higher cash balances and (Inaudible - highly accented language) interest rates and effective rate was 32%. Now turning to the balance sheet. On June 30, we had 964 million in cash and short term investments an increase of the 171 million versus the prior year and accounts receivable balance was 198 million up 49 million versus the prior quarter due to the higher revenues in the quarter. Inventories were 93 million in line with the prior quarter and on June 30,(Inaudible - highly accented language) it was 70 million and 23 million for the distribution business. We expect our inventory balance at the end of Q2 to be substantially higher as we prepare for the first multiplatform launch of Guitar Hero 3, for which we have significant and firm customers orders on hand. (Inaudible - highly accented language)107million. Decrease of 17 million with the last quarter and Q1 titles. (Inaudible - highly accented language) Property cost were 82 million, down 18 million versus the prior quarter also due to the (Inaudible - highly accented language) of Q1 releases. In summary, fiscal '08 is off to a terrific start. (Inaudible - highly accented language) And it is strong and balanced and better programs in reducing supply and balance for the franchise. We finish the quarter and(Inaudible - highly accented language) previously provided and based on the performance and confidence for the remainder of the year. We have the out look. Activision remains committed and we 10 to execute against (Inaudible - highly accented language) Before getting into the specifics of our financial outlook. I would like to begin by saying today, and factors that could cause results to differ materially. I refer to the civic for a full review of the risk factors. Now, on to the second quarter outlook. To date, we have the shipping transform on multiple platforms. And it is for the PS2 and we plan for the PC and in the last of Q two and early Q3 and it is the final decision on the release date. And for the financial outlook. The last call, we said Q2 earn see will be higher and we were still expecting a loss in the quarter. So for Q2 we are expecting revenues of 250 million. Including FAS 123-R which relates to the expansion of stock options and stock based compensation (Inaudible - highly accented language) $0.04. And excluding FAS 123-R is approximately $0.03. And for the quarter, we expect the distribution cost approximately 50% of net revenues and we expect operating expenses including royalties of approximately 60. (Inaudible - highly accented language) And tax rate of 64% that can be used throughout the year and share count of $286 million. And for the quarter, excluding the impact of FAS 123-R, we expect opening expanses of royalties about 69% and all of them the same as I mentioned a moment ago. As for outlook for the full year. We are increasing and today we expect fiscal '08 of $1.870 billion and we expect operating income excluding FAS 123-R will reach $250 million. More than double year-over-year. Operating margin is expected to reach a new all time high. Exceeding 13% and fiscal '08 and including FAS 123-R. I expect it to be $0.51 and the outlook is approximately $0.6(Inaudible - highly accented language)1. And for the fiscal year. We expect manufacturing and distribution cost of approximately 44% of net revenues. And we expect operating expanses and approximately 45%. And diluted share count of 315 million. For the fiscal year excluding the impact of FAS 123-R, we expect operating expenses including royalties of 43%. This is higher than the prior year as we highlighted. And due to increased mix and larger growing. And our anticipation of it. (Inaudible - highly accented language) And here are the details for P&L. Starting with the sales and marketing expense. We expect it to be up from the prior year due to the fact that I had outlined and it will fall in the range of 13 and 14% which is better than our previous outlook. Due to deficiencies in the first quarter. And the cost will be up during the next general products and increase in licensed and in our publishing. It is development cost for the revenue tens to improve year-over-year. And looking ahead. We should see the better realization and as it continue to say ramp the learning curve and increase the amount that is being off short to locations. Finally, with respect to G&A expense, we expect to see a meaningful improvement and believe the line will come in around the top end the 46% target range. In summary, we expect that fiscal(Inaudible - highly accented language) 2008. Will be the the record and improved the visibility for the full year and today we are increasing it by 130 basis point to say an all time high of 13.3% and special increase in operating income will mark another significant step forward towards our chief operating segment forward. Now, I would like to turn it over to Mike Griffith, President and Demo of Activision Publishing who will provide his thoughts on fiscal '08 and beyond.

Thank you, Thomas. My comments will focus on two areas. (Inaudible - background noise) Where we see the hardware and software markets and how we are looking at the fiscal 2008 and beyond. Overall, industry fundamentals are very strong and continue to improve. On June 30th, the installed base of hardware in North America for current and next generation systems including handheld was approximately 131 million units. The very large installed base of PS2 combined with the growing installed base for all three of the NextGen systems bodes well for our performance this year. We believe growth will be also fueled by continued strength in handheld platforms and eventually lower price current GEN hardware. With respect to the hardware market as of today, we expect the following increases in North America during the calendar year. We are estimating PS2 will be up 4 to 5 million units and we are anticipating 3 million PS3 units, we expect X-Box 360 growth of 4 to 5 million units we also expect about 5 million plus units from the Wii and finally we expect handhelds will grow 12 to 13 million units.

Moving to software, and as you know, we define our market to include all major platforms in North America and Europe. For calendar 2007, we expect the combined North American and European software markets for current and NexGen consoles handheld and PC to grow approximately 12 to 15% driven in part by a strong installed base of hardware. With respect to software pricing, to date, we continue to be pleased by the consumer and retail acceptance of the higher NexGen pricing. We expect that traditional software launch pricing for the X-Box 360 and PS3 will hold at $59.99 and for the Wii at $49.99. Of course pricing decisions for front line current GEN console titles will be made on a title by title basis base on quality and other factors. And always, we will be monitoring pricing conditions very closely and remain mindful of competitive practices.

Turning now to the fiscal 2008, our record Q1 performance was driven by broad slate and strong commercial execution both in the U.S. and Europe. We are pleased in our success in driving the top line while continuing our margin expansion agenda. Our focus on consumer marketing, retail sales category management and in-store execution focused against our largest market and our largest customers is paying off and will continue to be a key focus for the Company.

For the second quarter. We will continue to support the multi platform launch of TRANSFORMERS worldwide. TRANSFORMERS had a very strong launch in the U. S. coming in as the number three product overall in June for NPD and the European launch is now underway. In the UK, TRANSFORMERS recently debated as the number one title in all formats. This title should also get another boost in the holiday with the DVD launch.

In addition, we will continue to roll out our Shrek launch internationally as the movie opens in new countries. We always recently launched Guitar Hero Encore; Rocks the 80s for the PS2. This skew had the highest first day sale through in Activision history demonstrating continued strong growth potential for the franchise. Finally, we are planning to ship Enemy Territory Quake Wars for the PC in the last week of Q2 or early Q3. This title is nominated as best action game and best PC game by E3 game critics.

Looking to Q3, we will come to market with an exceptionally strong line up in a market that is poised to reward big titles. We will start by leveraging the theatrical promotions surrounding the DVDs releases of our movie based titles Spiderman 3, Shrek the Third and TRANSFORMERS as these titles take advantage of renewed marketing support a larger installed base and stronger seasonality. In addition, our holiday line up will be anchored by high quality slate based on the most sucessful franchises in our company's history including Tony Hawk, Call of Duty, and Guitar Hero all of which nominated for the Best-of- E3 Awards and will launch before Thanksgiving. Last year we grew the Tony Hawk franchise and we are particularly excited about Tony Hawk proven ground this years new title which is getting strong feedback and which will launch across multiple platforms this fall. This year we are allocating a portion of our marketing spend on the Tony Hawk brand toward interactive demos on the 360 and PS 3 ahead of the game's launch.

We consistently see in our testing that trial is one of the key drivers of purchase intent for this title and offers consumers a compelling demo will highlight the competitive advantage we have built on this franchise over the last nine years. Next, we will look to further capitalize on the success of the Call of Duty franchise with Call of Duty 4; Modern War Fare The Call of Duty franchise was our largest seller in fiscal 2007 and this title marks the fifth consecutive annual release. The game is designed to take true advantage of the next GEN technology and will released on the X-box360, PS2 and PC. Consumer interest is very high for this title and preorders are up significantly versus the prior year. The title will also come with a variety of downloadable content. Many of you got to see the title first hand at E3 and the incredible leap forward it represent for the franchise and not surprisingly, it was named by the E3 game critics as the best action game ahead of other high profile games.

Third we will continue to broaden our leadership in the super hero category with the release of our new marvel title; Spiderman Friend or Foe. Which is targeted at the younger demographic and perfect for the holiday season. This title will benefit from the momentum and advertising spend creat by the theatrical release and DVD launch of Spiderman 3 and provide a nice differentiated compliment to our Spiderman 3 game. Next, in terms of new intellectual property we will release the B movie. Our next Dream Works movie base title which will coincide with holiday theatrical release starring Jerry Seinfeld. Also launching world wide this holiday will be Guitar Hero 3; Legends of Rock, across multiple platforms. Guitar Hero is currently the number one1 franchise in the U.S. market and to date has only been released on the PS2 and X-Box 360. To put the opportunity in perspective this holiday.

Guitar Hero 3 will launch on the PS2, X-Box 360 and PS3 and Nintendo Wii, which today represents a 50 million unit install base in the US and nearly 90 million units worldwide. This compares to potentially competitive product which we will launch on the PS3 and 360 which represent only a 7 million unit installed base in the US. So we feel Guitar Hero will continue to build the genre that it created. The strength of this product has resulted in unprecedented interest from our retailers who are already placing their Q3 orders providing us with increased visibility for the holiday. To insure we continue our momentum with the consumer, we will have over 30,000 in-store kiosk worldwide where consumers can play the game. This is more than triple the number of kiosk we had last year. and to support the launch, we had significantly increased our capacity for guitar production and we will be ready for multi platform and worldwide demand this holiday.

In addition we will offer a full selection of internationally relevant music and downloadable content. We also plan to expand the depth and breadth of the franchise through continued and Guitar Hero 1 and 2, which will provide additional content for our new Guitar Hero 3 consumers. And Guitar Hero has the right music and right innovative features to continue expanding. Our song list is extensive featuring bands including Metallica, the Rolling Stones, Red Hot Chili Peppers and Guns and Roses. The game builds on its competitive play strength by introducing boss battles for players challenge legends of rock n' roll in side by side play and finally the Guitar has been innovate and will wireless across all platforms. So in summary our fiscal 2008 lineup is the strongest in the Company's history and with our improved visible on the year, we are increasing our fiscal 2008 net revenue guidance to 1.87 billion marking our sixteenth consecutive year of growth. In fiscal 2008, we will more than double operating income and expect record earnings per share in operating margins.

Beyond this fiscal 2009 already looks robust driven by block buster movie games such as James Bond, Dream Works Kung Fu Panda and Madagascar 2. We will also focus on driving Guitar Hero further and coninuing to broaden our core franchises like Tony Hawk and Call of Duty in addition to supporting our leadership position in the super hero category with two new releases. In fiscal 2009, we see the market continuing to expand at a double-digit rate, we see our portfolio of brands continuing to grow, we see increasing revenues from emerging markets and lastly a continued focus on shareholder value creation.

So with that, I would like to thank you for your time and the opportunity to share our initiatives with you for the future. I will now open up the call for you questions.

Thank you. The questions and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Well take our first question from Ralph Schackart from William Blair.

Good afternoon. Another great quarter, guys. I know you alluded to it, or talked about it on the call in terms of increasing guitar production. But do you think you're at a very good point, in front of the holiday season, to be able to anticipate demand and if it's, you know, an increased demand than you anticipated, can you gear up production to make sure that the product is available in the stores?

Sure, well, if you know, there's certainly a lead time associated with the hardware production along with this gain. But, as I said on the call, we have put a lot of effort against increasing and streamlining our product supply situation for guitars on Guitar Hero. We anticipate that we are fully ready for the demand and if for some reason we find ourselves short of supply, I think we're all going to be extraordinarily happy.

Great. And one follow up, Mike, now that GTA force slipped into calendar '08. Does that change your market outlook for the installed base for hardware platforms through the end balance of the year?

You know, Ralph, because it's such a new development, we haven't had a chance to really assess what the changes would be. I would say, one possibility is that now, Call of Duty 4 is likely to be the number 1 product on the PS3, but I think it's a little early to figure out just yet how all of that opened to buy or get reallocated and what that would to to our business in the quarter.

Okay and Bob do you want to give us any insights to what Guitar Hero looks like on the WII at this point? Do you want to make us wait?

As you know, we are very, very excited about it, and it's -- it's one of the products that takes full advantage of the capable of the WII and we think consumers are going to be especially excited by it as well.

Great, thanks a lot.

We'll take our next question from Heath Terry with Credit Suisse.

Great, thank you. To touch on the GTA issue on a little bit different angle. We've spent the -- probably the last year and a half so far hearing questions about how you would plan around HALO and GTA. Is -- given what we've heard today, is it too late for you to be able to make adjustments on the timing of product that might have been moved around to create room and in that September/October time frame to take advantage of what looks like will be a big gap during the month of October from a product standpoint.

I think, again, as Bobby said. You know, this is brand new news. And we've to to digest it. But certainly, you know, within a reasonable window of time, we have flexibility to adjust our -- our release dates and that's something we'll look at. You know, obviously we've got big titles coming out competitively. There is of course HALO but Guitar Hero and Call of Duty I think are also going to be huge holiday titles. So, you know in the end, I think we'll make appropriate adjustments if we see the need and we've got flexibility to do that within a certain extent.

We are definitely going to allocate resources in trade marketing and sales [to gap filling].

Yes. Okay. And on the Guitar Hero side of things. Obviously seems like we still have a lot of stock outs particularly on the stand alone guitars for the XBox system. Do you have a sense for how big the gap is in terms of supply and demand for the hardware on Guitar Hero and can you quantify for us when and to what degree you think the increase in production needs to be for you to catch up with where demand is?

Well, we think, you know, we've been, you know chasing the supply since we launched this game. You know, we are now getting to the point where we're satisfying the consumer demand which will spike up considerably again when we launch Guitar Hero 3 in the fall. And as I said earlier, I think, you know, based on the best visibility we have of retailer commitments and they've stepped -- excuse me, stepped up early with commitments recognizing the lead time of hardware. Based on all of our consumer research, you know, we expect a sizeable increase in this business on the year and we think we've got it covered on the hardware front.

Great hank you.

Thank you, we'll take our next question from Michael Savner with Banc of America.

Thanks very much. I know you answered questions about Grand Theft, so I will follow up as well -- no, just kidding. I think those were covered pretty well. But, just to dig in a little bit more on Guitar Hero, as we look into the fall. Can you give us a little bit more color on what you're hearing from the retailers in terms of their ability to physically handle the inventory that's going to be coming in both from your guitars and the competitor instruments? Also, you know, is that kiosk support you have, firm support or is that still some what fluid from now through the holidays? And, lastly, I'll -- you know, same part of the question is, will the compatibility of your guitar be compatible with the competitive products or will new guitars not work with the rock band product?

Well, you know, I think first of all you raise a good point on retailer space and this is a big issue and I think you know, an area that we have a very large advantage for with category management capabilities that we put in place and our focus over time on building our retail -- excelling in merchandising capabilities. So, we feel we're very well positioned to work with retailers, they're very interested in stocking full quantities across all skews on Guitar Hero. It's obviously in their best interest in doing that. We've got 30,000 demo stations lined up. Very strong and in the store and off-shelf merchandising support lined up with key retailers. So, we're very encouraged by retailer support. Now that said, you know, I think it does prevent an obstacle for more product to be placed in distribution side by side and I think as long as Guitar Hero does what we think it will do and meets the consumer need and sells well, we're going to have a major advantage in that area.

And the part about interoperability?

Well, you know, I really can't speak to that. We are focusing on our guitar and our software and innovating our guitar and hardware -- or excuse me, our hardware and our software together. We think that's a -- you know, a very important strategic factor. You know for other pieces of software to work with our guitar, you're going to have to have some knowledge about how the buttons have been mapped and so forth. So, you know, I think it is really premature for me to be able to comment on what other products might do interacting with our guitar except to say that as an innovator of the hardware and software together, there is a major advantage.

That's very helpful. Thank you very much.

We will take our next question from Ben Schachter with UBS.

Hello guys, congratulations on a nice quarter.

Thanks you Ben.

Wondered if you could help us understand a bit more about Guitar Hero and how it plays internationally. Can you give a break out of what sales are like today and what you think the localization of the music may mean going forward. And then also on Guitar Hero for the down loads. Is this just going to be a 360 product (inaudible) into this year and also, how do you feel about the pricing of the 360 down loads? Thanks.

Okay, well, I think, you know, on the International side of things we have a major opportunity on Guitar Hero. It was really launched internationally a year behind UF and the development, you know, remains that way. We have, for the first time with Guitar Hero 3, adopted local music content for specific European taste. Which I think was a major initiative that we needed to get after and we very encouraged by that. But the majority of Guitar Hero sales over the past year, still didn't skew towards North America. So, by achieving the split we have in the balance of our company also on Guitar Hero, there is enormous upside potential there for us. And I am sorry, I forget the second part of your question.

It was about online. Will that be only on 360 for Guitar Hero and how do you feel about pricing for Guitar Hero downloads right now? Thank you.

The downloads -- it's a primarily a 360 program we had -- had about a -- almost a 30% of tax rate on the Guitar Hero 2 on the 360. We're pricing about $2.00 a song. We're selling a three song pack for approximately $6.00. So, the consumer seems to be responding well to that.

would say, Ben, there is a focus on broad -- there are a whole host of initiatives to broaden the appeal of Guitar Hero in the international markets. And so you'll continue to see us using that as a big advantage against potential competition, really leveraging our international presence.

Great, thank you.

And your next question from Colin Sebastian with Lazard Capital markets.

Good afternoon. Thanks for taking my question. You mentioned pricing for PS2 titles we made on and individual basis. And I guess, can we assume other than, maybe Guitar Hero, that most of those titles will be $39 or less? And then my second question is you mentioned a little bit for the fiscal year. I know you're not in a position to provide guidance at this point. But can you give us some indication whether you think you can gain market share next year?

Sure. I think, you know, first of all on your PS2 question. There's no doubt the market is predominantly at $39 now a Play Station 2 release titles. But, you know, based on the quality of games, we make the individual pricing decisions and you are right to point out that our Rock the 80's Guitar Hero pack just released at $49 and set, you know, record initial sell through for the company. So, it shows that with the right product, we've got robust pricing opportunity. And for fiscal '09, we are not going to say a lot about it yet on this call. It's obviously too early and we're bullish on how the program is coming together. It's always our intention to build year-over-year revenue and share.

Okay and one housekeeping. Did you -- and I apologize if I missed this. Did you mention the impact of legal and professional fees in the quarter.

No, we haven't. The -- as expected, the impact is coming down a little bit. Quarter over quarter. And the first quarter, it was about 4 million in additionally expansions related to the stock option review and just to preamp another question. The rate of (inaudible) amortization was about $3.5 million.

Okay. Thank you very much.

Thank you, our question will come from Justin Post with Merrill Lynch.

Thank you, could you first comment on how the channel is for Shrek and Spiderman in the U.S. How are you feeling about that?

We feel comfortable with where we are if you look at the channel inventory of Spiderman and Shrek versus their competitors Shrek 2 and Spiderman 2. We're in about the same position relative to the ratio that we've sold through and expect the future opportunity to hold. We've got, you know, the theatrical DVD -- or the DVD releases for the theatrical films coming in the fall. A continued increase in install based, stronger seasonality, big marketing programs. So, you know we think there's an awful lot more opportunity on these titles. But we feel comfortable with where the inventory is today.

Okay, and the company has a really strong record of growth. As you mentioned sixteen years of. How can you manage, maybe your marketing and investment this year or your product release calender to really help your growth, given that this year is off to such a strong start? And next year?

Well that's really not how we are thinking about it. We are trying to maximize the opportunities that present themselves. At the Earliest possible times. So we are going to drive very hard this year and will build the business as far as we can, while at the same time, you know, planning ahead. Not just for next year, but for the next three years and making sure we can keep our track record of growth going.

Great. And then, when you think about the 250 guidance for next quarter. Is Quake in that number? And then the last question, is Call of Duty ready for the Play Station 3 in the quarter? Are you really confident in the [availability] of that game?

We are very confident in the state of (inaudible) late for the holiday season. So, and that's reflected in our guidance. And in the fact that we felt comfortable to increase it this early in the fiscal year. And with regards to Quake, we don't expect it to have a material impact on the quarter where that is going to shape in the last week or the first week of Q3.

Thank you.

Thank you, our next question will come from John Taylor with Arcadia Investment Corporation.

Hello, congratulations from me too. Lets see, I have a couple of questions if I could. Could you guys give us a sense of how big you think the Guitar Hero franchise might be of either total revenues or publish revenues. And, I don't know how -- you know, give us a sense of how, concentrated revenues will be in the product and maybe -- and or how they're going to be spread throughout the year by quarter. Give us maybe some sense of that.

JT, I don't think we will be going into that level of detail from a guidance perspective. But, obviously, you know, its been the number one title in the US and therefore we would expect it, from our perspective for the year, to be the number one title in the portfolio. And beyond that, you know, we really don't provide by (inaudible) guidance.

The only thing I could say on that. It's a title that has proven to be, at least modestly, less seasonal than the industry or the balance of our business.

Great. Okay, good. And then on Guitar Hero 3. Could you give us a sense of what you are assuming , you know, in either Q3 or Q4 or combined, the mix between domestic and

Well, we -- as I said, were primarily a domestic business last year on Guitar Hero. We are looking for significant growth internationally. We certainly over time fully anticipate that we can get to the same split we see in the other franchises. It is not even more, given the universal nature of music, but it's going to take us a little bit of time to get fully to that split.

Okay, great. And then looking, in detail at the sell through on Spiderman and Shrek, by platform. I wonder if you have noticed anything in terms of consumer demand by platform, that is likely to influence the mixed decision you're making by platform as you are go into the holidays. Any changes in the mix between the next gen or the older platforms or handhelds?

You know, we don't really look at it that way in terms of where we put support. Obviously the consumer sell through is going to guide reorders and that's going to guide how we build future quantities of it. You know we see it strong across all the platforms on which it's been launched. You know, continuing to see more robustness than we had originally expected in the Play Station 2 and you know, to some extent that has factored into our future planning But we think it is pretty balanced across all skews. You know, we expect to continue to see a ramp up on Play Station 3, as well

Okay.

And JT, even though we can't give you the forward forecast on the Guitar Hero, for the quarter, Guitar Hero is roughly 30% of the consolidated number.

Okay, for the June quarter?

Yes.

Okay, great. And then last question. The -- so if you take a title like Call of Duty or Guitar Hero 3 and contrast -- I wonder if you could contrast what your marketing spend for you know, one or two of your leading titles, the big big titles, it's going to be this year or last year, say the average budget.

On the marketing spends, JT?

yes.

You know our marketing spend is -- on a percent of revenue basis. Is you know, in line, you know, across most of our titles. We don't really break it out on a specific title basis for competitive reasons. But you know, our overall guidance that we provided, you know varies somewhat, but I think that's a good working range.

Okay. Thank you.

We'll take our next question from Sean Milne with Oppenheimer.

Good afternoon. And thanks for taking my questions. I just wanted to follow on the sales marketing question. Certainly you seem pretty positive on your out look for that for the year. What in the quarter seemed to perform better? If you can just drill down on that. What marketing programs performed best for you. Secondly, you gave the WII number, I believe, if I heard it right, the WII number -- unit number for the US was 5 million. Why so low? And lastly housekeeping. Can you give us a catalog percentage number for the quarter? Thank you.

Let me start with the catalog number. Catalog for the first number was at 23% of consolidated net revenue. And for the WII number. We said 5 plus million.

Okay. And what was most effective on the sales marketing front?

Well, on the sales and marketing front, we have a good balance of activity, we continue to see strong merchandising effectiveness in stores, particularly with display activity. We see continued encouragement that our on line marketing programs are working and driving presales, which have been strong indicators of success. But you know, we have a balance of activity across television, print, on line and so forth. So, we study all those elements pretty carefully and do a lot of post analysis -- with continuing to make adjustments as we go forward.

One thing I think we have been getting very good is on the trade marketing front, is really being able to evaluate effectiveness of the trade programs and I think we are taking some of those processes now to the International markets where we're going to do a better job of evaluating effectiveness of the trade programming in Europe.

Okay. Thank you. Great quarter.

Thank you.

We will take our next question from Arvind Bhatia from Sterne, Agee & Leach.

Good afternoon guys. A question on the James Bond franchise, wonder if you can provide some color on that. Sorry if I missed that, but how big are you planning that particular franchise o be? Can you give us some sort of idea, of you know, how big can it be. You know, is it a Call of Duty type number that we are looking at? And then if you can refresh us on the number of skews in development today in your pipeline?

Sure. Well, on Bond, you know, the [prime us] and the reason that we we acquired the rights to the [international] property, is -- we think it's going to be one of our core franchises. So, we expect it to be one of our largest opportunities going forward. The game is under development now. We are very encouraged by it -- obviously encouraged by the movie -- first movie has done to the franchise. So, we think there is an awful lot of upside potential and of course, time has to play out to see exactly where that is going to go. But we really think that one has got a lot of potential for us. You know our skews under development and you know, I don't think we are going to get into specifically, what we are producing now. We have got about 55 skews that are going to hit the market this fiscal year.

The one thing, Arvind, I -- you know very well that the history of James Bond has been across all platforms and especially on the Nintendo with Golden Eye. And when we acquired control of that franchise. It was with the idea that it could be one of the most successful franchises going forward as it has been historically. And so that's -- that's our commitment to the franchise. That's what we are looking to get out of it.

And I think somebody tried to get this question answered. But, when you look at the -- next year's slate which you kind of hinted at, you obviously have the compares into Spiderman, but you so have James Bond, as you mentioned. Do you feel confident about continued growth given what you know today of your slate for next year?

Well, we don't comment on next year's guidance other than to -- given a preview of some of the titles that are going to be there. But you know as we started the call, you know we have historically grown at rates of growth -- greater than rates of growth of the market. And that's something we hope to do over the next 17 years as we have the last 17.

Great, congratulations.

Thank you.

And we will take our final question from Edward Williams with BMO Capital Markets.

Good afternoon, just a couple of questions for you guys. First of all looking at the revenues -- publishing revenues, for this year. What percentage do you expect to come out of International territories?

Well, let me just put the question the other way around. We expect about half of the revenue to come out of our North America publishing business. And then the rest is international which is combination obviously of our publishing business in international and our distribution business in international. And as we said, I think at a previous occasion. We expect the distribution business to be about 15% to 20% of our business.

Okay. And then if you are to take a look at -- Thomas, your comment about operating margins expansion towards the peak. How long so you think it would it take to get to the proverbial peak of the platform cycle.

I would say. So, far, we are Certainly tracking ahead of when we said the goals originally as you will see by the fact that you know we have taken the margin up, I think our guidance reflects industry leading operating margins at this point. So, I think we have made better than expected progress to date. But you know, there is no -- this is not a time to get complacent, so are going to continue to drive as hard as we can. Not the top line, as I mentioned earlier, but also make sure we don't lose our focus on cost optimization in the progress. So that, you know, we can get that operating leverage to the bottom line.

And then, can you guys just compare the relative performance that are Transformers versus Spiderman, are they kind of (inaudible) with each other or how would Transformers compare to Spiderman?

You know, it's a little early to tell. Because Transformers actually hasn't theatrically released in all the international markets yet. But we will have a better sense of that on the next conference call.

Okay and then what were the allowances at the quarter end date?

We had a reserves of about $116 million and that represents about 37% of gross.

Okay. And then Michael, can you talk a little about the efficiency of TV and print marketing at this point. And Bobby, maybe you can pipe in with how it compares to you have seen in the efficiency of TV and print marketing versus several years ago. In the efficiency of print marking mark marketing and several years ago.

Yes I think we are definitely seeing -- we have become a lot more efficient in the way that we're evaluating and managing ourselves in marketing programs. You know on the sales side, as I commented earlier, trade marketing, we've gotten much more effective at evaluating what we can do in the trade and what worked well for us. In the sales and marketing side, I think you have already seen some of this, but, you know we are taking a much harder look at television and what works on TV and how to get the most out of our dollars there, likewise with print. And then in our on line initiatives, we have seen the benefits of our customer relationship management programs, a lot of what we are doing with free media instead of paid media and those initiatives are continuing. They are an important part of some of the changes that we've recently made in which advertising agencies we are working with and so, were continuing to see the benefit of more paper performance. Lower costs generally on on line as compared to traditional forms of media like print and television. And the organization is moving towards those as key components of integrated marketing programs.

How effective do you see XBOX live downloads as being for you -- demos that is?

What do you mean effective? For demos?

Yes.

It is a very, I mean demos, on some of our franchises in particular, are a very important tool. And we have seen XBOX live be an important contributor to that. And you know, this goes a little bit extending your question and we announce that Call of Duty 4. Modern warfare would have a beta version to the X-Box live. You know, and this goes, a little bit extending your question, but you know, we announced that Call of Duty [foreign] modern warfare would have a beta version available via XBOX live and so that continues to play an important in the marketing (inaudible).

One of the things that we've found that just has really been helpful in developing and selling of marketing programs (inaudible) the franchise is that we now have so much history, whether it's Tony Hawk or Call of Duty, even Guitar Hero, you look at the Dream Works success, Spiderman, Shrek, we've got now so much history in really being able to evaluate what has worked and what hasn't, that we, I think we are doing a much better job than we ever have in evaluating selling and marketing programs and getting the best out of our selling and marking programs.

And then, lastly. How do you -- what is your thought, I guess on getting into Asia and the MMO category as a whole. And is that something that you see active, as you making a you know, meaningful move into over the course of say the next year or two? Or is that something that is a little bit longer term for you?

You know, right now. We have so much opportunity in Europe that's low hanging fruit and you listen to Thomas' answer about the percentage of revenues that are represented by our European territories today and how much up side we have introducing Guitar Hero that's localized. The really low hanging fruit for us right now is in the European markets that we haven't gotten our fair share of penetration as compared to EA. You know we are the number one market share company year-to-date in the US. But we still have work to do in the European territories. I think the nice thing about the Asian market opportunities and the MMO business as well as the cash (inaudible) gaining opportunities is that you know when you think about the next three to five years, those are going to be the opportunities to continue expanding operating margin and gaining greater growth while today and the next few years we will likely be -- continue to be focused more on things that are lower hanging fruit opportunities. But, you know, very enthusiastic about the category. Just, we have go to really figure out how to compete.

Congratulations on a great quarter.

Okay. Well on behalf of every one at Activision, we thank you for your time and consideration.

That's the end of today's teleconference. We appreciate your participation. You may now disconnect.