動視暴雪 (ATVI) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the Activision Blizzard third quarter fiscal 2009 earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Kristin Southey. Please go ahead.

Good afternoon, and thank you for joining us for the Activision Blizzard third quarter 2009 conference call. With me today with Bobby Kotick our CEO, Thomas Tippl, Chief Corporate Officer and CFO, Mike Griffith, President and CEO of Activision Publishing, and Mike Morhaime, Chief Executive Officer of Blizzard Entertainment.

I'd like to remind everyone that we will be making statements that are not historical facts. These forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties. As indicated in the slide that is now showing, a number of important factors could cause the Company's actual future results and future circumstances to differ materially from those expressed in any forward-looking statements. Such factors include without limitation, sales levels, shifts in consumer spending and demand, macro economic conditions, the seasonal and cyclical nature of our markets, difficulties related to World of Warcraft in China, declines in pricing, product returns, price protections, product delays, competition, rapid changes in technology, protection of proprietary rights, litigation, maintenance of key relationships, counter-party risks, foreign exchange risks, and identification and execution of acquisitions.

These important factors and other factors that potentially could affect the Company's financial results are described in the annual report on form 10-K for the period ended December 31, 2008 and subsequently filed quarterly reports on 10-Q. The Company may change its intentions, belief or expectation at any time and without notice based upon any changes in such factors and 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, November 5, 2009, or to reflect the occurrence of unanticipated events. I would also like to note that certain numbers we will be presenting today 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 to 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, and the amortization of intangibles and the changes in costs of sales resulting from purchase price accounting adjustments and the associated tax benefits. 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 periods prior to July 9, 2008, which we refer to as the non-GAAP comparable basis. Please refer to our earnings release posted on our website at www.activisionblizzard.com for reconciliations and further explanations. I would also like to highlight that beginning last quarter we added a PowerPoint overview which you can access with the webcast and which will be posted on the website following the call.

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

Thank you, Kristin, and thank you all for joining us. We're pleased to report that Activision Blizzard delivered another quarter of better than expected financial results. While the results for quarter were better than we anticipated, we still remain cautious of the many variables that can effect industry fundamentals and our own market performance. Macroeconomic risk and market volatility continue, and consumer spending remains a significant concern as unemployment remains at historic highs. We are, however, very well positioned for this holiday season with the strongest lineup in the industry anchored by four of the top selling franchises in the history of video games. Guitar Hero, Tony Hawk, Call of Duty, and World of Warcraft. We have always sought to create the best entertainment experiences for our consumers and this year's slate delivers like never before. Guitar Hero 5 and DJ Hero both recently launched with very high ratings. DJ Hero brings the most unique and exciting innovations yet to the genre with entirely new music, game play, and peripherals.

Just two days ago we launched Band Hero in North America, our first E-rated product in the genre and one that responds to a consistent demand from all of our audiences for pop music. Mike Griffith will discuss these and other Guitar Hero trends in more detail later in the call.

Speaking broadly, what these launches show is that the music genre still has room for growth as long as we continue to deliver high quality, highly innovative products to our gaming audiences. And that there remain many untouched consumers, both by genre and geography, who are interested in this category. Dan Rosensweig is off to a great start as the new head of the business, and we're excited to enter the holiday selling system with him at the helm.

Our upcoming Tony Hawk games continues our focus on innovation with a revolutionary physical interface, responding to gamers' demands for an actual interactive skateboard on which players can have an actual skating experience. We made our largest investment ever in this franchise, including over two years of polishing and refining the hardware and software. And we are very excited for the Tony Hawk Ride launch in two weeks.

In five days, we'll release Call of Duty Modern Warfare II. We expect the game to receive some of the highest ratings in Activision Publishing's history. And we're on track for the largest video game launch of all time. In fact, it's likely to be one of the largest entertainment launches of any media of all time. We believe that the incredible entertainment experience that Infinity Word has created could lead to a record level of consumption in both revenues and hours played as compared to many other forms of entertainment.

Lastly, World of Warcraft continues to attract millions of online subscribers. And Blizzard is making significant investments in its global customers service initiatives. Having already achieved best in class service, Blizzard is now focused on becoming best in world. We expect this kind of investment, coupled with recent highly successful relaunch of World of Warcraft in China to deepen in already unparalleled massively multi-player experience for our audiences and provide us with an even more compelling game experience compared to whatever the competition might develop. Mike Morhaime will share more about these initiatives later in the call.

You'll notice a common theme across our key titles. We believe each title delivers an unmatched game experience, which results from significant investments made possible by our strong balance sheet, solid cash position, operational capabilities, and scale. Each requires a level of investment many of our competitors aren't committed to or capable of making. And each creates a rich interactive experience for our player communities, creating sustainable long-term value for our shareholders in these franchises. This strong slate is the result of the hard work and dedication of the most talented group of employees in our industry and, in particular, the best production studios in all of video games. I cannot thank our teams often enough for their outstanding efforts and contributions. The strength of our slate enables us to keep our outlook for the calendar year and reinforces our belief that we are better positioned than any of our competitors to capture the interest of the consumer this holiday shopping season.

We recognize that significant market uncertainty remains. And we do remain concerned about consumer spending in our category and overall. However, unlike most of our competitors, we have a diversified product portfolio of highly rated games from the industry's best studios focused on core gamer audiences, and we have the extensive resources to continue to invest in the deep and rich gaming experiences that our audiences value most. This type of focus should allow us to deliver earnings growth and margin expansion as we have for many years. We also benefit by being the leader in subscription based online games which significantly reduces our risk profile as compared to many of our competitors. Today, more than 50% of our operating income comes from outside the console and hand-held market. And the vast majority of our revenues are based on proven, wholly owned internally developed games which can also lead to more predictable results.

Our market position and global footprint continue to expand. We have grown our US and European market share year-to-date and we expect to exit the year in an even stronger position. These advantages are all the result of providing the best possible games to our audiences. Now I'd like to turn the call over to Thomas Tippl who will provide a review of Activision Blizzard's strong financial results for quarter and review our outlook for the balance of 2009.

Thank you, Bobby. Today I'll begin with a recap of our September quarter results and then I'll (inaudible) in calendar 2009. Before I get into the numbers, I'd like to remind everyone that due to reverse merger accounting, our historical GAAP financials are those of Vivendi games only. Activision's results are only included as of the date of the merger July 9, 2008. In order to help you with your analysis of our results, we have included in our press release a set of schedules which provide non-GAAP comparables by business segment and these will be the numbers that I will refer to unless otherwise noted. Also, please refer to our earnings release for a GAAP to non-GAAP reconciliation.

For third quarter, GAAP net revenues were $703 million. GAAP operating income was $9 million and earnings per share was $0.01. On the non-GAAP basis, September quarter net revenues were $755 million which is $55 million higher than the prior outlook. Non-GAAP operating income was $75 million and non-GAAP EPS was $0.04, $0.01 ahead of our outlook. Our performance was driven primarily by continued sales of our three wholly owned franchises, World of Warcraft, Guitar Hero and Call of Duty, and our new releases, Guitar Hero 5, Marvel Ultimate Alliance II and Wolfenstein. And our third map pack for Call of Duty World at War.

Net revenues for September quarter were down only slightly versus the prior year despite the negative impact from FX, lower distribution revenues and World of Warcraft being offline in China for most of the quarter. Non-GAAP EPS was down year-over-year for the reasons just mentioned and increased marketing and customer service investments, as well as significantly lower interest income.

With respect to specific line items, I will refer only to non-GAAP numbers. In the September quarter, non-GAAP product costs including cost of sales for MMOGs were 34% of net revenues, about in line with our outlook. Non-GAAP product creation costs which include software royalties and amortization, intellectual property licenses, and product development were 28% of net revenues, non-GAAP sales and marketing expense was 17%. And non-GAAP G&A was 10% of net revenues. In total, non-GAAP operating expenses came in as expected at 56% for quarter. Our effective non-GAAP tax rate was 29%. Lower than anticipated as we continue to benefit from growth and international geographies which are subject to lower taxes.

Turning to the balance sheet, on September 30 we had no debt and approximately $2.7 billion in cash and investments. This quarter we repurchased $290 million worth of stock. At the quarter end we were about three-quarters through our $1.25 billion authorization and in total have purchased about 89 million shares for $960 million.

Let me turn to our other key balance sheet positions. Accounts receivable balance was $228 million on September 30, a decrease of $41 million versus the prior quarter end. We continue to put significant focus against customer created risk management in light of the current economic environment. Inventories on September 30 came in at $351 million. As expected, this is up versus the prior quarter as we started to build for the big holiday launches. As compared to the prior year, inventories were down $26 million. At quarter end, capitalized software development costs were $268 million, an increase of $21 million versus prior quarter. Of the $268 million, approximately $55 million is related to deferrals for online enabled games. Capital assets and intellectual property costs were $65 million, up $9 million versus the balance on June 30. In summary, our balance sheet remains strong and puts us in an excellent position to capitalize on investment opportunities for long term growth.

Before turning to our financial outlook, I'd like to highlight a few items. Our outlook is subject to significant risks and uncertainties, including declines in demand for our products, fluctuations in foreign exchange rates and tax rates, counter-party risks relating to customers, licensees, licensors and manufacturers. And risks relating to the ongoing ability of Blizzard's licensee NetEase to commercially operate World of Warcraft in China without interruption. Our outlook is also based on assumptions about sales and rates for our products and the launch timing success and pricing or our new slate of products. And current macroeconomic conditions increase those risks and uncertainties. As a result of these and other factors, actual results may deviate materially from the outlook presented today.

So now, on to the Company's outlook.Today our outlook for calendar 2009 remains unchanged. We expect GAAP net revenues of $4.05 billion and GAAP EPS of $0.26 per share and non-GAAP net revenues of $4.5 billion and non-GAAP EPS of $0.63. For the calendar year we expect GAAP product costs including MMOG of approximately 35% of net revenues, and operating expenses including royalties of about 55% of net revenues. We project a GAAP effective tax rate of about 19% and a diluted share count of about $1.33 billion.

On a non-GAAP basis, we expect product costs of 37% which is a significant improvement over the prior year driven by cost reductions for Guitar Hero hardware and mixed shift to software for the franchise. Gross manufacturing margins should also expand due to smaller contributions to our business mix from our distribution and co-publishing businesses which carry much higher cost of goods. We expect non-GAAP operating expenses including royalties of almost 38% of net revenues. Higher than a year ago due to our larger publishing slate, which includes a number of new properties resulting in higher product creation costs and higher sales and marketing expense year-over year. Also as we mentioned on our last call, Blizzard is increasing their investment in product development and customer service to drive long term growth.

For the calendar year, we expect a non-GAAP record operating margin of about 26%, one step closer to achieving our long term goal of 30%. We expect our effective non-GAAP tax rate to be in the range of 29%. And expect a diluted share count of 1.33 billion.

Now moving to the December quarter. This quarter our slate includes Bakugan, DJ Hero, Band Hero, Call of Duty, Modern Warfare II and Tony Hawk Ride. For the quarter we expect GAAP net revenues of approximately $1.33 billion. We expect GAAP product costs of 38% of net revenues and operating expenses including royalties of about 62%. We project a share count of $1.27 billion, and GAAP per share $0.04. We expect non-GAAP net revenues of $2.22 billion for the quarter. Net revenues should be down slightly versus the prior year as we lap Blizzard's highly successful Wrath of the Lich King launch in November of 2008. For the quarter, net revenues and operating margins for Activision Publishing are expected to be up year-over-year driven by our strong slate, particularly the expected Call of Duty, Modern Warfare II blockbuster performance, and higher margins on music titles compared to last year.

For the December quarter, we expect non-GAAP EPS of $0.43. We expect EPS to be up significantly versus the prior year due to improved revenue mix for the publishing business and a lower expected tax rate. We expect non-GAAP product costs of 36%, non-GAAP operating expenses of 28%, and a non-GAAP effective tax rate of 31%. We also project a diluted share comp of about 1.3 billion.

Looking ahead to 2010, we will give guidance as we usually do on our fiscal year end call. We are currently in the midst of our annual planning process and, as always, the holiday season results and market trends need to be incorporated into our outlook for next year. Having said that, you should expect us to focus on the following key building blocks for profitable growth in 2010. First, we expect 2010 will be driven by growth from Blizzard. As we intend to launch Starcraft II and BattleNet and continue to invest in growth of World of Warcraft with the Cataclysmic expansion pack, value added services and strong operating performance in China.

Second, in 2010 Activision Publishing is expected to release a strong product line of innovative new titles. The diversified lineup will include titles based on the best selling franchises in the company's history, including Call of Duty, Guitar Hero, Tony Hawk, Shrek, Spiderman, and select new intellectual properties such as Blur and Singularity, and a strong catalog based on our top sellers of 2009.

Third, we expect to increase the operating income contribution of our music business as the product mix continues to shift from hardware towards software. And finally, we will continue our cost containment efforts in order to expand operating margins while investing in our product pipeline. I will now turn things over to Mike Griffith, President and CEO of Activision Publishing, who will provide his thoughts on the holiday quarter.

Today I'll focus my comments on the hardware and software markets, and also a review of the key drivers for our holiday quarter. Starting with the review of the market, on September 30, the installed base of hardware in North America and Europe for current generation systems and hand-helds was 188 million units, an increase of 47% year-over-year. This quarter we got the much needed hardware price cuts on the PS3 and Wii. The PS3 price cut helped deliver a healthy pickup in PS3 software sales the month of September.

As for Nintendo, they've cut hardware prices everywhere except the UK. and it's too early to determine what the impact has been overall.

For calendar 2009, our expected increases for hardware in North America and Europe are that console units up approximately 30 million units and hand helds up about 21 million units, for a total 51 million increase in the installed base for the year.

Turning to software, third quarter software sales in the US and Europe were weaker than expected, driven mainly by lower than anticipated sales on the Nintendo platforms and catalog games. For the fourth quarter, we expect that software sales in the US and Europe will be more or less flat year-over-year. Our software outlook is based on the assumption that retailers will hold AAA launch pricing throughout the holiday season, as we've seen so far. It's important to note that over the past few years, the sell through for US and European software has been fairly consistent ,with about 15% of the sales for the quarter coming in October, 35% in November, and 50% in December. This highlights that the opportunities as well as much of the risk is expected to be back loaded in the quarter, consistent with expected consumer buying patterns.

Overall, retailers continue to be selective with their open to buy dollars and taking a cautious approach to inventories. We believe that we'll see a similar scenario play out as last year where retailers will chase the winners and that the top titles this quarter will benefit disproportionately.

This quarter we're launching the most exciting and innovative slate that we've ever had and we've never been better positioned at retail or competitively. In the US and Europe retailers have allocated more square footage to our product than ever before. Significantly expanding our global footprint. As an example, we have integrated more than 15000 demo kiosks in the US alone. And Toys "R" Us is featuring Activision's holiday games in demo kiosks in a dedicated store within a store section in nearly 600 stores across the US and Europe. This is indicative of the kind of progress we continue to make in store, where the consumer makes their final choice. And we feel secure with retailer launch support we're receiving this season.

This, along with other elements of our execution, is an important factor contributing to our share gains. This quarter Activision increased its US share alone by 3.1.points over the prior year to 13.3%. Also during the quarter, we had two of the top 10 best selling franchises in the US with Guitar Hero and Call of Duty. In the month of September, we had two top 10 titles, Guitar Hero 5 and Marvel's Ultimate alliance II. And quarterly sales from downloadable content were strong, driving by the Call of Duty, World at War map packs which have sold more than 7.5 million units year to date.

In the month of September, we also saw a strong resurgence in the music category in the US and Europe behind new product launches, demonstrating significant consumer demand for music games. Prior to September, the music genre was down year over year driven by a continued mix shift towards software, reflecting the higher hardware install base, and a lower repurchase rate among the casual consumers who came into the franchise through the Nintendo platforms. We find that our gamer consumers who play on Microsoft Xbox 360 or Sony's PS3 platforms continue to be very engaged. And in fact, consumer sell through on these platforms for the Guitar Hero franchise is up a full 20% year-over-year for 2009 across the US and Europe. And more importantly, year to date, the Guitar Hero franchise was the number 1 third-party franchise overall in North America and Europe.

New this year is our segmentation of our music business into three Hero brands. Guitar Hero 5, DJ Hero and Band Hero, to capture different audiences and exploit different genres more effectively. We launched Guitar Hero 5, our first major music title of the year in early September. Guitar Hero 5 is targeted against rock enthusiasts. The game features the largest selection of guitar centric rock songs ever in a game, and sports new game play innovation with the drop in drop, out party feature. And the game's been rewarded with high review scores in the 85 to 90 range.

Guitar Hero 5 has sold to date about equal units world-wide to the Beatles game, establishing a good competitive start with two more Hero games to go in the quarter. We're encouraged with the progress in Europe where Guitar Hero was the number 1 third-party franchise in the quarter.

On October 27, we released DJ Hero which introduced radical innovation with the turntable controller, and is our first step at diversifying beyond hard rock into the rapidly growing genres of hip hop, rap, and electronica to broaden our user base. The game ratings and reviews have been excellent, also in the 85 to 90 range. This new property should continue to gain momentum into the holiday season where it's expected to sell the majority of its units.

We just started our media campaign during the World Series and we have a strong retail support planned throughout the holidays with powerful demo displays nationwide. As expected, we sold in all we could produce at launch, and we're now focusing on sell through and replenishment orders for the holidays and beyond.

Band Hero launched two days ago in the US and delivers an exciting new music collection featuring Top 40 hits designed to appeal to broad family audiences. It's also highly reviewed, 80-plus, and it's our first E rated music game. And features pop sensations such as Taylor Swift and Maroon Five. Band Hero will be showcased on the Oprah Winfrey show for two episodes entitled "Oprah's Karaoke Challenge". The shows will air today and November 12. Band Hero is the exclusive sponsor of these shows, and will be shown in segments with audience members performing and playing Band Her.

As we plan ahead, this segmentation between Guitar Hero, DJ Hero, and Band Hero, gives us a solid foundation to establish and build stronger loyalty among different segments of the genre. As we focus on maximizing consumer sales in the periods ahead, we're also acutely focused on expanding operating margin as well as absolute profitability of the franchise.

Now on to the rest of our holiday lineup. On October 20 we launched Bakugan Battle Brawlers, one of the most anticipated kids titles that leverages the popularity of the award winning toy line television show. This title will be focused on holiday gifts, and given its mass market appeal and the expected strong sales of the toy line, we expect this to sell well throughout the quarter.

In mid-November we'll launch Tony Hawk Ride in the US, the UK and Germany. The game lets consumers experience the thrill of skating like a pro with a physical interface of a realistic looking and feeling skateboard controller. To satisfy initial demand this holiday season, we'll only ship the game in three territories. We're very excited about the new direction of the Tony Hawk brand and the possibilities afforded by this innovation hardware platform.

In just five days, we'll launch what's expected to be the largest game of 2009 with Call of Duty Modern Warfare II for the for the consoles and PC. Modern Warfare II set a new record for pre-orders, and the $149 prestige edition which included the night vision goggles quickly sold out everywhere. The game delivers an unprecedented cinematic look and feel that truly blurs the line between movies and games, which few games can match as well as offering all new multiplayer modes. With a significantly higher installed base of consoles, we expect that Modern Warfare II will once again set new records for online play. Retailers are strongly supporting this title, with a number of retailers running TV campaigns dedicated to Modern Warfare II. We're also partnering with 12 different retailers to host over 10000 midnight store openings in North America alone. Call of Duty Modern Warfare II could be the top selling title this holiday, and we expect the global user base will continue to build over the next year as word of mouth goes truly mass market, and the installed base of hardware continues to grow. In addition, we believe downloadable content will continue to keep current players engaged while also attracting new consumers to the brand.

While this holiday season is a challenging one, we have a great line-up supported by our strongest retail marketing programs ever. And unquestionably, we're well positioned competitively. As we look to 2010, we'll benefit from continued growth in the installed base and projected robust catalog sales from the strong foundation we're laying this holiday season with our overall slate. We'll also have strong new releases for the core franchises like the Hero brands, Call of Duty, Tony Hawk and Spiderman, just to name a few.

We'll also enter new segments with Blur for racing, and a new IP we'll talk more about later in the $4 billion action genre. And we'll continue to step up online monetization with downloadable content on our strongest franchises and exploration of significant new online business models. We look forward to sharing more specific 2010 details with you on our next call. And now I'd like to introduce and welcome Mike Morhaime, CEO of Blizzard.

Thank you, Mike. First I will discuss Blizzard Entertainment's Q3 performance, and then I'll offer a broad picture on our recent activity and our product plans for next year. On the top line, revenues were down slightly versus prior year. In Q3 foreign exchange rates continue to negatively impact us just as they have through the first half of the year. The quarter was also impacted by the transition of our China business to our new partner, NetEase. Though the transition took longer than expected, we're happy to report that World of Warcraft has been back in China since the relaunch following the free beta period lasting seven weeks. Operating income was $116 million down as compared to the prior year due to the items I just mentioned. And as we continue to enhance our service and development infrastructure in preparation for future titles, additionally, we increased our marketing investments to maintain momentum for our games through the summer months. In spite of those challenges, The World of Warcraft business continues to be strong. With our global subscribership increasing versus the same quarter last year. This is encouraging, especially considering the impact of the economy -- that the economy had has on many industries. We feel that this reflects the exceptional entertainment value our players receive from World of Warcraft.

Now I'd like to discuss some of our operational highlights from the quarter. The response we have received following the relaunch of World of Warcraft in China has been very positive. In fact, we hit our all time peak concurrently in the region after the relaunch, indicating that the popularity for World of Warcraft in China has never been stronger. We are currently working towards the release of Wrath of the Lich King in China. Having recently resubmitted the expansion there for an approval review. Given the success that we've seen with the relaunch, we're expecting the new content to help drive further growth of World of Warcraft in China. I also want to discuss our fourth BlizzCon which was held in August and was the biggest and best show we've ever put on for our players. The demand for tickets was so high that only those who managed to join the online queue in the first minute were able to buy tickets. We hosted more 20,000 attendees and 500 press with tens of thousands more watching via pay per view. We view BlizzCon as a great opportunity for us to connect with our players and collect feedback on our games. At this BlizzCon we revealed our next World of Warcraft expansion, Cataclysm. We also gave everyone a first look at the new version of Battle.net, the online gaming service we are integrating with StarCraft II. The Cataclysm announcement generated a lot of excitement with our players and the media. Based on the playable demos on the show floor, the early feedback on the new content and features has been very positive. Progress on the game is coming along well and we are targeting a 2010 release of Cataclysm.

We also had exciting announcements at BlizzCon about Battle.net. On our last call , I mentioned that our vision for Battle.net is ambitious, and that we are building the service to be the premier online gaming destination. Since all of our games going forward will use the service, we see Battle.net as a cornerstone for our future. One of the primary goals of Battle.net is to connect the Blizzard community. At BlizzCon we talked about how battle.net will offer players advanced communication features. These will allow World of Warcraft players to chat with friends who may be playing Starcraft II or who may be playing World of Warcraft on different realms. By breaking down communication barriers across our games and across realms, we make it easier for friends and family to stay connected while playing Blizzard entertainment games. We hope this will help more players experience and enjoy our games in the years ahead. We're also making it easier to find friends who may be playing on the service by improving our user search functionality.

Another exciting Battle.net feature we discussed is the Starcraft Marketplace. This will be a post-launch feature for game and Battle.net. The Marketplace will let players who create premium content sell their maps and campaigns over the service, in much the same way developers can create and sell applications for iPhone and the iTunes APP store.

I want to emphasize that this will not be available for the initial launch of StarCraft II. There's still much work to do and many details to finalize. We do believe that the marketplace will enhance Starcraft II's longevity by promoting even higher quality player-made content than our previous games.

Now I'd like to discuss some of the recent and upcoming initiatives for World of Warcraft. Later this month, we will be transitioning our World of Warcraft players over to Battle.net accounts. This is an exciting first step in unifying our player base. In the coming months, these players begin enjoying some of the benefits of our Battle.net feature set, starting with the ability to chat with friends across different realms while in game.

We are currently testing a large new content update for World of Warcraft which should arrive in the coming weeks. This update will add new dungeons and items and provide a great experience for current and returning players as we bridge over to Cataclysm. We also recently opened the Warcraft Pet Store. Companion pets are a popular feature in the game and we've seen players go to great lengths to collect them. The Warcraft Pet Store gives players who enjoy accumulating in-game pets an opportunity to add some unique pets to their collection for a nominal charge. In addition to the value this adds for collectors, it's also a great opportunity for us to contribute to one of the charity organizations that we work with. A portion of the proceeds from one of the first pets available in a store will go to the Make A Wish Foundation.

Since the last call, we also introduced two other premium services, paid faction change and paid race change. Without delving too deeply into details, these services have been requested by our players for some time. They give our players more options as to how they play and flexibility in joining friends who may already be established on certain realms or with certain characters. Both of these services have been very popular since they launched. Despite the fact that World of Warcraft has been one of the top games in the world for five years, we are still working hard to meet our players' needs. Making it easier for friends to play together and developing the additional services that players want are good examples of our commitment.

Before closing, I want to talk about StarCraft II. We are targeting a release in the first half of 2010. We're still driving hard towards the beta test which all of us are excited to get started. We remain encouraged about the prospect s for Starcraft II in all regions. In August, StarCraft II won game of the show at games.com, the biggest gaming show in Europe. We also showcased a playable demo of the campaign at various events this past quarter. And the feedback both from players and from press has been very positive. Our developers are continuing to polish the campaign to make it even better as we move forward. With Cataclysm and StarCraft II, along with an improved evolution of our battle.net platform all slated for 2010, as well as Diablo III also in development, the pipeline for Blizzard games is solid, and we continue to be excited about the future. Thanks everyone. I will turn the call back to

Thank you. Operator, I think we're ready for questions.

The question and answer session will be conducted electronically. (Operator Instructions). Our first question will come from Mark Wienkes from Goldman Sachs.

I was just looking, year-to-day, the operating income, X-Blizzard, so just Activision Publishing was sort of flattish through the first half of 2009 but then took a turn down in 3Q Clearly, it's a fourth quarter business, but I was just wondering does that reflect more the earlier launch of Guitar Hero V this year versus last year, and is this sort of the way you've been thinking about the shape of the year through the year?

It hasn't really changed the shape of how we think about the year. We had a number of new releases which were launched in the Activision Publishing side in the September quarter which came with significant marketing support as well as the amortization of the related product development expanse. While last year we were largely producing a catalog quarter where most of the development costs had already been amortized.

You mentioned Tony Hawk being launched, US, UK, Germany, is that a production issue or what drove that decision?

It was primarily a production issue on boards that we could manufacture against demand we thought we were going to see in the marketplace. We matched that with the historical strengths of the Tony Hawk franchise and that led to our decision to focus on those three markets for this year.

Makes sense. Thank you.

Our next question comes from Heath Terry from FBR Capital Markets.

Great. You mentioned that you have resubmitted the expansion of the Lich King. Which agency or ministry is that being submitted to now? And has that changed from the first time it was submitted?

We don't comment on the regulatory process in China. As the operator for World of Warcraft in China, our partner NetEase handles all the related government approvals and the operation of the game there. Blizzard Entertainment and Activision Blizzard are committed to doing business in China and throughout the world in accordance with local laws and regulations.

Great, thanks. Bobby, you've talked about in the past that DJ Hero in particular was going to be capacity constrained kind of through the holiday season. Is that still the sense that you've got now that you've got a better feel for what supply and demand for the game looks like?

We're working hard to produce DJ Hero product. We had a successful launch. It's one of the most innovative products that we've ever created and we'll do our best to satisfy the demand.

Great, thank you.

We'll now go to Jeetil Patel from Deutsche Bank Securities.

Thanks. Two questions. It looks like in the fourth quarter you're going to have $1.8 billion in publishing revenue. What percentage of that $1.8 billion or publishing revenue was based on initial sell and initial shipments in versus reorder activity to get to that number? And how that's changed this year versus prior years for 2008? And second, in that publishing division, can you give us a sense of what percentage of profits from the top two titles in the category versus the rest of the business?

Very good questions. But this is a level of guidance by franchise that we have historically not gotten into and we are not planning to do right now going forward. What I can tell you is that the way we see the order patterns running is not all that different from last year. Mike Griffith has already alluded to the fact that retailers ever since last year have become more cautious in terms of volumes that they're taking in up front.

On the other hand, DJ Hero for example, we sold 100% of the supply we had for the day one launch. So we sold in as much as we had. I think we have extremely strong demand as we mentioned also earlier on Modern Warfare II where retailers are very focused to make sure they are fully in stock, given the momentum that's behind that franchise. But of course, we haven't sold in the full quarterly unit number at this point. And there'll be continued replenishment on products like DJ Hero, Tony Hawk as well. We are selling every unit that we have at launch and we continue to produce to replenish and meet demand.

On Call of Duty pre-orders, can you talk about how much it's up year-on-year?

Well, I think Call of Duty has been obviously very strong this year. And its preorders and always the special added value units. I don't think we want to get into the specifics on how much it's up versus last year, but it is up and its' set set new records for us and we feel very bullish going into the launch.

Operator? Our next question comes from Ben Schachter from BroadPoint AmTech.

A few questions on the Blizzard side of things. The Pet Shop initiative, I know it's not a big revenue driver. But what does it say about the digital item strategy going forward for Blizzard. And then when we think about the full Blizzard games, what percentage of that revenue comes from digital distribution of those games versus just the traditional retail? And is that going to change when we have Battle.net? And just last, housekeeping. Mike didn't mention the new IP from Blizzard. Just wanted to make sure or understand if that's still there.

Thanks for all the questions. So the first question was about the Pet Store and our item sales strategy. Let me just say that we're open to selling things and offering services related to World of Warcraft that enhance player experience. But we certainly aren't interested in doing anything that might adversely affect the player experience in game on imbalance the game in any way. If you look at all the value added services that we do offer, they're all things that are not required to play the game. They're completely and totally optional. They don't do anything that adversely impacts anyone's experience who decides not to participate in them. And so they are really are just there to enhance the experience of the players that choose to take advantage of them.

The second question, retail versus digital. We don't break out our retail versus digital sales. So I really can't comment on the balance between the two. Obviously, we expect the digital sales to increase in the future. And we hope to take advantage of that.

The third question was about our unannounced IP with respect to the product that we have in development which is a new multi-player online game. We have not announced any details with respect to that game or the intellectual property associated with it other than to confirm that there is an unannounced MMO currently in development at Blizzard and that it is not a direct sequel to World of Warcraft.

Thank you.

Our next question comes from Brian Pitts from UBS.

Can you give us any additional color on the revenue guidance for Q4? It looks like you adjusted it downwards slightly. Is this title specific or are you just being conservative? And then on Modern Warfare II, two quick questions. Do you anticipate any real supply constraint problems in the channel with that one? And do you have any concerns over the negative buzz building around the PC version which is not going to have any dedicated servers? Thanks.

In Q4 as you know, we announced this, I think, last month. The Blur title shifted out of Q4. So that's fundamentally what explains the difference in our Q4 guidance. There was some title expectations moving around certainly Modern Warfare momentum continued to build week on week, so those numbers have moved higher. With regards to supply constraints. On Modern Warfare, as it's a software only product and doesn't have a peripheral base supply chain attached to it, we are in good position to replenish very rapidly. And I would say, as I mentioned earlier, retailers have been extremely supportive and bullish behind the title. So there will be significant unprecedented quantities available on day one. So we're doing everything to make sure we're not running out of stock and protecting upside on the title.

Just to chime in on the PC buzz that you commented on, we're of course watching this very carefully and paying attention to it. But we're not overly concerned about it. We think one of the problems with our PC SKUs on this title in the past is that it has not been as friendly a consumer experience in terms of match making and online play as the consoles have allowed it to be. Our solution here improves that consumer experience overall by a significant margin and so we think that the benefits that we will see are going to far outweigh any negatives that seem to be surfacing.

Great, thanks.

And we'll now go to Shawn Milne from Janney Montgomery Scott.

Thank you and thanks for taking my questions. I wanted to go back to the commentary on the pickup in Guitar Hero or music sales overall. Can you kind of strip out the early shipment for Guitar Hero year-over-year? What lends you to believe that the organic growth still and the opportunity is there, can you maybe give a little more color around the margin opportunity as we move forward as we shift to -- sounds like you're not baking in much more in terms of the band kit or the hardware build-out, but mostly software going forward. Thanks.

Sure. I think overall as I said during the call, the music category has certainly been down year-over-year worldwide. It has been down a little bit more than the market in general. But we're also, as you kind of parse out that business and you look at the consumers who came in on a very casual base, primarily the people that have used the Nintendo Wii for Guitar Hero. Their propensity to repurchase has been a little bit slower than for consumers on the Xbox and the PlayStation platforms. And consumers on that platform, which I think you've got to say, are the foundation of the Guitar Hero business. Continue to show strong interest. And sales to those consumers is actually up 20% year-over-year.

We think Guitar Hero 5 has done its job as it launched and it's got stronger worldwide units than the Beatles and is really just setting us up for the quarter. And what we expect to see more sales throughout the quarter as we continue to expand our business internationally, where we've seen substantial growth this year and also as we get into new segments like DJ Hero and segmented approach with Band Hero.

We feel like we're better meeting the consumer needs on this business and reaching the markets where there is expansion opportunity like Europe where we've had some good success. On the margin side of the business as we alluded to on the call, we think there is substantial opportunity for margin expansion through all elements, including our COGS component of the equation. And we've got a lot of good initiatives and progress in that regard. And we think we'll see that play out next year, particularly as we announce our 2010 program.

Thank you.

Our next question comes from Justin Post with Merrill Lynch.

Thank you. One question for Bobby and one for Mike. When you think about the numbers, people have definitely been lowering their estimates for industry growth this year. I think we're now in negative territory. Do you think that's recession or has there really been a change in the value proposition? And if it is recession, could the industry bounce back pretty strongly if we have a recovery?

And on Star Craft II, can you tell us anything about the size of the audience for that game as it exists today so we can maybe try to gauge how many units you could sell next year?

I'd say that probably a lot of it has to do with macro economic factors and severity of the recession. I think that also this year up until now, have not been that many compelling titles. And I think as we get into the back half and you look at our product slate whether it's Modern Warfare II or DJ Hero or Band Hero, or Bakugan, we're coming into a holiday period with price cuts from the hardware manufacturers and very compelling titles. And to the extent that titles are important and we think they are in continuing to drive interest in the category, we need more innovative game play and more innovative titles. And I think that on the Wii in particular, you need to see -- we can't be the only company, but you need to see innovative new titles that are going to take advantage of physical interface. The commitment to the gamer and making sure that we're delivering fresh, new, and interesting experiences is what we think is going to drive growth.

Okay, and with respect to the Star Craft audience, I can give you a couple of data points. Back at BlizzCon we mentioned that we have 12 million active accounts on our classic battle.net. Those are people playing Star Craft, Diablo II and War Craft III primarily. And if you look at Star Craft franchise to date sales, that's Star Craft and one expansion, we have solve over 11 million units worldwide to date.

Thank you.

Our next question comes from Eric Handler from MKM partners.

Thanks for taking my questions. How aggressive do you see the black Friday holiday promotions this year versus last year? And how does that impact your sales plans aside from Modern Warfare II?

Black Friday as we've seen year-over-year is a time where retailers really do fight for store traffic and generally field some aggressive programs. And I think we'll see that again this year. Clearly, the macroeconomic conditions are making retailers more sensitive to the need to provide value to consumers. And I think we'll see aggressive programming from the retailers on Black Friday. I think the general trend of what we see and how we plan for it will be very similar to last year.

Okay, thank you.

And our final question will come from Doug Creutz from Cohen.

Could you talk about what the US international split has been for Guitar Hero 5 and how you've been allocating your initial shipments of DJ Hero, US versus international?

Sure. I think just in general, we said about a year ago that one of our strategic focus areas was going to be building Europe on our Hero franchise, and Europe had been significantly underdeveloped on that. Through the course of the year we've made a lot of progress on this, and we've grown our music business quite substantially in Europe. And it's much more evenly balanced now relative to our historical ranges. So as a result, we've had roughly two-thirds of our business in North America and a third in Europe. And then that's probably about the pattern that will play out on Guitar Hero 5 and DJ.

The other thing we see on the launch of Guitar Hero 5 in Europe is that against some of the competition we substantially over-performed against the competition. And I think that what we are starting to see is in our song selection, our access to universal music catalog and other partners that we're in business with. And our focus on songs and game play characteristics that are going to be more appealing to international consumers is really paying off.

And the last thing I would say about the international growth is because it's a less mature music business for us, our mix is more strongly related to bundles with the hardware components in Europe, whereas in North America we're seeing the mix shift more towards software.

Great, thanks.

Okay. Thank you, everyone, for joining us today. We thank you for your time and consideration and we look forward to speaking with you soon.

This concludes today's presentation.