動視暴雪 (ATVI) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Activision Blizzard's fourth quarter and calendar year-end earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn today's call over to Vice President of investor relations, Ms. Kristen Southey. Please go ahead, Kristen.

Good afternoon, and thank you for joining us today for Activision Blizzard's December quarter and calendar year-end conference call. I want to let everyone know that our release hasn't crossed the wire yet, it should be doing -- should be momentarily as we have a number of tables that are associated with the release and they are taking awhile to be loaded, so we apologize for any delay. With that, we're still going to get started. So, as always, I'm going to start with a review of our Safe Harbor disclosure followed by comments by Bobby Kotick, CEO; Thomas Tippl, CFO; Mike Griffith, President and CF -- CEO of Activision Publishing; and today, Paul Sams, Chief Operating Officer of Blizzard Entertainment will join us as Mike Morhaime is traveling.

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 statements are based on current expectations and assumptions that are subject to risks and uncertainties. The Company cautions that a number of important factors could cause Activision Blizzard'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: The impact of the current macroeconomic environment; sales levels of the Company's titles; shifts in consumer spending trends; the seasonal and cyclical nature of the interactive game market; the Company's ability to predict consumer preferences among competing hardware platforms; declines in software pricing; product returns and price protection; product delays; retail acceptance of our products; adoption rate and availability of new hardware and related software; industry competition; rapid changes in technology and industry standards; protection of proprietary rights; litigation; maintenance and relationships with key personnel, customers, vendors, licensees, licensors and third-party developers; counter-party risks; domestic and international economic, financial and political conditions and policies; foreign exchange rates; integration of recent acquisitions; and identification of suitable future acquisition opportunities; our success in integrating the operations of Activision and the games in a timely manner or at all; and our ability to realize the anticipated benefits and synergies of the transaction to the extent or in the timeframe anticipated. These important factors and other factors that potentially could affect the Company's financial results are described in the Company's quarterly report on Form 10-Q for the period ended June 30, 2008 and September 30, 2008.

The Company may change its intention, belief or expectation at any time and without notice based upon any changes in such factors in the Company's assumptions or otherwise. The Company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after today, February 11, 2009, or to reflect the occurrence of unanticipated events.

I would also like to note that certain numbers we will be presenting today, including net revenues; operating income; earnings per share; manufacturing and distribution costs; product creation cost; sales and marketing expense and G&A spending; inventory; capitalized software and intellectual property will be made on a non-GAAP basis, excluding the impact of the change in deferred net revenues and related cost of sales; expenses related the equity-based compensation costs; the operating results of products and operations from the historical Vivendi Games businesses that the Company has exited or is winding down; one-time costs related to the business combination between Activision and Vivendi Games; the amortization of intangibles and the changes in cost of sales resulting from purchase price accounting adjustments; and the associated tax benefit. Please refer to our earnings release for a full GAAP to non-GAAP reconciliation.

In addition, due to the fact that our business combination was accounted for as a reverse acquisition we will be presenting additional non-GAAP information that includes Activision stand-alone results for the periods prior to July 9th, which we refer to as non-GAAP comparable basis. Please refer to our earnings release, which is posted on our website and will be posted at activisionblizzard.com for reconciliation and further explanations.

And now I would like to introduce Bobby Kotick, our CEO. Bobby?

Thank you, Kristen, and good afternoon. In previous calls, I've shared with you our strategic approach to our business. We focus on a select number of proven franchise and genres where we have a development expertise. We try to ensure the titles are high quality with broad appeal that can be delivered across multiple platforms and geographies. We support strong retail-oriented marketing and sales programs to achieve our commercial success and we look for ways to broaden the footprints of our franchises and where appropriate, we develop innovative business models, like subscription-based online gaming. We consistently execute with our lean, efficient and focused strengths, which we believe to be the best in our industry. We believe this approach was vital to capturing market growth and profitability and that would -- it would be embraced by both retailers and consumers. Our results this year were a confirmation of that approach.

In calendar year 2008, Activision Blizzard grew revenues and operating income in excess of 20% on a non-GAAP comparable basis. We also achieved on a non-GAAP comparable basis net revenues of $5 billion and operating income of $1.2 billion. both Company records, while our non-GAAP operating margin of 24% set the standard in operating margin for third-party publishers. We were the number one third-party console and handheld software publisher for North America in dollars. We had a number one selling title or franchise on every major platform; console, handheld, PC and online subscription, in our view, a very important accomplishment. We had in the December quarter, both the number one and number two best selling console titles, Guitar Hero: World Tour and Call of Duty: World at War in North America and Europe, and we became the first publisher to surpass $1 billion in sales from a single title; Guitar Hero III: Legends of Rock.

On the PC, we saw the number one selling game in the December quarter, World of Warcraft: Wrath of the Lich King, and that helped us to reach 11.5 million World of Warcraft subscribers, an increase of 1.8 million subscribers from a year ago. And on handhelds, we had the number one best selling title in North America on the Nintendo DS, Guitar Hero On Tour. These terrific results billed on 17 consecutive years of revenue growth and establish another year of 20+% operating margins. They are the direct result of the hard work, talent and passion of our employees who are responsible for the success of our brands, the quality of our products and the continued success in the execution of our strategies. I'm incredibly proud to be associated with our fantastic team and I'm very grateful for their continued commitment to excellence in every aspect of our business.

The dedication of our employees was especially remarkable in light of the difficult macroeconomic environment. Success that we accomplished in two areas is worth highlighting. First, in executing the seamless integration of Blizzard Entertainment and right sizing our organization, we have now attained nearly $150 million in merger integration and cost savings, exceeding our original goal and our original timeline. This merger-related work has also allowed us to realize the tremendous benefits from a predictable and growing subscription base model, which makes us more resilient to market volatility and console transitions. Second, in delivering our entire holiday slate on schedule with strong quality ratings on all our key titles. Our consistent track record of on-time delivery gives us a significant advantage with our global retailers who value planning and predictability to an even greater degree as they focus on tighter inventory management.

As we now turn our attention to 2009, I want to highlight three key competitive advantages that will allow us to build on our success and continue as the world's number one third-party video game publisher. First, our proven strategy of focusing on high-quality franchises, which is evident in our 2009 product line up, the best in our Company's history. Second, our industry-leading operational capability, which allows us to avoid the distraction of right sizing and restructuring. And third, our strong financial position, which gives us the ability to use capital as a competitive advantage. The consumer outlook remains uncertain for 2009. As always, we recognize that our titles will need to perform well. We remain mindful of the many variables that can affect industry fundamentals and our own near-term market performance, as there is still significant macroeconomic risk, consumer acceptance risk and pricing risk.

We do believe that our proven ability to focus on select franchises gives us an unparalleled competitive advantage this year. Our strategic planning process provides us with the consistent ability to understand which titles to pursue, those which offer the greatest near- term reward with the greatest long-term value to our audiences, as well as which titles and genres to avoid. We're there therefore confident in launching in calendar 2009 more products than ever before, what we believe to be the strongest slate in the industry. The great majority of these are based on proven franchises, including three of the most successful franchises in the history of video games. A small minority will consist of a select few wholly-owned and internally-developed new intellectual properties. for which we have planned conservatively but if successful will provide a high return on investment for the near and long term.

We take an even more thoughtful, rigorous and measured approach to launching new intellectual properties than we do to long-standing franchises, as the introduction of new IP is one of our industry's most difficult challenges. We conservatively manage our portfolio risk profile by generating the majority of our revenue and operating earnings from the more predictable and stable franchises that have served us well over long periods of time. We believe this strategy is in the best interest of our long-term shareholders and has been validated by our consistent performance.

Our proven operational capability compliments our strategic focus and gives us another competitive advantage in the industry. This capability includes, as a core value, a culture (inaudible) and it lies at the heart of our operating philosophy. Scrutinizing spending to ensure that every operating expense from the purchase of office supplies to the investment of hundreds of millions of dollars in massively multiplayer online games is part of the genetic cultural code embedded in our Company. We conservatively monitor costs and we aggressively monitor spending. This approach allowed us to deliver industry-leading operation margins in 2008 and it should enable us to achieve a record non-GAAP operating margin in 2009. In fact, we're forecasting a 26% operating margin, the highest operating margin attained by major third-party publisher.

Our strategy and capabilities with supported by our very strong financial position. We ended the year with more than $3 billion in cash and investments and no debt. The $1 billion share repurchase program we announced in November reflects our confidence in the Company as an investment. To date, we repurchased approximately 13 million shares. Even after the repurchase program is completed, our remaining cash on hand liquidity and predictable cash flow provide us with the ability to continue investing for the future. Our solid balance sheet distinguishes us from our competition and provides us with another key advantage during this time of uncertainty.

Finally, as we enter the year we are well-positioned to capitalize on the markets' opportunities. As you'll hear from Thomas, Mike and Paul later on, the video game market fundamentals are positive and we expect another year of growth in 2009, something very few industry sectors are expecting this year. Our competitive advantages, combined with the significant cost per hour entertainment value that games deliver other other forms of media and our growing subscription-based business model should enable us to continue to capitalize on this industry growth.

We believe that the most dynamic parts of the digital economy are represented by the products we create, and that we should be able to increase a relatively small share of the global entertainment business, which is expected to reach $2 trillion within the next few years. Interactive entertainment continues to transform the media landscape and global consumer demand for virtual and digital content has increased significantly. The demand for video games is growing and they continue to capture a larger share of all media and leisure time. We're the leader in the highly-profitable online subscription market where others continue to try without success. Our market position, our large global footprint, our world-class proven brands, our strong development capabilities and our focused commitment to our long-range financial plan should enable us to deliver sustainable long-term growth and profitability to our shareholders as we have for 17 years.

Now I'd like to turn the call over to Thomas Tippl, who will provide a review of Activision Blizzard's financial results for the quarter and a review of our outlook for 2009. Thomas?

Thank you, Bobby. Today I'll begin with a review of Activision Blizzard's December quarter and calendar year-end results and then I will review our initial outlook for the first quarter of 2009. Before I get into the numbers, I would like to remind everyone that due to reverse merger accounting our historical GAAP financials are those of the Vivendi Games only. Activision's results are only included as of the date of the merger, July 9, 2008. As we did last quarter, to provide a more transparent view of our comparable year-over-year operating results, we have included in our press release a set of schedules labeled, "GAAP to non-GAAP Reconciliations Segment Information" for the three and 12 month periods for our core business. We refer to these numbers as non-GAAP comparables and they represent an apples-to-apples comparison for the combined company on the year-over-year basis. These will be the numbers that I will refer to unless otherwise noted in my commentary. Also, please refer to our earnings release for a GAAP to non-GAAP reconciliation of the discussed items.

Focusing on our core business results for the calendar year, on a non-GAAP comparable basis we had a very strong year. with revenue growth of 26% and operating income growth of 21%. For the calendar year we had GAAP net revenues of $3 billion and on a non-GAAP comparable basis net revenues exceeded $5 billion, the most revenues ever generated by a third-party publisher. For the calendar year we had a GAAP operating loss of $233 million and a loss per share of $0.11. Non-GAAP operating income for the calendar year on a comparable basis was $1.2 billion, a 21% increase year over year translating in 24% non-GAAP operating margin, making us, by far,the most profitable third-party publisher. Result to the December quarter results, Activision Blizzard not only exceeded our non-GAAP outlook, we grew non-GAAP revenues and earnings over the prior year, something very few companies accomplished this holiday season.

For the quarter, we had GAAP net revenues of $1.6 billion and on a noncomparable basis net revenues exceeded $2.3 billion, a 24% increase over the prior-year comparable. Both Activision Publishing and Blizzard Entertainment performed better than expected in an extremely challenging environment. For the quarter, our strong performance was driven by high-quality releases from our three wholly-owned franchises; World of Warcraft, Guitar Hero and Call of Duty. This holiday we benefited as consumes and retailers focused their time and dollars on the products with the highest expected return on investment.

For the quarter, we had a GAAP operating loss of $148 million and a loss per share of $0.05, as product mix towards online-enabled games increased deferred revenues, which will be recognized in future quarters. In addition, we were able to accelerate restructuring activities and associated costs that were planned for early 2009. Both of these are desirable events, as earlier restructuring accelerates synergy capture and increase in online-enabled games provides additional ancillary revenue opportunities. Non-GAAP operating income for the December quarter was $644 million and non-GAAP earnings per diluted share were $0.31, $0.02 ahead of our outlook.

With respect to specific line items for the core business, I will refer only to non-GAAP numbers. In the December quarter, non-GAAP product costs, including cost of sales for [MMOGs] was 42% of net revenues, higher than our prior year for three reasons. First, we incurred higher costs associated with the launch of Guitar Hero: World Tour, which drove margin compression on the Activision Publishing segment. Specifically, the component and freight costs for the drums came in higher than expected as oil-driven input prices skyrocketed ahead of production and additional investment in drum tuning kits were required to ensure we deliver a best-in-class entertainment experience for our consumers. The fact that we outsold our competition by a margin of two to one in the December quarter validated our investment. And the upside is that these unexpected costs provide with us significant cost reduction opportunities in 2009. Second, we took high obsolescence reserves to write down our remaining inventory of Gibson guitars as our agreement has expired. Lastly, as we saw in the September quarter, price protection and terms reserves were higher amidst unprecedented economic uncertainty and retailer caution with regards to inventories.

Non-GAAP product creation costs for the core business were 18% of net revenues, non-GAAP sales and marketing expense was 10% and non-GAAP G&A was 3% of net revenues. In total for the quarter, non-GAAP operating expenses came in at 31%, lower than expected. The favorability was due to a higher business mix from our distribution and affiliate business, acceleration of synergies and tight cost management. During the quarter, we generated $18 million in investment income, $6 million less than last quarter despite higher cash balances, as yields continued to decline because our investments are held in government-backed, shorter-term securities to limit credit exposure and provide flexibility to deploy capital. Our effective non-GAAP tax rate was 35%.

In summary, our operating performance for the first two quarters as a combined company has been exceptional, especially in light of the economic conditions and the need for the organization to deliver the business, as well as the integration and cost synergy initiatives. As a combined company, we finished a year well ahead of the prior year and have extended our industry-leading non-GAAP operating margin advantage over key competitors, many of whom produced non-GAAP operating losses for calendar 2008. The strategic and financial benefits that we expected from the merger with Blizzard have materialized for our shareholders and positioned us well for continued strong performance.

Now, turning to the balance sheet. On December 31st we had no debt and approximately $3.1 billion in cash and investments, a slight increase over the prior quarter. In today's capital market environment we continue to view the strength of our balance sheet as a major competitive advantage. and we're putting the cash to work. On our last call, we announced that our board had authorized up to $1 billion of share repurchases and to date we have purchased approximately 13 million shares for approximately $126 million at an average price of $9.68 a share. In addition, we believe a prolonged and challenging macroeconomic environment might provide acquisition opportunities for which we are well-positioned with our balance sheet, a more predictable cash flow outlook resulting from Blizzard subscription business model, and the backing of Vivendi as a shareholder.

Now let me turn to our other key balance sheet positions. The accounts receivable balance was $1.2 billion. This is $894 million higher than last quarter's balance and up $394 million from the prior year on a comparable basis, reflecting the strong holiday sales performance. We also successfully navigated the bankruptcies of Circuit City and Entertainment UK without incurring bad debt. Inventories were $262 million, down $115 million from the prior quarter and up $88 million from the prior year on a comparable basis. The increase was due mainly to our larger slate and the expected late quarter replenishment of Guitar Hero, which shipped more SKUs in more territories and at higher price points than in the prior year. We see opportunity to reduce inventories going forward, driven by the strong sell through of Guitar Hero product we saw in January and the retail and trade programming we have planned for the remainder of the quarter.

Capitalized software development costs were $236 million, a decrease of $10 million versus the prior quarter, but excluding deferrals for online enabled games and purchase price accounting adjustments capital software -- capitalized software development costs were $165 million, in line with the comparable prior year and down $80 million versus the prior quarter due to the amortization of our Q4 launch titles. Capitalized intellectual property cost were $40 million, an increase of $30 million versus the prior quarter, but excluding deferrals and purchase price accounting adjustments, capitalized intellectual property costs were flat versus the prior quarter. In summary, our combined company December quarter results were strong and our financial position has never been stronger. We are well positioned as we enter a very challenging market environment in calendar 2009.

Before turning to our financial outlook, I would like to highlight a few items. On non-GAAP results, we'll continue to exclude the items detailed in today's press release. All these changes are intended to provide our investors as much visibility into our underlying operating performance as they had in the past. Finally, due to current macroeconomic conditions, our outlook is subject to significant risks and uncertainties, including declines in demand for the Company's products, fluctuations in foreign exchange rates, and counter-party risks relating to customers, licensees, licensors and manufacturers. Our outlook is also based on assumptions about sell-through rates for the Company's products, the new slate of products and progress in integrating operations following the Company's recent business combination. As a result of these and other factors, actual results may deviate materially from the outlook presented today.

So, now on to the combined company's outlook. We entered 2009 with a reasonably prudent approach as we always do, especially in this uncertain and difficult macroeconomic environment. We are monitoring the retail and consumer environment carefully and remain cautious, despite the strength of our franchises, the quality of our slate and the best-in-class execution we are bringing to the distribution of our titles, both online and offline. Having said that, we're still positioned to exceed the industry-leading calendar 2009 financial goals, which we set for the combined company at the time of our merger announcement on December 2, 2007, which as a reminder, were $4.3 billion in revenues and $1.1 billion in operating income. This is in spite of the fact that we have entered a global recession and have to offset the negative impact of the significantly-stronger dollar since our merger was announced. In addition, our long-term Company-wide focus on profitability is expected to yield another year of operating margin expansion.

For calendar 2009, we expect GAAP net revenues of $4.2 billion and non-GAAP net revenues of $4.7 billion, which includes a negative impact of more than $400 million from a stronger dollar year over year and reduction of more than $200 million in revenue from our lower-margin distribution and co-publishing businesses and the movement of the James Bond title to calendar 2010 to avoid head-to-head competition with Call of Duty. On a constant currency basis, however, non-GAAP net revenues will be up year over year. For calendar 2009, we expect GAAP EPS of $0.22. We expect non-GAAP EPS of $0.61, which also includes about a $0.06 negative impact from FX year over year and a reduction of about $0.01 related to the distribution and affiliate revenue decline. In addition to our larger slate, our relentless focus on cost optimization, especially with regard to the Guitar Hero franchise and merger synergies, will drive a non-GAAP operating margin of approximately 26%. This is another step closer to our 27% to 28% near-term operating margin objective.

For the calendar year we expect GAAP product costs, including cost of sales for MMOGs, of approximately 33% of net revenues and operating expansions, including royalties, of about [67]% of net revenues. We project a GAAP effective tax rate of 32% and a diluted share count of about 1.33 billion. On a non-GAAP basis, we expect product costs, including cost of sales for MMOGs, of 34.5%, which is an approximately 650 basis point improvement over the prior year, driven by cost reductions for Guitar Hero hardware and mix shift of software for the franchise. Gross mar -- excuse me -- gross manufacturing margins will also expand due to revenue declines in the distribution and co-publishing businesses, both of which carry much higher cost of goods.

The flip side of this, smaller distribution and co-publishing business is an increase of operating expenses, including royalties, to almost 40% of net revenues. In addition to the mix shift our larger slate, which includes three new intellectual properties, which carry higher product creation costs and higher sales and marketing expense year over year. Also, Blizzard is expected to increase their investment in customer service to further enhance the (inaudible) entertainment experience and expand its advantage.

Finally, Blizzard's product development expenses are projected to increase as they get further into development of future titles, including Diablo 3. The return on these investments is reflected in our operating margin expansion plan for this year and beyond. For the calendar year, we expect an effective non-GAAP tax rate of 34% and a diluted share count of 1.33 billion. Please note that our share count could be different depending on the amount of repurchase activities executed in the year.

Now, moving on to the March quarter. We have two important release, both of which are launching in the last week of the quarter; Guitar Hero Metallica on the 360 PS3 and Wii in the US, and DreamWorks' Monsters vs. Aliens, which in addition to catalog sales and significant revenue deferrals, I expect it to generate GAAP net revenues of approximately $860 million. We expect GAAP product costs, including costs of sales for MMOGs, of approximately 34% and operating expanses, including royalties, of about 47% of net revenues. We project a GAAP effective tax rate of 32%, diluted share counts of about [1.25] billion and GAAP earnings per share of $0.08.

We expect non-GAAP net revenues of $550 million. This is lower than year ago, as we're cautious about the near-term retail environment plans for further channel inventory reductions and have to absorb a significant negative impact from FX. We expect non-GAAP product costs, including cost of sales for MMOGs, of 34%, non-GAAP operating expanses, including royalties, of 54% of net revenues and a non-GAAP effective tax rate of 34%. We also project a diluted share count of 1.35 billion and non-GAAP earnings per share of $0.03.

Before I close, I want to provide a recap of the progress we have made with the merger integration synergy capture. Since the merger we increased our synergy target by $50 million to a range of $100 million to $150 million and we're tracking toward the top end of this range. We right sized our organization, having already eliminated approximately 1,500 positions, avoiding a major distraction for our employees in 2009. And our net (inaudible) cash restructuring cost I expect it to come in well below the $100 million threshold due to our successful disposal activities. As we enter 2009, our integration efforts and synergy capture will focus on the European territories.

So, in closing, our merger has been an all-around success. In 2009, we have the strongest line up of proven properties in the industry and today we expect to generate record operating margins. Finally, we have a strong balance sheet. which gives us the ability to take advantage of market opportunities that arise from these challenging times.

I will now turn things over to Mike Griffith, President and CEO of Activision Publishing, who will provide his thoughts on the holiday.

Thank you, Thomas. Today, I'll focus my comments on our projections for the hardware and software market, the key strategies that drove Activision's solid performance, and our initial thoughts and key drivers for calendar 2009. First, starting with a review of the market. Despite the global economic turmoil in 2008 industry fundamentals remain strong. On December 31, the install base of hardware in North America and Europe for current gen systems, including handheld, was 159 million units, an increase of 69% year over year. For calendar year 2009, we expect the install base of hardware in North America and Europe will be up eight million units for the PS3 and up eight million units for the Xbox 360, and we expect the Wii to add more than 16 million units. Finally, we expect handhelds will grow in excess of 21 million units.

Moving to software, we define our market to include all major platforms in North America and Europe. In 2008, the software market grew 20%. It's important to note that during the holiday quarter, the industry grew 6% year over year, showing strength, even during a challenging economic environment. The video game market has shown resilience compared to other sectors. For 2009, we expect the combined North America and European retail software markets to show mid single-digit growth, something very few sectors are expecting this year. Overall, we anticipate that the software market will continue to hold launch pricing and reward the titles with the best quality broadly across platforms and geographies. In the US, the average price point of retail trended up during the year and the average price point for the December quarter was the highest ever, buoyed by premium-price SKUs.

Consumers have proven receptive to special editions at higher prices and bundles with added value on top titles. Our Band bundles at $189 sold extremely well and if we had had more in stock during the critical hop -- shopping period of the holidays, we would have sold even more. In addition, we've continued to hold launch pricing on Call of Duty: Modern Warfare more than a year after launch. We expect that we'll continue to hold premium pricing for our AAA titles as we were able to do this holiday season with our core franchises and we continue to examine opportunities for further pricing. Of course, pricing decisions for our titles will be made on a title-by-title basis, based on quality and other factors.

Turning now specifically to Activision, for calendar 2008 Activision Publishing was the number one third-party console and handheld publisher in North America and the number one third-party publisher for for the Nintendo Wii platform worldwide. And we also had the number one Nintendo DS title in North America, a first for any third-party publisher. For the December quarter, we were the number one console, handheld and PC publisher for the quarter. and we had the number one and number two best-selling console franchises in North America and Europe in dollars with Guitar Hero and Call of Duty. Overall, we believe that our continued focus on three core strategies drove our success in 2008 and have fostered strength and capabilities, which will drive our long-term competitive advantage. These strategies are: First smartly expanding our balanced franchise portfolio; second, strengthening our development capabilities; and third, focusing our resources disproportionately on the top customers in the top markets and against our top properties.

First, we're committed to expanding our balanced franchise portfolio by offering new entertainment experiences that resonate with consumers. We believe that our ability to extend the life of our franchises, coupled with the introduction of a select number of new IPs, will allow us to maintain our industry-leading track record of success. As you know, we have been cautious with new intellectual property development, carefully vetting concept and product and that's led to an excellent track record of success with the focus on creating big new franchises, not just one-off opportunities, and as a result, we've had strong success broadening our wholly-owned franchises.

For the calendar year worldwide, two of our franchises had more than one title in the top ten. The Call of Duty franchise had two top ten titles; World at War and Modern Warfare. And the Guitar Hero franchise also had two titles in the top ten; World Tour and Guitar Hero III. We'll also look to expand our proven franchises by offering consumers new entertainment experiences, which extend the reach of our franchises and broaden our consumer base. We successfully executed this approach in calendar 2008 by extending the Guitar Hero franchise to Nintendo DS, capturing the number one spot in the US. And in calendar 2009, we plan to launch yet another completely new entertainment extension in the music genre with Deejay Hero.

With respect to new intellectual property, we recognize how challenging it is to create and launch new franchises, which why -- is why we limit our exposure to only a select few properties in a single year. This year we'll launch two new well-vetted and qualified Activision intellectual properties; one in the racing genre and one in the first person shooter genre. These genres are large, profitable, [thinner] capabilities and represent scalable opportunities for new entrants who offer consumers fresh and innovative development. In addition, we'll launch prototype, a new intellectual property we picked up in the merger that was largely already developed and which is getting very strong media buzz. Lastly, we'll continue to extend the shelf life of our franchises through new downloadable content offerings. To date, more than 37 million Guitar Hero songs have been downloaded and in the coming months, we expect to release all new map packs for Call of Duty: World of War, which currently is the number one game on Xbox live. It 's still very early days for downloadable content; however, we expect this revenue stream to continue to grow in the years to come.

Our second key focus is to continue strengthening our independent studio model, which we believe is a long-term competitive advantage. This model fosters creativity and innovation and enables us to more easily attract and retain studio talent, particularly in this economy. During the past year we added four developers to our studio roster: Radical Entertainment and High Moving Studios, which we acquired as part of the merger and chose to retain after extensive due diligence; Bud Cap Creations, an award-winning studio with expertise on the Nintendo platforms; and Freestyle Games, a leading UK developer of music-based games. All of these developers have been fully integrated into our Company and are working on upcoming games.

Finally, our third strategy is to focus our global resources on the top markets and on our top customers and against our top titles. In 2009, we'll continue to allocate our resources against North America and European consumer marketing activities focused to make the big bigger in our biggest markets, also on our worldwide, in-store execution activities to win the consumer at the point of sale where we're built consistent capability over time. And third, integrated marketing plans with each of our top five customers in all key geographies.

In summary, our business is well positioned in the market, our global team's focused on the right priorities and we have the financial flexibility to execute on our strategic initiatives to deliver long-term revenue goals and record margins. The progress we made in 2008 provides us with a solid foundation as we enter 2009. Our strong product slate, coupled with a less-crowded landscape, provides us with the unique opportunity. The combination of our games, based on some of the best selling franchise of all time, the historic increased appeal of video games during difficult economic times, and the growing worldwide install base of hardware should allow us to reach new consumers with our titles.

There's no other company better positioned to capitalize on the market opportunities that should present themselves during the calendar year ahead. In 2009, we'll launch games based on proven franchises; Call of Duty, Guitar Hero, Transformers, Wolverine, Marvel, Tony Hawk, Wolfenstein and Ice Age. Additionally, we'll launch new intellectual property. Our racing game, Singularity, is our new first person shooter and prototype, as well as DreamWorks' Monsters vs. Aliens. We made a strategic decision to move our next James Bond release from late 2009 to 2010 to benefit from a better launch window and avoiding having to compete with a large holiday line up in going head to head with Call of Duty, both of which negatively impacted the performance of this title this holiday. The movement will have an added benefit, in staggering the completion of our racing title and the next Bond, both in development at Bizarre Creations. This will allow the studio to give each title the time and attention it deserves for finish and polish. Again, learning from last year's experience as [Triyar] had to simultaneously finish Call of Duty: World at War and James Bond, which we believe somewhat limited the opportunity for Bond this last holiday.

In 2009, we're also committed to maintaining a leadership position on the Nintendo platforms by continuing to innovate on our intellectual properties best suited for this consumer, like Guitar Hero and Tony Hawk plus Deejay Hero, in addition to a variety of content and innovation at our Minneapolis value group is working on in a number of genres including sports and family-oriented games. Our break-through performance on the Nintendo platforms last year underscores our commitment to this goal and the strategic advantage we enjoy as the Wii continues to grow by having titles well matched to Wii's demographic and playing dynamics. In addition to our mainline titles, we expect that our catalog will provide a solid base of revenue driven by the number one and number two top-selling titles in the December quarter.

Before moving to the release schedule I'd like to spend some time discussing the overall music category and Guitar Hero's strategic plan for next year. Today, the music genre represents almost 11% of the worldwide software markets and an even higher percentage of top ten revenues. In 2008, the music category grew for the year, for the holiday quarter and for the month of December. For the year, the music genre grew 68% worldwide, for the holiday quarter, the category grew 17% worldwide, and for the month of December, the category was up 27% year over year. In 2009, we expect that the category will be flat to up slightly, with continued long-term growth prospects since the music genre in total is still smaller than several other genres and lends itself very well to this console's generations' demand for interactivity.

This year, the category will be driven in part by a larger install base of hardware, our larger line-up year over year and the late fourth quarter 2008 supply of the premium-priced Guitar Hero: World Tour band kits. Guitar Hero created the music genre and for the record, Guitar Hero was the largest video game franchise worldwide in 2008, and Guitar Hero: World Tour was the largest video games title worldwide in the holiday quarter. And Guitar Hero sell through for the month of January, including all measured and unmeasured outlets, is up versus year ago. In 2009, we will continue to lead the category with product innovation, a robust and growing music library and the introduction of compelling new games and features that will excite existing fans and bring in all new users. Today, there are essentially two significant players in the large music genre and Guitar Hero is the clear leader with an install base of more than 32 million worldwide, almost 4X that of our nearest competitor, who we continued to outsell strongly through the most recent holiday quarter.

Despite supply constraints for the band product in the key holiday quarter, Guitar Hero was the number one selling console franchise in the US and Europe. In Europe, the franchise's sales increased 122% during the holiday period, and although sales were up significantly, international revenues for the brand are still tracking below our publishing average of approximately 40% in North America. Therefore, despite significant growth, we believe there is still an opportunity for us to grow this franchise faster Internationally. The music genre is clearly robust and our internal research shows that there are many genres of music that we've not yet tapped, but which consumers are very interested in. This year we'll introduce new products to meet consumer demand and attract more people to the Guitar Hero franchise. In calendar 2009, we expect the install base of consoles and handheld hardware will grow by another 53 million units, giving us a large new base of potential consumers. Our experience continues to show the new users to the franchise broaden our demographics and that these new users, as well as established users, still hunger for additional music variety .

While we've made significant achievements over the past few years there is still a lot more that we have to accomplish. In Europe, we continue to be underdeveloped and this year we to include more songs from European bands in order to leverage the growing install base of consoles. In February we'll launch the (inaudible) drums worldwide to consumers who purchased the guitar bundle; they can add a drum set and build their own band. We expect that our focused approach in delivering products that appeal to a variety of musical tastes should enable us to bring new consumers to the franchise and with products like Deejay Hero, which build on the core idea, to take the idea in an innovative and completely new direction. And attacking these opportunities, with nearly twice as many SKUs as last year, we'll continue to build our leadership. So in summary, the music category is very large, has continued long-term growth prospects ,and we have a robust strategy in place to leverage our leadership position.

Now, I'd like to discuss our March quarter game releases. We'll release two new titles in the last week of the quarter; Guitar Hero Metallica for the Xbox 360, PS3 and Wii in North American, and Monsters vs. Aliens worldwide on multiple platforms. Guitar Hero Metallica lets players experience one of the greatest heavy metal bands of all time, as well as 20 other bands hand picked to build out the experience. Metallica is one of the most popular artists in music history, having sold an estimated 100 million records worldwide and having won nine Grammy awards, including two earlier this month. Their 2008 album debuted at number one, marking the first time a band has had five consecutive albums debut at the top of the charts. Next month Metallica will be inducted into the Rock And Roll Hall of Fame . All of our market research for the group supports top-tier appeal in both North America and Europe.

In late March we'll also release Monsters vs. Aliens, ahead of the March 27th theatrical release. The game is based on the first ever DreamWorks 3D movie. Additionally, we'll continue to support sales of our top two franchises with new downloadable content for Guitar Hero and Call of Duty. In the first quarter we'll release about 50 downloadable songs for Guitar Hero and the first map pack for Call of Duty: World of War, that features all new multiplayer maps.

Looking now at the second quarter - excuse me - first up is the much-anticipated X-Men origins Wolverine. Wolverine is one of the most popular Marvel characters of all time and the game's multiplatform May launch coincides with the global release of 20th Century Fox's feature film. Developed by our own Raven Software, which also developed the highly-rated Marvel Ultimate Alliance, this is the first game that lets players experience Wolverine's regenerative ability and indestructible claws. It's Wolverine Uncaged and we expect that this title will be one of the best action games this year, based on all the early buzz and feedback.

The second title is Transformers: Revenge of the Fallen, on multiple platforms, which will be released with movie in June. The first movie was one of the top 20 grossing domestic movies of all time and the game has sold nearly five million units to date. The next title will be prototype, the all new third-person open world action game from Radical. The press on this title has been very positive and we're excited about (inaudible). The game puts the players in the shoes of Alex Mercer, who can change by consuming others to become the ultimate shape shifting weapon.

We'll also launch Ice Age 3 timed to the movie's release at the end of June. The Ice Age feature films have grossed in excess of $1 billion in theatrical revenue worldwide and Ice Age 2 sold nearly two million units of the game. Lastly, we have a robust line-up of new Guitar Hero SKUs. In addition, to Guitar Hero Metallica, we expect to launch a new Guitar Hero game for the Nintendo DS and a separate greatest hits compilation Guitar Hero game that includes full-band versions of the most popular songs from previous Guitar Hero games and will made available for the 360, PS3 and Wii. As we look at that back half of the year we expect to release the majority of our games. Starting with the Guitar Hero franchise, we'll launch a major restage of the business, with all-new differentiated Guitar Hero products, plus the launch of Deejay Hero, a line extension that enhances and extend the franchise. We'll be sharing more details with you about our new Guitar Hero line up and Deejay Hero games in the future.

We'll also release Call of Duty: Modern Warfare II from Infinity Ward, The Call of Duty franchise is in its seventh year and it's never been stronger. Our recent performance is driven by Call of Duty: World of War. It was a huge success for us this year, ranking as the number two selling franchise in the holiday quarter and the strength of Call of Duty 4: Modern Warfare catalog sales, which was the number one first-person action game of all time with like-to-date sales of more than 12 million units. 2009 is going to be a very exciting year for the franchise, because we expect this year's launch is likely going to be the most anticipated title of all 2009.

In addition, we'll be entering the large racing genre with a new IP from Bizarre Creations that we're very excited about. In 2008 the racing genre grew an incredible 34% and is the fifth largest genre. While we haven't disclosed many details yet for competitive reasons, Bizarre Creations has a proven track record of developing hit racing games for the past ten years and was the principle reason we acquired them. They have developed an incredibly innovative game that looks great and which we expect will appeal to a global mass market audience, and we think the launch timing vis-a-vis the competitive environment couldn't be better. In addition to the above, we also have a new game based on the Tony Hawk franchise. We said we would reinvent this franchise from the ground up and we've developed a very innovative and interactive approach for Tony that should allow us to broaden the appeal of skateboarding beyond the core to mass market audiences and take advantage of this cycle's dynamics. More details later for competitive reasons.

Additionally, this summer we expect to release an all-new Wolfenstein built on the DIB Software's well-established video game franchise. And lastly, we'll be launching our new wholly-owned first-person action game, Singularity, which is being developed by our own Raven Software. The game propels players into a sci-fi experience where they must navigate through two intertwining [areas] to prevent a catastrophic accident called the singularity. This game is already receiving strong interest from the media and again, it is a combination of a well-vetted and researched concept in a large genre with a top-tier developer. If you haven't seen it, you should check out the cover story on Game Informer.

This provides you with a snapshot of what we have planned for 2009. It's our strongest slate ever and we believe it has the right balance between proven properties and new introductions to capitalize on our solid performance this past year. As we look ahead, there are few companies better positioned than Activision Blizzard to leverage the long-term opportunities that the interactive entertainment industry has to offer. As a Company, our strategy has been focused on those activities that will drive long-term growth and operating margin expansion. We'll continue to innovate our franchises and aggressively pursue those long-term opportunities that can enable us to increase our global market share. And lastly, as Thomas discussed earlier, we'll continue to drive efficiency as a major focus area. This focus has never been more of a competitive advantage than during these uncertain times.

And now I'd like to introduce and welcome Paul Sams, the Chief Operating Officer of

Thanks, Mike, and hello, everyone. Today I'll spend most of my time discussing the December quarter and then I'll talk about some of our initiatives for 2009. We had three very strong quarters from January through September, but the December quarter was our best of the year. This was due to the November launch of our second World of Warcraft expansion, Wrath of the Lich King. More than 16,000 stores were open at midnight to celebrate the launch, and that's three times the number of stores that held midnight launches for the first expansion. Within 24 hours of availability, the new expansion sold more than 2.8 million copies.

Not only did this break the record for fastest selling PC game of all time, previously held by the first World of Warcraft expansion, but in a single day, Wrath of the Lich King had already sold enough copies to become the best selling PC game of 2008. It went on to sell more than four million copies in the first month which set a new record for PC games. In addition to record sales, the new expansion received critical acclaim, with an average meta critic rating of nearly 92%. It also won several editor choice awards and was named best expansion of 2008 by multiple news outlets.

The success of Wrath of the Lich King led to a new subscriber milestone, also. In October we announced that the game had reached more than 11 million subscribers. By the second week of December, we were at more than 11.5 million subscribers. For the year, the game grew by over 1.8 million subscribers, which is approximately 18% beyond where it was in December of 2007. This growth was proportional across all regions, keeping us at a 55/45 split between east and west. This past quarter we also rolled out our paid character recustomization service. which let players change their character's appearance and gender for a fee. The community had been asking for a feature for a long time and we were pleased to be able to offer it to them. Similar to our page -- paid realm transfer and character name change service the recustomization feature has been very popular with players.

As a result of all of these factors, our non-GAAP net revenue was up 61% and our non-GAAP operating income was up 76% compared to the previous quarter. Overall, 2008 was our best year to date. On a non-GAAP comparable basis, net revenues for the year exceeded those of 2007 by 21% and our operating income was up 24% year over year. This was fueled by the sustained performance of the first World of Warcraft expansion, as well as the Wrath of the Lich King launch. Including Wrath of the Lich King's number one finish, three of the top five selling PC games in North America and Europe were in the World of Warcraft series in terms of units sold. The World of Warcraft base game and the Battlechest, which combined World of Warcraft and the first expansion stayed in the top ten list nearly all year.

In addition, Warcraft III and Diablo II Battle Chess were several -- made several appearances in the weekly top ten list, despite having been on store shelves for five and seven years respectively. While no industry is immune to the current economic situation, World of Warcraft is well positioned to remain the entertainment experience of choice for our players. This is because it offers what we feel is the best entertainment value for the dollar. For less than the cost of a single movie ticket and popcorn, our players receive one month's worth of entertainment versus the two hours they'd get at the theatre. The comparison is equally strong when you look at the hourly cost of cable television, sporting events, theme parks and so on.

Part of what makes World of Warcraft appealing is the constantly changing in game experience. This comes from players interactions with each other, as well as from the new content that we add throughout the year. Keeping the focus on quality with this new content will help position us for continued growth in 2009 and beyond. Historically, Blizzard games remain top sellers year after year. This emphasizes the value we see in taking the time we need with each game to make sure we get it right. We believe that the performance of our previous games in each series is a good indicator that Starcraft II and Diablo III will be well received once they're ready for release.

Turning now to the year ahead, we're optimistic about the continued performance of our games in 2009. We're preparing to release Wrath of the Lich King in China and we anticipate that that launch will attract new and returning players there, just as we saw in other regions. Also coming up in the months ahead will be the Starcraft II beta test. The beta will be played on a basic version of our new Battlenet architecture, which will give us the opportunity to test the game and the service in a live environment. Over time we'll be adding features to deliver a second generation Battlenet experience. We know that the demand for Starcraft II is very high. The original Starcraft has sold more than 11 million copies worldwide and the sequel has been named on mo -- on several most anticipated lists. We're aiming to release Starcraft II as soon as possible, but as with all previous Blizzard games, we won't ship it until we feel it is ready.

For World of Warcraft we'll be delivering substantial content updates this year. These updates play a large part in retention because they offer new challenges and rewards for players while continuing the rich and immersive story. The first of these will be going to our public test realm soon. The test realms are a good way for us to give players a chance to be part of the development process which helping us to test upcoming content before it gets added to the live game. So, we're off to a good start with the first quarter. World of Warcraft subscriber base has continued to grow despite the ongoing economic concerns and we just announced that we'll be starting our fee-based player-versus-player tournament for the game soon. This tournament proved to be exceptionally popular last year and we're hoping for a similar response this year given the $200,000 in cash prizes we're offering.

As I mentioned, our focus remains first and foremost on quality. This applies to every aspect of our organization. One of the ways we'll be demonstrating this over the upcoming quarters is through some major customer service initiatives. We recognize that customer service is a retention factor for many players and we're committed to ensuring the quality of our service matches the quality of our games. Ultimately, our goal is to be among the best-in-class for customer service regardless of industry. In addition, we'll continue to put every effort into develop -- into delivering the types of entertainment experiences our players expect and enjoy. This goes not only for our upcoming World of Warcraft content, but also for Starcraft II and Diablo III, as well as our unannounced massively multiplayer game. While the amount of development activity we currently have underway is as high as it's ever been, we're fully committed to maintaining our quality standards with each and every product we deliver.

Mike Morhaime and I look forward to sharing more information with you about our 2009 initiatives on future calls. For now, I thank you for your time and I'd like to turn the call back over to Kristen.

Okay. Thanks, Paul. Operator, we would now like to open up the call for questions, but I want to highlight, given the large number of people and the time that we only ask you limit questions to one per caller. So, operator?

(Operator Instructions). And your first question will come from Ralph Schackart with William Blair.

Good afternoon. I'll keep to one given the length of the call. Just curious -- excuse me -- just curious how the sales have trended post holiday Q4 results, any big changes in terms of units, pricing for top games versus catalog, any color you could provide there would be great? Thanks.

Sure, Ralph. I think in terms of pricing, there's really been no change, there's been normal promotional activities right from the holiday quarter and into January. As you know, many retailers end their fiscal year at the end of January, so we did see stronger sell-through performance in early January. A little bit of that backing off later into the month. But then it has rebounded at the end of the month and on into February. So, we're encouraged that our own sell-through results were up year over year in January. The open-to-buy dollars in retailers seem to be loosening up a little bit now that they're fiscal years are behind them, and pricing and promotional activity is kind of what we would expect.

From Deutsche Bank Securities, we'll hear from Jeetil Patel.

Hey, guys. A question around just -- if you look at your three top franchises for this year, I assume are Guitar Hero, Call of Duty and Hawk, can you -- if you combined those versus Guitar Hero and Call of Duty for '08, do you think you comp positive as you look at three franchises versus the two in '09 or do you think that it'll be made up of some of the newer titles coming out this year? And then just a quick question around cash flow. The $0.61 that you guided to for the year, do you think cash flow pretty much tracks around that earnings number?

Just to start, Jeetil, since we're only going to answer one question --

Take the first one then. (LAUGHTER)

So, I think when you look at operating margin contributors, the Call to Duty franchise, Guitar Hero and World of Warcraft will be the biggest three operating margin and cash flow contributors for the year. And as far as new releases on other existing franchises, it is a long list of other products, and so we don't -- we're not going to give the level of granularity on a title=by-title basis but the strategy has been pretty consistent. Put out only products that we think can achieve that broad penetration, can do many millions of units, have clear sequel potential, are annualizable and will get us to our operating margin objectives. I would say that's pretty much the case across the board on every product.

And on --

As far as cash flow --

And on your second question on cash flow. cash flow going forward is going to track closer to EPS as we have burned through our net operating losses and we are a cash taxpayer now. Now, obviously it's not going to track perfectly to net income. It depends on IP investments that we'll be making, et cetera, but it's going to track closer to that number than it has in the past.

And from UBS we'll hear from Ben Schachter.

I wonder if you could say -- you mentioned that Starcraft won't ship until it's ready but does your guidance include any non-Warcraft revenue from Blizzard this year? And then just a quick follow up, could you give us what you think the blended ASP for the music genre titles will be this holiday? Thanks.

This is Paul, I'll take the Starcraft one. As we mentioned at the analyst day last year, Blizzard intends on delivering one front line release per year and I think that you can see in our numbers that that is contemplated. As it relates to which title will be releasing this year, we're not prepared to say.

On the Guitar Hero pricing, I think you can expect very similar price points as we saw in 2008. We've got premium priced software at $59, guitar bundles at $99 and band bundles at $189. And while we see some opportunity for premium collector's editions and added value and increased realization for that value that we're contemplating, I think in general terms you'll see the average pricing the same.

We haven't announced the price yet for Deejay Hero.

Okay, thanks.

And from Piper Jaffray we'll hear from Tony Gikas.

Hey, thanks, guys. Maybe you could just give us a quick update on your comfort level with Company and retail inventory levels and then any pricing strategies that you might have on some of the Guitar Hero product that's in the channel right now? Thanks.

Sure. I think overall on the inventory we're about in line on a percent of sales to our historical ratios as we entered January. Nothing we sold in isn't connected to some move through program. In fact, I mentioned just a minute ago, we saw very strong sell-through results in early January. A little bit of that slowed, I guess, as retailers prepared to close their fiscal year and the impact of lower gift card sales in December, but then toward the end of the month we have seen that rebound and into February. So, we're comfortable with where we see the inventories at this point.

Thanks.

We'll hear from Heath Terry with FBR Capital Markets.

Great, thanks. Was wondering, you talked a little bit about the install base of $32 million that you have on Guitar Hero. Can you give us a sense of what you feel like the active -- I'm assuming that's a total sales number, kind of life to date for the system -- given the multiple purchases and the guitar upgrades you've had over the years, can you give us a sense of what you feel the active install base of guitars and now band kits is out there that you'll be selling software into this year?

I think it 's -- you're right in that that install base number includes all units we've sold and so, as you know, that some households do own multiple guitars, and so there is a little bit of repetitiveness in that number. But we also know that the genre represents only 11% of software sales, so we think that there's tremendous upside growth opportunity. So, beyond just selling the software into our current install base of hardware we think we've got continued strong growth prospects to get hardware into new households, as well as software. So we think it's going to be a combination of those two components, not to mention that we've got particularly strong expansion opportunities in Europe and with multiple titles.

Of course. And then just quickly, the -- do you have a sense for what your expectations for share are this year, particularly given that there's apparently not going to be a Rock Band III out of MTV Games this calendar year?

Well, the genre has exploded and grown very fast. That's one thing that we've enjoyed and that's attracted competition. I think you're right, to date while there have been others Rock Band has been the serious competition and it's hard to say exactly what our shares os going to be. We're focused more on our absolute performance and continuing to build our install base and building out titles with existing users. So, I can't really comment on what Rock Band might or might not do, but I will say that we've consistently outsold them quarter by quarter by a substantial amount, in total by more than four to one, and in Europe, by significantly more than that. So, I think we're well positioned to maintain the leadership position in the genre and we're really focused on our own program and satisfying the consumers with the many opportunities that we know are still out there.

Great, thank you.

We'll take a question from Colin Sebastian with Lazard Capital Markets.

Thanks. Good afternoon. I was wondering roughly what portion of your 2009 operating income or EPS you're expecting to come from online revenue sources, broadly speaking, including subscriptions, downloads and micro transactions.

Colin, we're not providing guidance by revenue line item, so what we generally expect to see is based on World of Warcraft's track record continued growth of subscribers. Now this is being somewhat hampered when you look at the dollar revenue results by the fact that a large portion of Blizzard subscribers are outside of the US and I mentioned earlier the strength -- the stronger -- the significantly stronger dollar in our assumptions is partially offsetting that. When you look beyond the subscription revenues from World of Warcraft, we continue to expect growth from other digital revenues where we have made good progress over the last couple of years and it's becoming a more meaningful part of our business. I think last year, we've done somewhere around $70 million or so in ancillary revenue streams and we expect that to grow probably closer to somewhere in the $100 million range.

Thomas or Paul, did you break out the portion of subscribers in western markets versus Asia?

We haven't broken it out but I think Paul mentioned that the rough split being 55/45 between the west and the east -- or rather the east and the west, so the east 55%, the west 45%, and that has been pretty consistent as they were able to grow their subscriber base in all regions.

Thank you very much.

Next we'll hear from John Taylor with Arcadia.

Hi. I wonder if you'd go into a little bit more detail on the music side of things. I guess maybe talk about your assumptions related to the mix of disks versus guitar bundles versus band bundles maybe in '09 versus '08, how that might shift. I see your ASP assumption's similar, wonder if there's -- what's lying behind that? And also, in December quarter and for calendar '08, I wonder if you'd tell us how much of the music business was in the US versus elsewhere in the world? Thanks.

Sure. I think for starters, on the Guitar Hero business and the music genre in total, as I mentioned already, the genre has continued to grow. It grew in the year, it grew in the quarter, it grew in December. Our business sell through is up month over month in January. So, the trends are continuing to suggest strong consumer interest on into the future. But we've got a lot more to do on this business, starting with the fact that our musical focus has still been somewhat narrow and we are expanding that this year. And our International sales -- to the second part of your question -- while they've doubled they're still below average, in the 20%, 30% of North America levels, representing our International side of the business. So, we've still got some room to grow Internationally to get up to the average ratio between North America and Europe.

We also see expansion opportunities -- and we haven't talked a lot about Deejay Hero and we're going to talk about that more on a later call -- but that takes the franchise into a completely new area with new hardware and new revenue opportunities. And we've learned a lot from the band launch in the holiday quarter and the stratification of price points that we're incorporating into a major restage of the business for holiday 2009. So I think all of those components lead us to believe that we've got a lot of opportunities in front of us, a lot of good elements in our plans that support the projections that we've put in front of you, but I think we're not going to get into the specific granularity of the SKU by SKU expectations.

Okay, thank you.

We'll take our next question from Doug Creutz with Cohen and Company.

Thanks. I noticed in your launch plans for the Guitar Hero Metallica, the greatest hits package, you didn't mention the PS2 as a release platform. Are you backing away from the PS2 on Guitar Hero and more generally from your broader line up? Thanks.

Well, on Metallica we will have a PS2 SKU. I may not have mentioned it but it's going to come out, not with the initial launch in the March quarter, it'll come out a couple of months later. So, we're watching the trends very carefully on PS2. Our strategy is always to map to the market. and we're focusing on where the opportunities are. But on Metallica, yes, we will have PS2.

And we'll have a selective release schedule for the rest of the year, reevaluated for the following year. But as Mike pointed out, we do map to the market. I think one of the things we've realized is as we've started to focus even more on the International territories, where Sony has a more significant share, particularly in Europe, there may be some selective opportunities there that you don't necessarily have here in North America. But overall, I think that we're going to need to see some price cutting on the hardware if we're going to keep some momentum on the PlayStation 2 platform.

And we have time for one more question and your final question will come from Brent Thill with Citi.

Thanks. Thomas, you're guiding '09 margins up a couple hundred basis points, kind of in the backdrop of what is perhaps one of the worst economic environments we've seen. What are the levers that you see, that you're the most confident in for achieving that margin leverage in that backdrop?

I think a couple of things. Where we are confident in that plan is, first of all, I think our strongest franchises are wholly-owned franchise that had the most success in the market place. We again have the strongest plans for next year, whether that's Call of Duty, whether that's the Blizzard business, whether that's our entry into a new genre like racing, these are all very high-margin opportunities for us. In addition, we're going to get the full-year impact next year of the synergy initiatives we have executed this year and that we'll continue to execute into the spring of next year. And then on top of that, as I mentioned earlier, I think we have not perfectly executed the Guitar Hero; World Tour launch from a cost perspective this year. We were extremely successful in the market and with consumers but I think we could have done a lot better on the cost front.

We now have some additional time to refine our supply chain and we think we can take out the significant amount of cost on the (inaudible) business also helped by much lower raw material input prices now that we now at, whatever, around $40 of oil probably for the foreseeable future versus $150 right ahead of our production last year. So it's a multiple-pronged plan. It's a focus on old IP, it's a focus on making sure we put the marketing investments behind the highest investment franchises, take out cost, and what Bobby mentioned at the beginning, which is we have always been very focused on keeping a lean OpEx budget and you're going to see the same thing from us next year in terms of very limited and selected headcount additions and various type cost control.

I would just add, if you look over the last four years we have, at the beginning of each one of our fiscal years, articulated a margin objective and either achieved or exceeded that margin objective. I would say some of the things that are the -- that Thomas pointed out that are the easier drivers this year as compared to last year, freight costs will be lower as a result of lower fuel costs, The impact of oil last year, not just affected our freight cost but also our cost of the plastic -- the plastic injection molding that we use for the manufacture of guitars and some of the other products that we're selling, and so with the lower fuel cost we'll get more efficiencies there. The benefits of scale we continue to see in our ability to negotiate better freight forwarding, shipping and logistics expense. You look at the product portfolio this year as compared to last year, we had even more owned intellectual property this year than last year.

So, across the boards I would say, when you look at just the efficiency gains that we've gotten over the last two or three years, continuing to stay focused on things like managing our G&A, managing headcount tightly, better productivity within our studios, more efficiency, and performance and reward systems that are more oriented toward operating margin and cash flow than ever before, I think we're especially well positioned this year to actually get the couple of points of operating margin leverage that we're looking for. And it really is the best product slate that we've ever had across more geographies, more platforms, more diversity so less volatility in the mix between online subscription revenue and every other platform that we support. And we've had the benefit of, over the last year, looking deep into the operation through the restructuring process. So, we now get really the benefit of a very lean, focused, proven management team with a lot of operating efficiencies in the Company, and I think you'll see, as you have for the last few years, we'll continue to perform better than our peers and capitalize on the growth that you see in the market.

Thank you.

Okay. On behalf of everyone at Activision Blizzard, we thank you for your time today and consideration, and we look forward to speaking with you on our next call.

Ladies and gentlemen, that does conclude today's presentation. We thank everyone for your participation and have a wonderful day.