動視暴雪 (ATVI) 2010 Q1 法說會逐字稿

Good day, and welcome to the Activision Blizzard's first quarter CY 2010 earnings conference call.

At this time for opening remark, and introductions, I would like to turn the call over to today's Senior Vice President of Investor Relations, Ms. Kristin Southey.

Good afternoon, and thank you for joining us today for Activision Blizzard's first quarter calendar 2010 conference call. With me today are Bobby Kotick, Chief Executive Officer, of Activision Blizzard, Thomas Tippl, Chief Operating Officer, and Chief Financial Officer of Activision Blizzard, and Mike Morhaime, Chief Executive Officer of Blizzard Entertainment. I would 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 that are subject to risks and uncertainties.

As indicated on the slide that is now showing a number of important factors could cause the Company's actual future results and other future circumstances to differ materially from those expressed in any forward-looking statements. Such factors include without limitation sales levels, shifts in consumer spending trends, current macroeconomic conditions, the seasonal and cyclical nature of our market, difficulties related to World of Warcraft in China, our ability to predict consumer preferences among competing hardware platforms, decline in prices, product returns, price protection, product delays, retail acceptance of our products, adoption rate and availability of new hardware and related software, competition, litigation and associated costs, rapid changes in technology, industry standards, business models including online and used games.

And consumer preferences, protection of proprietary rights, maintenance of key relationships including the ability to attract, retain and develop key personnel and developers that can create high quality hit titles, counter party risks, economic, financial and political conditions and policies, foreign exchange and tax rates, identification of acquisition opportunities and potential challenges associated with geographic expansion. These important factors and others factors that could potentially effect the Company's financial results are described in the Company's annual report on Form 10-K for the period ended December 31, 2009. The Company may change it's intentions,beliefs or expectations at any time without notice, based on any changes and 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, May 6, 2010, 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 changes in deferred net revenues and related costs of sales, expenses related to equity-based compensation costs, the operating results of products and operations from historical any games businesses that the company has exited or substantially wound down, cost related to the business combination between Activision and Vivendi games, the amortization of intangibles and the impairment of intangible assets and the associated tax benefits. Please refer to our earnings release for a full GAAP to non-GAAP reconciliation. Please refer to our earnings release which is posted on our website at www.activisionBlizzard.com for reconciliations and further explanations. Also given that we are in litigation, related to Infinity Ward's past and present employees, we will be limited in what we can say with respect to human resource issues. Finally, there is also a Power Point overview, which you can follow on the webcast, and which will be posted to the website following the call. And now I would like to introduce you to our CEO, Bobby Kotick.

Thank you, Kristin. We once again have significantly outperformed both our quarterly revenue and EPS expectations. And we have raised our EPS outlook for the year. We continue to accomplish industry-leading financial performance, as a result of the over 7,200 exceptionally talented people at Activision Blizzard, whose dedication and commitment enable our consistent performance, growth, and margin expansion. We have begun the fiscal year with great momentum in both Blizzard Entertainment and Activision have extraordinary product line-ups for this year. As always, we will provide detailed reviews of the quarter and our updated expectations for the balance of the year later in the call.

I want to focus on Activision's strategy for the Call of Duty brand, and our commitment to maintaining and supports the best development talent in the industry, including the addition of Bungie to our team. I want to start by affirming four points, each of which I'll discuss in more detail. First, we're focused on growing our Call of Duty franchise, broadening it's reach, using it to lead technical innovation in our industry, and providing a greater entertainment value than ever before to all of our audiences. We have long-term well thought through plans in place, and we are fully resourced to continue to lead the industry with this important franchise. Obviously studios like Infinity Ward remain an important part of this process, and we continue to invest in its growth and support the talented developers there, who are working hard on the first title.

Next, we expect to launch a groundbreaking Call of Duty retail title in 2011, in addition to our expanded digital content strategy for the brand. And, finally, we couldn't be more excited about our new ten-year alliance with Bungie, which is one of our next big things. Over the last 20 years, one of our key goals has been to broaden the audiences for our franchises, while selectively adding new franchises with the potential to be billion-dollar properties. Our actions over the past few months demonstrate our commitment to this objective. Call of Duty as an overarching franchise is perhaps the best example on how to focus on the tastes and interests of audience. In this case, an audience that numbers in the many tens of millions of players, and use audience insight to shape future product plans. There is nothing accidental about the continued success we are having with the Call of Duty brand.

The driving factor in Call of Duty's success is our ability to consistently execute a three-pronged strategy to elevate the franchise to greater levels of audience satisfaction, through superb execution with our retail partners, delivery of innovative game play through online tools and distribution capabilities, and by driving greater interest in the franchise in new geographies. Through our multi-platform multi-developer approach, we continue to build an enormous player base. While our direct to consumer digital business is growing, our continued success will come only with the tremendous support of our fantastic retail partners. Last year we successfully mobilized our logistics, supply chain, and sales teams, to partner with great retailers around the world, and leverage social media and great quality advertising to create the large retail video game launch in history. We have every intention of doing this again this year with Call of Duty Black Ops, driven by our Company-wide focus on driving impact, interest, and audience satisfaction. We continue to complement our retail strategies with value added online game play and digital content offerings.

Life to date on the Call of Duty franchise, we have digitally delivered almost 17 million map packs, which doesn't include the PS3 Modern Warfare 2 downloadable content which just launched. To date our audiences have played a staggering 1.75 billion hours of online multiplayer Call of Duty games on XBox Live alone. To continue to provide gamers with the digital content they increasingly demand, we have dedicated multiple development teams to focus exclusively on this online opportunity. Call of Duty is unique in the world of entertainment. As we like to say, there's a soldier in all of us, and both a solitary experience and social experience of the various Call of Duty games, satisfies that universal fantasy in an incredibly appealing engaging way. Today we believe there is no comparable entertainment platform, and as we execute against our strategies, we have the potential to drive the breadth of audience, increase the value added services we can provide our players, and grow the returns to shareholders on the capital that we invest.

It's our goal to continue to create higher investment returns, compared to our competitors, as well as other entertainment companies, as we have done over the last 20 years. As a preview into this exciting future, expect additional exciting content for Modern Warfare 2, and Call of Duty Black Ops, that will surprise our millions of players. The popular global fantasy of being a soldier, is allowing us to enter new geographies, leveraging expertise only Company's like Blizzard have in markets like China and Korea. We have dedicated teams in these new markets creating content for the audiences that to date have only been satisfied by Blizzard games. Soon we'll announce our plans for both China and Korea. Making Call of Duty games today is managed by more than 325 incredibly talented employees, spanning three studios,Treyarch, Infinity Ward, and Sledgehammer. These studios are among the best in the world, and a position that is among the most coveted in their industry, is the opportunity to work at any one of these studios.

Since we have seen some change and dislocation in Infinity Ward, I wanted to take a moment, and share our thoughts on this studio and it's future. The team at Infinity Ward today is comprised of some of the most talented people in the video game industry. They are an incredibly well-respected group who are motivated and obviously extraordinarily capable. Since we terminated the two executives at Infinity Ward, approximately 35 others have resigned, and it is likely that a few more people will leave, as well. Many of these people have been recruited by other studios, because of how talented they are. We are obviously disappointed about this, and we wish we could have convinced some of these incredibly talented people to stay. The decision, though, to terminate the two Infinity Ward executives was not done lightly. And it was not done to deprive them of their bonuses, nor was it done without a great deal of deliberations about the consequences.

The background leading up to our decision to separate the two former Infinity Ward executives for breach of contract and breach of fiduciary duty is outlined in our cross complaint that we filed in April, which I'm sure many of you have read. Against this background, we felt we had no choice but to terminate to the two Infinity Ward executives. We did this to protect the Company's assets in the interest of our shareholders. I personally consider the two of them friends, and their conduct was a compromise of our friendship, which is equally disappointing. Once we began to understand what had occurred, there was no gray area. There was nothing that would have allowed us to retain their services, as talented as they might have been. This is an example of our commitment to pursuing the difficult right, rather than the easier wrong. Our actions were firmly rooted in our long-standing values of integrity, and an expectation that our employees, who signed and acknowledged our code of conduct will behave with the highest ethical standards.

We have a great place and a great team in place at Infinity Ward, which continues to work on downloadable content, and the studio's next unannounced project. We continue to support the culture of excellence that is defined in Infinity Ward and are already strengthening the studio with additional talent and financial resources. You'll hear more about our exciting plans for the Call of Duty franchise and the many studios and resources now focused on continuing to create incredible entertainment based on this franchise later in the call.

Despite the frustrations with the former Infinity Ward executives, we remain the top destination for development talent in the video game industry. Our recent ground-breaking alliance with Bungie is one example of the commitment we have to working successfully with our industry's most talented teams. Last week, we announced that Activision and Bungie entered into an exclusive ten-year alliance to develop and publish Bungie's next blockbuster after HALO. This landmark alliance will deliver to consumers an entirely new intellectual property, already under development, and what we believe is unlike anything audiences have ever seen before. We expect it will be accretive to our operating margins, and incredibly compelling for audiences.

Bungie will have almost 200 people working on this project and they're excited to have their products available on multiple platforms, in many countries around the world, which they really haven't been able to do before our alliance with them. Bungie titles have generated more than $1.5 billion in revenues, only on the XBox, so reaching these new larger audiences will be both creatively satisfying and financially rewarding for Bungie and Activision Blizzard shareholders. Bungie is a great complement to our already deep bench of the world's leading development talent, including the recent addition to the Activision family like Sledgehammer and Bizarre Creations. Combined with the talent at Blizzard Entertainment, we believe we have some of the strongest creative teams anywhere in the video game industry, and we continue to be the first choice for development talent.

As I enter my 20th year at the helm of Activision, I've never been more enthusiastic about our prospects, both as an industry and as the industry leader. The people at Activision Blizzard are among the most supremely capable talented people in any industry. The work ethic here is unmatched, and the products we consistently produce are among our industry's finest. Recently, we had some changes in the -- at the Company, and I wanted to make a point of recognizing Mike Griffith's appointment to Vice-Chairman of Activision Blizzard. Under Mike's leadership, Activision tripled its revenues and added two billion-dollar franchises. And on behalf of the shareholders, we're thankful to Mike, for both his past contributions and excited that he will continue on as a trusted advisor to the Company.

I am also pleased to announce that Thomas Tippl has been appointed to the newly created position of Chief Operating Officer. For the past four years, Thomas has been our Chief Financial Officer, and in the past year he became our Chief Corporate Officer. Thomas has done an incredible job driving industry leading operating margins and shareholder value through his financial discipline and strategic leadership. Our shareholders will continue to greatly benefit from Thomas's talent.

Lastly, I want to thank Mike Morhaime, Paul Sams, Rob Pardo Frank Pearce and Neil Hubbard, and the extraordinary folks at Blizzard. Starcraft and Battle.net are massive undertakings. The time dedication and commitment Blizzard has invested in bringing something truly extraordinary to audiences, is almost impossible to explain in words. On July 27th, gamers will experience something unlike anything they have ever seen or played before with StarCraft II. And once again, we expect Blizzard Entertainment will transform gaming. Thank you, everyone at Blizzard. Now I would like to turn the call over to our new Chief Operating Officer, Thomas Tippl, who will provide a review of Activision Blizzard's financial results for the quarter, and an update on the Activision Publishing business.

Thank you, Bobby. Today I will begin with a recap of our March quarter results and provide our outlook for the June quarter and calendar 2010. And then I will review the Activision Publishing business, before handing over to Mike who will cover the Blizzard business. For your reference, in our press release, our set of schedules which provide non-GAAP measures 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 the quarter, GAAP net revenues were $1.3 billion, and GAAP earnings per share were $0.30. On a non-GAAP basis, revenues for the quarter were $714 million, and non-GAAP earnings per share were $0.09. Earnings per share were above the prior year, and ahead of the outlook we provided in February.

The March quarter was driven by the continued performance of Blizzard Entertainment's World of Warcraft and Activision's Call of Duty. Beyond strength in catalog sales for, Call of Duty in retail, we also benefited from the launch of the Call of Duty Modern Warfare 2 map pack, which was previously expected to release in the June quarter. Additionally, certain operating expenses previously planned for the March quarter will now be incurred in the June quarter. With respect to the P&L line items in the March quarter, GAAP product costs, including costs of sales of MMOGs were 30% of net revenues. GAAP operating expense including royalties were 31% of revenues, and our GAAP tax rate was 25%. In the March quarter, non-GAAP product costs including costs of sale of MMOGs were 36% of net revenues, higher than our outlook, due to sales mix. Non-GAAP operating expenses came in at 41%. This is below our outlook due to the timing and sales of marketing expenses, for both Activision and Blizzard which will now be incurred in Q2. Our effective non-GAAP tax rate was 30%.

Now turning to the balance sheet. On March 31st, we had no debt and approximately $3.4 billion in cash and investments, an increase of approximately $300 million over the prior year, despite returning almost $1 billion to shareholders through our buyback programs, over the past 12 months. Our strong financial position is a major competitive advantage, which affords us the ability to allocate capital across a number of strategic initiatives. We have purchased approximately 8.5 million shares under the new $1 billion share repurchase authorization, at an average price of $10.84. And on April 2nd, we paid out our first cash dividend of $0.15 per share. Additionally, we can allocate capital to our own operating investments, within our franchises and in our platforms. We can also continue to invest into new and exciting opportunities such as the ten-year alliance with Bungie.

And although we haven't announced a specific financials for the deal, I will say that there was no up front payment provided, but that Activision will be funding the development expenses, which we will approach it in the same manner as any of our other projects, with the vast majority of expense are capitalized. We expect that as of the first release, the deal will be accretive to Activision's operating margin every year of the alliance. In today's increasingly competitive environment, the ability to structure a deal, which is accretive to our already industry-leading operating margins, with a proven team is a unique benefit, available only to companies with a leading industry position in worldwide retail and online publishing, and a strong financial profile such as our own.

Now let me turn to a brief review of our balance sheet as of March 31st. The accounts receivable balance was $134 million, a decrease of $47 million versus the prior year. We successfully navigated the weak macroeconomic environment over the last two holiday seasons, without incurring any significant credit issues. Inventories were $194 million, down $36 million versus the prior year, due mainly to a reduction in Guitar Hero inventory. Our quarter end position represents ourself lowest inventory level, since the merger in July of 2008. Capitalized software development costs were $221 million, as compared to $251 million a year ago. Of the $221 million, approximately $34 million is related to deferrals of online-enabled games. Capitalized intellectual property costs were $69 million. Excluding deferrals, capitalized intellectual property costs were $62 million, $32 million above the year ago, due in large part to the number of licensed properties scheduled for release in the next 12 months.

In summary, our March quarter was strong, and we continue to be in an excellent position to capitalize on investment opportunities for long-term growth. Before turning to to our financial outlook, I would like to highlight a few items. Our outlook is subject to significant risks and uncertainties, including those mentioned at the beginning of this call, and the risks highlighted in the Company's annual report on Form 10-K for the period ended December 31, 2009. As a result of these and other factors, actual results may deviate materially from the outlook presented today.

So now, onto the Company's outlook. As I previewed on our last call, we are focusing on a few key building blocks to drive earnings growth and operating margin expansion in 2010. I want to take minute to review the building blocks, and our progress to date. First, we expect significant growth in our online businesses, the majority of which will come from Blizzard. In the first quarter, we had better than expected performance from two of our largest online components. Blizzard Entertainment's World of Warcraft, and Activision's Call of Duty Modern Warfare 2 map pack on the XBox. And driving growth, later in the year are the upcoming Blizzard launches, StarCraft 2, Battle.net, and Cataclysm, and Activision's Blur which will also offer exciting downloadable content. Second, Activision Publishing is expected to release a strong product line-up of innovative titles. To date, all of our announced titles for the year are looking good. And in the second quarter, we have an exciting line-up with Shrek, Transformers, and our two new intellectual properties, Blur and Singularity. Third, we expect to increase the profitability of our music business, and we are on track to hit that objective as well.

And finally , we will continue to our overall productivity efforts in order to expand operating margins, while investing into our product pipeline. As you know, we announced a realignment in the first quarter, which is expected to generate run rate savings of $30 million to $40 million for 2011. In the first quarter, we executed against our stated goals for earnings growth, and are already on track to exceed our original outlook for the year. As you know, we entered 2010 with a reasonably conservative approach, due in part to the uncertain macroeconomic and retail environments, and consumer demand in some of the segments in which we participate. Today, we feel this conservative approach is still warranted, especially given the recent declines in European currencies.

For calendar 2010 we still expect GAAP net revenues of $4.2 billion, and non-GAAP net revenues of $4.4 billion. For calendar 2010 we now expect GAAP EPS of $0.49 and non-GAAP EPS of $0.72. This is $0.02 higher than the outlook we provided at the beginning of the year. In the March quarter, we outperformed our non-GAAP EPS outlook by $0.07, and we are passing on $0.02 to the full year. The remaining $0.05 can be broken down as follows. About $0.02 is due to the favorable timing I mentioned earlier between the March and June quarter for the map pack and the timing of expenses. The remainer is largely a result of lowering our assumptions for our large slate of licensed product planned for later this year. Licensed properties continue to underperform in this market, and as such warrant a high degree of conservatism than the rest of our business. In addition, there is some impact due to the significantly weaker outlook for the pound and the Euro.

For the calendar year, we expect GAAP product costs including MMOGs, of approximately 30% of net revenues. And operating expenses including royalties of about 50%. We project the GAAP effective tax rate of about 28%, and a diluted share count of about 1.27 billion. On a non-GAAP basis we expect product costs including MMOGs of 31%. Gross manufacturing margins I expect to expand meaningfully year-over-year, due mainly to Blizzard's high margin slate. We expect non-GAAP operating expenses, including royalties of 40% of net revenues.

This is higher than year ago, due to our larger publishing slate, which includes a number of new intellectual properties. Also Blizzard is increasing it's investment in product development and customer service to drive long-term growth. For the calendar year, we expect a non-GAAP operating margin of about 29%. We expect to achieve our margin expansion target by focusing on the core consumer at retail, combined with an increase in our higher margin online businesses. We expect our effective non-GAAP tax rate to be about 30%, which can be used for the remaining quarters, and expect a diluted share count of about 1.27 billion.

Now moving to the June quarter. As I mentioned earlier, we expect to release four titles. These releases, in addition to catalog sales, are expected to generate GAAP net revenues of approximately $925 million, and GAAP earnings per share of $0.11. We expect GAAP product costs including costs of sales of MMOG's of 29%, and operating expenses including royalties of about 49% of net revenues. We project a tax rate of 28%, and a share count of 1.28 billion. For the June quarter, we expect non-GAAP net revenues of $700 million, and non-GAAP earnings per share of $0.04.

Revenues and earnings for the quarter are expected to be down versus the prior year, due to a smaller release slate, lower music sales, and a higher tax rate. Also last year, on own new IP, Prototype exceeded our expectations, and took the number one spot in June. Prototype was very profitable in the quarter, as most of the costs had already been expensed pre-merger. We hope view have the same success with Blur and Singularity this quarter, but as you know, we approach new IP conservatively. For the quarter, we expect non-GAAP product costs including cost of sales of MMOGs of 32%, and non-GAAP operating expenses including royalties of 57% of net revenues, and a diluted share count of 1.28 billion. In summary, we believe our combined company strength in the retail and online businesses, our cost containment efforts, and our significant financial strength positions us to drive another year of shareholder value creation, and record non-GAAP operating margins.

So now let me move on to the discussion of Activision Publishing. are. Today I'll focus my comments on three areas. First, I will recap our outlook for hardware, software, and digital content. Second, I will highlight our core strategies and execution year-to-date, and finally, I'll cover the key drivers for the remainder of 2010. So let's start with a review of hardware and software. Over the first quarter, hardware and software performance in the US and Europe was largely in line with our expectations. Importantly, software sales for the PS3, XBox 360 and Wii consoles were collectively up single digits. On March 31st, the install base of hardware in North America and Europe for current gen systems, including handhelds, were 227 million units, an increase of 34% over the prior year, providing a strong foundation for the industry. Overall, our 2010 hardware installed base work has remained unchanged. And we expect to enter the year with a massive install base of 265 million units of consoles and hand helds.

We are also maintaining our full-year outlook for software sales. We expect that North American and European PS3, 360 and Wii software sales will collectively be up low-to-mid single digits, and that handhelds and PS2 software sales will be down. We also expect PC software sales will be up double digits this year, driven by Blizzard Entertainment's upcoming releases. This is expected to be the first year PC sales have been up in almost a decade. In addition, we expect that online sales will be up double digits, so in total, we expect retail and online sales overall will be up in the 5% to 8% range.

We have seen with our own Call of Duty franchise that downloadable content can add incremental revenue that can rival AAA stand-alone console launches, and can do so with significantly lower risk. In addition to revenue, digital content allows us to build direct relationships with consumers, who better understand their preferences, so that we can provide them with compelling entertainment experiences. As the social nature of online play continues to draw people to gaming who may not have previously played games, we feel the ability to expand our franchises, and to create value through digital content have never been greater. We expect the retail environment to continue to favor large proven properties, and for retailers to elect to hold AAA launch pricing.

In this environment, franchise equity is more important than ever, and Activision stands to benefit. It's not surprising that Call of Duty remains the number one third-party publisher franchise this past quarter. Our continued success reflects our focus on broadening our franchises, as it underpins our three core strategies. First, our laser focus on growing our top franchises to our top customers and in our top geographies. Second, selectively expanding our portfolio with content that offers innovative entertainment experiences, and robust opportunity in retail and online. And, third, strengthening our development capabilities, in order to deliver content beyond the retail SKU.

During the quarter, we again made progress in each of these areas. First, we continued to generate strong support for the Call of Duty franchise in the quarter from our top customers in our top geographies, as demonstrated by our significant overperformance in the quarter. Additionally, we just revealed our late effort title the Call of Duty franchise, Black Ops, which we will with a major marketing campaign later this year. Our commitment to innovation and superior execution at the point of sales, makes Activision one of the best partner for retailers worldwide. In addition to retail, we continue to expand the strong position of Call of Duty with the release of our first DLC pack. Call of Duty Modern Warfare 2 Stimulus Package. The Stimulus Package exceeded prior DLC sales records on the XBox Live, with more than one million gamers world-wide downloading the new map pack in the first 24 years alone.

As already mentioned, Modern Warfare 2 players have invested nearly 2 billion hours of game play on Xbox live since the title's release in November. These types of metrics illustrate the massive amount of online game play that now occur on top of the initial game sales. We recognized this trend early on, and established an accretive business model with Call of Duty, that has allowed us to expand the brand and grow our online audience. While every one of our franchises lent itself to this model, we were focusing our time and resources disproportionately on those that allow us to offer consumers the downloadable experiences they want.in a frequent and near persistent manner. Today, there are more core gamers than ever before, playing more hours than ever before. Delivering new online content requires additional development resources to create the game design, to support and assist character development and skill progression, and a back end infrastructure that tracks these stats, and can offer enhanced services such as social network integration. On consoles, in addition to Call of Duty, Halo is the next best example of high engagement online play.

This is one reasons we are so excited about our ten-year alliance with the talented team at Bungie. This alliance further strengthens our development resources, and allows us to work with one of the most highly acclaimed studios in the business. For the first time, million of players across the world will have access to Bungie's unique and inspiring games on the platform and device of their choice. Bungie now will be able to deliver new and exciting content to the fans, in a broader, more seamless and more persistent way than they have been able to experience to date. Profitable growth in our industry today is coming from games that offer immersive and sticky online experiences, and we expect this trend to continue in the future. People always ask what is next for Activision, and our alliance with Bungie certainly giving you a sense of the type of breakthrough opportunities we're working on. So in summary, we remain focused on the largest market opportunities, and believe that our strategic initiatives will enable us to deliver our long term financial goals.

Now I like to turn to our release schedule for the balance of the year, starting with the June quarter. This quarter we will release Shrek Forever After the game, which will launch in conjunction with Dreamwork's expected blockbuster animated film. We also are releasing Transformers War for Cybertron in the PS3 and XBox 360. And Transformers Cyberton Adventures on the Wii which was developed specifically for the platform. Transformers looks great, and it's coming to markets with terrific value from it's fan base, with over 5 million trailers used to date. . On the new IP side we are bringing to market two anticipated titles, Bizarre Creations' Blur and Singularity from Raven Software.

Coming first will be Blur, for which we launched an open Beta in April to outstanding reception from fans. Blur has taken the best of mass market multiplayer racing and aggressively merged it with a high-definition and graphically immersive features of the industries best high end simulation racing game. The result is a heart pumping electrified racing game, unlike any other. And as such, Blur has already been dubbed by the press as Modern Carfare, because it is bringing the intensity quality and online multiplayer experience of Call of Duty to the racing genre. Blur is actually taking online innovation even further. The game offers unique customization and online content integration features including a groundbreaking social network interface that is integrated throughout the single and multiplayer modes. We recently revealed Blur in-game integration, and look forward to unveiling the additional social networking and community game play features which will allow gamers to stay connected at all times. As for Singularity, Raven Software's new first person action title is set to hit the US store shelves in the last week of June. The game takes players on a harrowing sci-fi action experience where time has been fractured, threatening the world as we know it. The press reception for Singularity has been enthusiastic from the start, and we look forward to its release.

Now I would like to discuss our planned releases for the back half of the year, starting with the Guitar Hero franchise. As we mentioned on our last call, we expect the music category will continue to compress in 2010, as we have moved from the sales growth of higher priced peripherals to realizing improved economics on a higher percentage of software sales. Guitar Hero remains the leader in the category with over more 44 million games sold to date. This fall we expect to launch Guitar Hero 6, and soon after we are expect to launch the next DJ Hero. This year we've added more great original music, new game playing modes and a significantly enhanced social game play experience. We expect to follow each release with a full line up of exciting downloadable content. Beyond music, we expect to release all new addition to long standing and highly successful franchise properties, Spiderman, James Bond, and Tony Hawk. This year we also expect to bring back the True Crime franchise, with on open world action title, you'll be hearing more about in the coming months.

With respect to the Call of Duty franchise, we plan to release the second map pack for Call of Duty Modern Warfare 2 which is currently in development at Infinity Ward. And we expect November 9th will be our biggest launch of the year with Call of Duty Black Ops. Last Friday, we revealed first details regarding the highly anticipated game developed by our Treyarch Studio. This year's title Black Ops represent this first time that the entire 200-plus people at the studios have been focused exclusively on one single game with teams dedicated to creating single player and co-op modes, multiplayer game play, and DOC. So as you can see, our back half line-up is heavily focused on big propositions, and spans across many demographics in genres. in addition, we continue to build for the future by broadening the franchises we have, and adding new genres and business models, and selectively adding proven development resources, and new intellectual properties for the future. So now I would like to turn me call over to Mike Morhaime, who will provide an

Thanks, Thomas. I will start off with a review of our performance for the first quarter, and then discuss what's in store for Blizzard Entertainment for the rest of 2010. Q1 2010 was another great quarter for us as we grew income and operating revenue over the prior year. The World of Warcraft business is strong, and continues to maintain it's large and stable player base of over a 11.5 million subscribers. And later this year, we'll be looking to bolster our business with the release of Cataclysm, the Cataclysm expansion set. I will talk more about this in more detail later. For now, I would like to discuss StarCraft 2. Earlier this week, we announced a global release date of July 27, 2010. We began beta testing the game back in February, and have received a lot of great feedback from our players and the press. Hundred of thousands of players are around the world have participated. And our development team is continuing to collect their feedback, to improve and polish the game as we draw closer to ship.

The enthusiasm of our players is evident in a lot of ways. We're already seeing a huge number of replays and shout casts on Youtube. X fire also lists the StarCraft 2 beta in it's top 15 most played PC games, and the number two RTF behind Warcraft III. This is an extraordinary feat, considering we are running a closed beta, and limiting the number of players. All the excitement has resulted in strong pre-order numbers for StarCraft 2 from our retail partners. From a logistics standpoint, StarCraft 2 will be our most ambitious launch ever, with the game available in 11 languages and across five continents. Beyond globalizing the game into our player's native languages, we think it's equally important to tailor the business model in I've region to suit the unique requirements of each market. This is one of the keys to World of Warcraft's global success, and we are applying those same principles to StarCraft 2.

In the west, the standard game will include unlimited play, in keeping with the market standard in North America and Europe. In regions like Russia, Asia, and Latin America, we will have additional options for players, using time-based access models, to make the game affordable to a wider audience, while also creating a source of recurring revenue. We'll discuss these options in more detail by market, as we draw closer to launch. I would like to talk a little bills about battle.net now, which has been in beta testing, along with StarCraft 2. As the future home of all Blizzard games, we believe Battle.net will offer a lot of great features that improve the online gaming experience for our players, including a feature we call Real ID. Real ID is a completely voluntary and optional level of identity that keeps players connected across all of Battle.net.

When you and a friend mutually agree to become Real ID friends, you will gain access to a number of great features such as the ability to chat across different games. You will also see your real life friends by their real names. This unifies the community experience across all of our games, and makes online gaming more accessible, as you won't need to memorize the various character names of all of your friends in different games on b=Battle.net. Through without the beta test, we've made improvement to Battle.net adder and other areas, while adding other functionality like achievements. We also released the StarCraft 2 map editor to our beta testers. In just a few short weeks, we're seeing the creativity of our players reflected in new mods and maps. Players are creating everything from racing games to adventure games and more, using our powerful content creation tool. We believe that the map editor will create a tremendous value for all StarCraft 2 players, and motivate even more people to try the game.

I also wants to discuss another very exciting Battle.net feature that ties in to Real ID Our Facebook integration. The first part of this integration will be up the ability to easily find all of your Facebook friends who are also on Battle.net and add them as Real ID friends. This is an important feature, as we wants to make it as easy as possible to find your friends and play games with them over Battle.net, to make the online experience a lot more fun for our players. It's always more fun to play with people that you know. When we launch both StarCraft 2 and the revamped Battle.net surface on July 27th, StarCraft 2 players will be able to immediately communicate with their friends in World of Warcraft. This is an exciting first step for us in unifying the Blizzard community of gamers. And we look forward to continued development of the service after launch.

Now I would like to talk a little bit about the World of Warcraft. We have already begun internal testing on our upcoming expansion set, Cataclysm, and expect the larger external beta test to begin in just the near future. This means we are on track for the release of Cataclysm later this year. Historically, our expansion sets have spurred growth in the World of Warcraft player base. So we are optimistic that this new content will help us win back players who have taken a break from World of Warcraft, as well as attract new players to the game. As a matter of fact, one of the design objectives for this expansion pack is to overhaul a lot of the content from the original World of Warcraft. Though we have added a lot of content over the last five years, with patches and expansion sets, most of the original areas and dungeons in World of Warcraft have remained unchanged since 2004. With Cataclysm, we will leverage the vast expertise and experience of our developers that they've gained over the past five years, and redo the lower and mid-level content in the game to bring them up to the constantly rising game play standards. By improving the new player experience, we believe that Cataclysm will help us attract and keep more new players, and contribute to growth in the World of Warcraft community.

We've also made significant efforts on the marketing side to attract new players to World of Warcraft. Our Q4 outreach advertising campaign starring Mr. T quickly doubled our new player trial volume, in both the United States and Europe. We also saw a record number of returning subscribers in North America in December, and record trial activations in Europe during the first week of January. Due to the success of this campaign, we have gone back on air this week in North America and Europe. We're also continuing to add new value-added services. On the last call, I discussed the remote auction house. Normally, our players have to log in to World of Warcraft to be able to buy and sell virtual items for in-game currency. The new auction service will allow our players to access this functionality from outside the game, using browsers, or mobile devices like the iPhone. This service is well into internal testing, and we are looking forward to releasing more details about it very soon.

Existing value added services like paid character transfers, faction changes, and the pet store are seeing continued interest from our players. A few weeks ago, we introduced a new pet, Little XT, as well as our first mount, the Celestial Steed to the pet store. The mount, in particular, was a tremendous success. We continue to add new content and new services over time to meet player demand. With the upcoming launches of StarCraft 2, the revamped Battle.net service, and World of Warcraft Cataclysm, Blizzard Entertainment is poised to have its biggest year ever. Looking further down the road, we continue to maintain a solid pipeline of games, with Diablo III, and our unannounced MMO making great progress. We also look forward to sharing more news about StarCraft 2, World of Warcraft, and Diablo III at this year's BlizzCon in October. Thank you, and I'll turn the call back over to Kristin.

Thank you, Mike. And, operator, we'd like to open it up for questions. And again, I would just like to remind everyone that given that ongoing litigation related to Infinity Ward past and present employees, that we will be limited in what we can say with regards to the circumstances. So, operator, with that we can start your questions.

Thank you.

(Operator Instructions). Once awe'll take our first question with Heath Terry from FBR capital markets.

Great. Thank you. Thomas, you mentioned that World of Warcraft was better in the quarter. Can you give us a sense of what that means, from a subscriber standpoint, since we've generally seen subscribers flat for the last year or so, or was this simply a higher ARPU per subscriber that you were referring to?

Yes, I think the subscriber trends have been healthy. We continue to make great progress, and probably slightly better than we had even expected, particularly in China since we entered the relationship with NetEase, and NetEase has been doing a fantastic job growing the World of Warcraft community in China. So that's tracking very well. And then, in addition, as Mike mentioned in his earlier remarks, there's a lot of traction for the additional services that Blizzard has started to offer their gamers, and those have been -- those have been selling very well, as well.

So it's safe to say that we're still at 11.5 million subscribers?

Safe to say that we have not yet reached a new milestone that we would be ready to announce.

Okay. Great. Thank you.

Though we can confirm we are over 11.5 million still. I just want to add a couple of points, because we have a couple of reasons for optimism about the future this year, as being a big year for World of Warcraft. And I just want to call out two of those reasons. One is, of course, the launch of Cataclysm, which we're very excited about. Historically we've always seen a nice bump of returning players, as well as new players when we've launched expansions. And also we've seen -- we've seen great momentum for the game in China, despite the fact that we haven't launched Wrath of the Lich King yet. And we also expect that when we do receive approval to launch Wrath of the Lich King, that will also drive interest for the game in China.

Great. Thank you.

Next we'll go to Brian Pitz with UBS.

Great. Thanks. Two questions. With respect to map packs for Call of Duty, should we expect at least two additional releases for Modern Warfare 2 this year, and also is that $15 ASP sustainable? And just a quick one regarding Blizzard, is it likely that we can see two or more releases annually from the studio going forward? Thanks.

So with regard to the map packs, they've been selling incredibly well. As you know, we have expanded the number of maps that we are providing as part of that release. And therefore the $15 price point has still provided a fantastic value to gamers, and also evidenced by the billions of hours that people are playing the game online. So we think that that has worked. We have currently the second map pack in development at Infinity Ward. So we expect this will launch some time later this year, and we haven't made any comments beyond that at this point. And I'll let Mike handle the question on the Blizzard release schedule.

So I'll just say that we have a great pipeline of products in development, and we'll continue creating content for our games. So I would say we have a great pipe line of products in development, and we will continue creating content for our games. We've already announced that we'll be creating two expansions for StarCraft 2 after launch, but we haven't announced any details about the release schedule.

All right. Great. Thank you.

Next we'll go to Collis Boyce with Morgan Stanley.

Hi, guys. Thanks for taking my question. One question just around mobile. I know that historically you guys have licensed your franchises. And now that iPhones and iTouches are about 86 million for an installed base, the iPad already has a million units, I was wondering if that was still your strategy going forward, or if there is any change to how you think of mobile? Thanks.

We've said all along that prioritization of opportunity is always our greatest challenge when you have lots of growth opportunities. As the installed base of the mobile devices gets bigger, if we can -- we have a number of products that are on those platforms today that are performing well. But I think one of the challenges for us, is really figuring out how do you have a profitable business on those platforms, and they generate a modest amount of profitability. I will say this, I think over the course of the next couple of years, that iPhone and mobile generally will present opportunities for growth and margin expansion that we haven't seen in the past. So we're getting more excited about the opportunities there.

Thank you.

Next we'll go to Edward Williams with BMO Capital Markets.

Good afternoon. Just a quick question for you, Bobby. As you look at Call of Duty, can you give us an idea as to what you're seeing with the ARPU, given kind of what's the uptick rate like for the expansion packs, and how much have you been able to expand the ARPU above and beyond what the retail price is?

So we don't really look at ARPU per se. I think what we're really focused on, is how can we deliver value-added experiences to our customers that are worth paying for. And I think that we clearly, looking at the amount of consumption, we're doing that. I think we're going to continue to invest against the opportunities that downloadable content provide, as long as we see that the collection of what's included in the map pack is really going to deliver -- delight, surprise, enthuse our audiences, we'll continue to do that. But I can't say that we look at it from a pure ARPU perspective.

Okay. And then can you comment a little bit about what steps you may be taking with that particular franchise going forward, and integration, if any, that could come into the Battle.net platform?

We haven't said anything about integrating it with Battle.net. I think that Blizzard is focused on using Battle.net as a principal tool for StarCraft 2, and I'll let Mike answer that question, but from our perspective, what we're focused on right now is enhancing the multiplayer experience. And I will say this, what we're delivering in Call of Duty Black Ops in multiplayer, I think is beyond what any of our expectations was in terms of quality, capability, functionality. So I think where our players are going to get a lot of opportunity for an enhanced experience. It is going to be later this fall in Call of Duty Black Ops, but Mike might want to --

Okay. On the battle net question, I just would say that our focus right now is developing Battle.net to support Blizzard Entertainment games. I don't have any announcements to make at this time regarding integrating the service with any non Blizzard games.

Okay. Great. Thank you.

Next we'll go to Doug Creutz with Cowen And Company.

Thanks. I was wondering if you could maybe go into a little bit what the economic structure is for StarCraft 2 in Korea, given that they have a sort of unique PC cafe market there. Is it still kind of a straight unit model, or is there some kind of a revenue share deal that you have with the PC cafes? Thanks.

We have not yet announced the details about our IGR model in Korea. What we have said is that -- is that players will be able to purchase access to StarCraft 2. We have announced the pricing of 69,000 Korean won. And we have announced that there will be alternative pricing options available, as well as pricing for current WoW players that we're going to announce later. But for competitive reasons, we're not ready to get into additional detail right now.

Okay. thanks.

Next we have Ben Schachter with Broadpoint AmTech.

A few questions for Mike, and then one for Thomas. When you look at Korea, just what percentage of revenue do you think will come from Korea from StarCraft in the first year, and what does those StarCraft brand mean in China, and when might we expect to see it there? And then finally on StarCraft, how many of these world wide do you expect to sell direct through Battle.net? Is that going to be very different from your past relationships of selling it through retail? And then one follow up with Thomas.

Okay. Well starting with the last part, for competitive reasons, we can't go into our anticipated breakdown for digital versus retail, and how many players might opt to download the game digitally from the Blizzard store versus how many might get a box copy from retail. But we are committed to providing different distribution options, and payment options in various regions for players that want to play StarCraft 2. And the objective, of course, is to reach the widest possible audience. Regarding the breakdown of revenues by region, that's not something that we -- that we break down. I can say that -- that this StarCraft brand is extremely strong in Korea, as you know. And the Blizzard brand is extremely strong throughout Asia and in China.

And so Warcraft III happens to be more popular in China than StarCraft was, but that really, I think, is a product of the timing of the release. And just that the -- as the market in China evolved, since Warcraft III came out later, we were able to attract more players to play it. But throughout Asia, StarCraft is still a very strong franchise. And we expect there's a lot of buzz and a lot of anticipation in China, and so we expect to have success in China similar to other regions. In terms of the times of the launch in China, I don't have any forecast for you, other than to say that our desire is to launch the game in China as soon as possible. And we'll work with the relevant government authorities and with our local partner to ensure that we can do that.

Great. Thank you. And Thomas, excluding music and excluding COD, will Activision Publishing be up or down, year over year?

Excluding music and Call of Duty, it will probably be up year-over-year.

Great, thank you.

Next we have Justin Post with Banc of America Merrill Lynch.

I just want to clarify Call of Duty for next year. Sounds like there could an Sledgehammer version and an Infinity Ward version? Could you just talk about that? Are you worried at all about diluting the brand value by having so much content out there next year? And then one more follow up.

Our standards for the content that we're willing to put out on the Call of Duty franchise banner is extremely high. We have built a very enthusiastic and loyal fan base over the years that had very high expectations. And the last thing we would ever do is put a product out that doesn't live up to the standards. In fact, what we are trying to do with every product is raising the bar. And the good news about having such a large community that's banking so many hours, playing the game, and now also the online connectivity, and all of the data that we are gathering on our back end, allows us to see what parts of the game players appreciate the most. It's also a vocal fan base, they let us know the types of game play modes, services, et cetera they would love to have, but they're not having yet, and all of that feeds into our development process.

So we are extremely well positioned on Call of Duty because of the consumer interest that we have. And because of the fact that we have very developed -- very talented developers working on the franchise. And in fact we never had more talented developers working on this franchise than we have right now. We've added Sledgehammer, which is a super talented team. There is still a large group of extremely talented individuals at Infinity Ward that we're going to supplement. So we are very bullish about our plans. We know the expectations are high. And we have confidence that our development teams will live up to those expectations, and exceed them as they have done in the past.

Okay. And is there an Infinity Ward shooter version coming out for next year? Can you confirm that at this point?

Well, we have not yet confirmed the individual plans for next year. We usually don't this at this time. We're very focused in our communication right now about the release for this year. We have revealed that Infinity Ward is working on Call of Duty title, and you'll hear more details as we advance through the year.

Remember Justin, and this is a history that we have, we are laser focused right now. We don't want any distraction from the continued success of Modern Warfare 2 in the market, and more importantly the release of Black Ops later this year.

And the follow up, how is the retail reception, and what are you hearing about Black Ops, any way of quantifying it at all versus last year, which was obviously an unparalleled success? Thank you.

Retailers are very excited about the new game. And we are, again, I think set up for another blockbuster launch that's going to be supported with great advertising, a major marketing campaign, and tremendous retail support.

And it is an extraordinary multiplayer product.

Great. Thank you.

And we do have time for one more question. We'll take that question from Jeetil Patel with Deutsche Bank Securities.

A couple of questions. I guess there has been obviously quite a bit of controversy in the markets about Activision and different things, but I guess can you discuss maybe 2011 broadly, qualitatively? Do you think earnings grow in 2011? And, second, question around StarCraft 2. I know a lot of folks have asked questions around this, but it seems like a hybrid business model of software and subscription/royalties. And I guess when you look at the opportunity for a game like StarCraft 2, and I guess it's still being played after ten years, but if you look at it over the next five or ten years, what percentage of the kind of opportunity -- revenue opportunity comes, in the form of the traditional software model, versus maybe what we're not thinking about, which is subscriptions, royalties, and licensing, and all of the other ancillary pieces kind of the equation, you weren't able to monetize or capture here in the past decade with number 1? So, if you can go through those, that would be great.

I'll take the first part of your question, Jeetil, but we have a 20-year history of growing earnings and expanding margins. And while we don't give outlooks for next year this year, I think you know what our commitment is to growing our margins and expanding our business. And I think Mike would be best equipped to handle the second part of your question.

Okay. So I think initially the StarCraft 2 launch will probably look very similar to previous launches with -- with the model being driven by the sale of the unlimited client, either at retail or digitally. But as I mentioned, we plan to tailor the business model in each region, in a way that makes sense for individuals in each region. So I think that have the impact of basically extending out the life of the game, and also create additional accessibility for markets that really don't support full retail price point, like the United States and Europe.

And I just want to call out as an example, I'm in a -- going to give Russia as an example. The way that it will work, is we're going to offer two retail packages in that region. One would sell for the equivalent of about $33, and will include one year of play. Another would sell for the equivalent of about $16.50, and that would include four months of play. Players would then have the option of purchasing additional time for a fee, or even upgrading their account to unlimited play. And we think that giving players in these regions more options on how to pay for StarCraft 2 that will attract a wider audience and maximize participation and also minimize piracy.

And I guess to follow up to that, do you look at any particular model out there in media, or in general that, may be a good proxy for us to look at, just as a concept to think about StarCraft 2? And, second, I guess is the StarCraft 2 model that you're looking at broadly, maybe a blueprint for how you look at online in general, as you look at some of the other franchises and kind of this integration of client versus online?

Yes. Well, as far as the model goes our perspective on that is we always design our games first and tailor the model to what's appropriate to both the game and to individual regions and how we expect people to play the games. And in terms of the -- predicting what the breakdown might look like, I think I'm going to leave that up to you.

All right.

Okay. Operator?

And that does conclude today's question-and-answer session. I would like to turn the crawl back over to Kristin Southey for any additional comments or closing statements.

Well, thank you. And on behalf of everyone from Activision Blizzard, I thank you for your time and your support.

That does conclude today's conference, and we thank you for participating.