動視暴雪 (ATVI) 2010 Q3 法說會逐字稿

Good day, everyone and welcome to the Activision Blizzard third quarter CY 2010 earnings conference call. This call is being recorded. At this time, for opening remarks and introductions I'd like to turn the call over to the senior vice president of investor relations, Ms. Kristen Southey. Please go ahead

Good afternoon and thank you for joining us today for Activision Blizzard third quarter 2010 conference call. With me today are Bobby Kotick, CEO of Activision Blizzard, Thomas Tippl, COO and CFO of Activision Blizzard, Eric [Hershberg], CEO of Activision Publishing and Mike Morheime, CEO of Blizzard Entertainment. I would like to remind everyone that during this call we will be making statements that are not historical facts. These forward-looking statements are based on current expectations and assumptions that are as subject to risks and uncertainties as indicated in the slide that is showing, a number of important factors could cause the Company actual future results and other future circumstances to differ materially from those expressed in any (inaudible).

Such factors include without limitation sales levels, increasing concentration of titles, (inaudible) consumer spending trends, current macro economic and industry conditions, conditions of (inaudible) seasonal and cyclical nature of our industry, our ability to predict consumer preferences among competing hardware platform and genres, possible (inaudible).

Product returns and product delays retail acceptance of our product, adoption rate and available of new hardware and related (inaudible), competition litigation and associated costs, rapid changes in technology, industry standards, business models including online and (inaudible) games, and consumer preferences (inaudible) proprietary rights, maintenance accumulation system, though the ability of track retained and developed, key personnel and developers that can (inaudible) high-quality hit title, (inaudible) economic financial and political conditions and policies, foreign-exchange and tax rates (inaudible) of acquisitions, opportunities and potential challenges associated with geographic expansion. These important factors and other factors that potentially could affect the Company's financial results are described in the Company's annual report on form 10K for the period ended December 31, 2009 and in the Company's (inaudible)

The Company may change its intentions or expectations at any time and without notice based upon any changes in such factors in the Company's assumptions or otherwise. The Company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events after today, November 4, 2010. Or to reflect the occurance 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 the net revenue and related costs of sales with respect to certain of our online enabled games expenses related to share-based payments, the operating results of products and operations from historical (inaudible) that the Company is exited or substantially run down, cost related to the business combination between Activision and (inaudible) games, the amortization of intangibles and impairment of intangible asset and the associated tax benefit.

Please refer to our earnings release which is posted at the www.activisionblizzard.com for a full GAAP and non-GAAP reconciliation and further explanations. Finally there is a PowerPoint overview which you can access with the webcast and which will be (inaudible) to the website following call. Now I like to introduce our CEO, Bobby Kotick.

Thank you Kristen and thank you for joining us today. Today we are excited to report that Activision Blizzard delivered another quarter of better than expected financial results. As a result, we are raising our 2010 outlook for both revenue and EPS reflecting the continued strength in our business and our confidence in our continued execution. While we are likely to achieve record profitability this year, we sometimes overlook the strong ability our businesses have to convert profits into cash which for the last 12 months have generated approximately $1.2 billion of operating cash flow. Our increased outlook puts us on pace for the most profitable year in our history, and our highest operating margins ever. And should, I believe, allow us to maintain our leadership position as the world's largest and most profitable online entertainment Company . Our biggest brands are thriving while many other media and entertainment companies including most of our direct competitors, are experiencing challenges.

We continue to see a shift in the way our consumers play games which (inaudible) for our unique benefit. Having the largest reservoir of online gaming expertise combined with the most capable studios and development teams has resulted in a deeper and wider moat surrounding our core franchises. More importantly, we are delivering some of the world's best games for the largest audience of gamers we have ever addressed. All of this not only means that our business is stronger financially, which it is, but it also means that our audiences are embracing the franchises around which these moats are built. Mike Morhaime will give you a glimpse of how we were seeing this happen within Blizzard's games and this is clearly true with Call of Duty.

Our latest installment Black Ops launches next week and is likely to be the biggest entertainment launch of all time. In a landscape where many entertainment providers are trying to figure out how to manage lower audience engagement and rapid obsolescence, our core franchises are posting record engagement levels and seeing adoption curves that are longer, deeper and with fatter tales than ever before. And our players are enjoying a higher level of quality than we have ever delivered. That we have performed so well during a period in which many consumer businesses beyond video games have seen only disruption and decline is not due to chance.

Three years ago we recognized that success in our industry would require significant changes to product development and business models. In response, we merged with Blizzard, arguably the most incredible digital business and all media and entertainment. Since then we've combined Activision's strong legacy in game development marketing and retail sales execution with Blizzard's massive online and PC franchises its virtual world and World of Warcraft and the supporting architecture and intelligence behind that world to create a combined Company that is truly unique in our capabilities across both physical and digital channels.

We have transferred many elements of Blizzard's expertise to our approach to Call of Duty which now joins the very short list of entertainment properties that have successfully bridged traditional and emerging models. This quarter, we added StarCraft Two to our core portfolio. One of the highest rated games ever. StarCraft Two represents yet another exceptional quality title from Blizzard that was developed with the needs and interests of today's connected audience in mind. StarCraft Two is already off to the fastest start of any strategy game ever with even more content and geographic expansion on the way. I have great confidence that with its global player community, exceptional game quality, and deep multiplayer appeal, the StarCraft franchise will continue to see high levels of player engagement and make significant financial contributions to our Company.

Our strong execution and significant investment in immersive digital opportunities while others struggle with dependence on legacy business models, underlines my confidence in the future for Activision Blizzard. In particular there are three factors that position us exceptionally well. First, interactive entertainment continues to broaden its appeal to wider consumer audiences. Second, our franchises are among the most successful in all of entertainment. Third, and perhaps most important, we have some of the strongest most creative development and sales and marketing talent in our industry in fact in any industry. Filling out a product pipeline that is one of the strongest I've seen in my 20 years at this Company. And an incredible balance sheet and the deep financial resources to assure that the success of our games in the marketplace for many years to come.

Today, audiences want to be connected. They expect games to have a strong social component and they want the ability to customize and express themselves through their entertainment experiences. Our gamers also want immersive stories and experiences that offer the depth and exceptional production values that we are uniquely delivering. As interactive entertainment stretches to meet this broader demand, it not only brings in new audiences but embraces and immerses traditional audiences more tightly than ever before. Through today's video games, we are now delivering against all of the most important consumer expectations.

Advanced user interfaces, high-definition and 3-D graphics,, online connectivity, mobility, deep and compelling storylines, and massive highly engaged communities such as those you see on our core franchises. Only a select few properties in interactive entertainment are bringing together these characteristics of depth, quality, creativity, and media seeing connectivity and a single entertainment experience like our franchises do. As a result, you have seen World of Warcraft set the all-time launch record for PC games on its last release and continue to raise the standard for massively multiplayer online games with new record subscriber levels.

You've also seen Call of Duty and now StarCraft Two shatter launch records Call of Duty taking it even one step further by setting new marks for game play hours on Xbox live. In fact we believe that the cumulative hours being played online by our gamers is starting to approach the time audience spend watching any giving television network. As we look ahead, our portfolio is likely to increase in size and breadth and our core franchises should continue to strengthen.

Starting next week with a launch of Call of Duty-- Black Ops and over the next month with the release of Blizzard entertainment's Cataclysm we'll be enhancing the online offerings available to our player communities and further out we look to expand franchises like Call of Duty both geographically and in places in China. In addition Blizzard has an unprecedented pipeline in development including two expansion packs to StarCraft Two the highly anticipated next-generation of the Diablo series and Blizzards next MMO the title of which has yet to be announced.

We also have Bungee, the creators of the ground breaking Halo series embarking on their next major product which will be published exclusively by Activision for a decade. In a market that rewards truly great content it is incredibly valuable and personally rewarding to work with such extraordinarily talented and capable people.

I'm excited to introduce you Eric Hershberg who officially joined us as CEO of Activision Publishing almost two months ago and has already had a terrific impact on our business. Eric brings exactly the kind of high energy creative and inspired leadership that we need to continue accelerating our business for many years to come. We are better positioned than ever before to capitalize on the numerous opportunities we continue to see for growth and margin expansion and the continued delivery of the very best games in the world.

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 the quarter and review our outlook for the balance of

Thank you Bobby. I'll begin with a recap of our September quarter results followed by a review of our outlook for the fourth quarter and full year 2010. For your reference in our press release is a set of schedules which provide non-GAAP comparable business segment and these will be the numbers that I will refer to unless otherwise noted. Also please refer to our earnings release for GAAP to non-GAAP reconciliation.

For the third quarter GAAP revenues were $745 million ahead of our outlook by $145 million. GAAP operating income was $55 million and EPS was $0.04 also head of our break even GAAP EPS outlook. For the first three quarters of the year GAAP EPS was up 73% over the prior year. Non-GAAP net revenues were $857 million ahead of our outlook of $725 million. Non-GAAP operating income was $204 million and EPS was $0.12 exceeding our non-GAAP outlook by $0.04.. Importantly for the first three quarters of the year, non-GAAP EPS is up a strong 29% over the prior year. The quarter was driven by Blizzard Entertainment StarCraft Two and World of Warcraft along with Activision's Call of Duty, Spiderman and Guitar Hero.

Compared to prior years outlook third-quarter non-GAAP net revenues and operating income are up considerably driven by strong performance of StarCraft Two and Call of Duty combined with continued cost control. World of Warcraft was also key driver in the quarter. Third quarter non-GAAP net revenues for World of Warcraft were up versus the prior year down slightly from the second quarter primarily due to the absence of new valuated service or in game item releases. The strength of these online naval franchises help drive a 1400 basis point expansion operating margin for the quarter compared to prior year.

Heading into the same with the launch of Cataclysm, World of Warcraft stands to benefit from its largest ever global audience based driven by a large number of returning subscribers anticipating the new content. Products with strong online integration and digital revenue streams continue to drive growth for Activision Blizzard. For the nine months ending September 30, 2010 our digital offerings contributed close to half of our total non-GAAP net revenues and for the same period, digital revenues have increased approximately $165 million more than 15% over the prior year.

As our premium quality online enabled content continues to outperform we generate extended digital value creation opportunities beyond the initial retail sales. Our focus execution against these higher margins and highest growth areas combined with cost discipline continues to yield significant operating leverage, earnings power and capital generation. This dynamic was once again reflected in our results this quarter. Before I review the P&L line items for the September quarter I'd like to note that all the percentages will be quoted as a percentage of net revenue with the exception of our tax rate. Our GAAP product costs were 34%, GAAP operating expenses 58% and our GAAP tax rate was 26%.

In the third-quarter non-GAAP product costs were 30% bottom line with our outlook Non-GAAP operating expenses were 46% better than expected driven mainly by the timing of marketing span and more product development cost. We delivered a 24% operating margin which is the highest ever outside a holiday quarter since our merger. Our effective non-GAAP tax rate was 28%. Now turning to the balance sheet. On September 30 we had no debt and approximately $2.9 billion in cash and investments.

This quarter we repurchased $263 million worth of stock. Through September 30 repurchased about 55 million shares for approximately $600 million under the current billion-dollar authorization. Now let me turn to our product key balance sheet position as of September 30. Accounts receivable balance was $246 million an increase of $56 million versus the prior quarter end. The increase was primarily due to higher revenues in Q3 and the late quarter release of Guitar Hero, Words of Rock and Spiderman (inaudible)

Inventories were $258 million up approximately $100 million versus the prior quarter in advance of our Q4 releases but down by $93 million versus the prior-year due mainly to a reduction in catalog and peripheral inventory. (inaudible) development costs were $285 million an increase of $36 million versus the prior quarter due to upcoming releases. Of the $285 million approximately $52 million is related to the (inaudible) games. Capitalized intellectual property costs were $62 million about $3 million below a year ago. Turning to cash flow for the (inaudible) 12 months we have generated approximately $1.2 billion in operating cash flow. In summary our financial position remains strong and puts us in an excellent position to capitalize on investment opportunities for long-term growth.

So now on to the Company's outlook. Our outlook is subject to significant risks and uncertainties including those mentioned at the beginning of this call and the risks highlighted in the coming annual report on form 10K for the period ended December 31, 2009 and the Company's other SEC filings. As a result of these and other factors actual results may deviate materially from the outlook that is made today. Again all percentages will be quoted as a percentage of net revenue (inaudible) of the tax rate. On the strength of our third-quarter result, we are raising our revenue and EPS outlook for calendar 2010 we now expect GAAP net revenues of $4.28 billion and GAAP EPS of $0.51 presenting an increase of $100 million in revenue and $0.02 in EPS which is our prior GAAP outlook.

We are also raising our non-GAAP outlook. We now expect non-GAAP net revenue of $4.45 billion and non-GAAP EPS of $0.74. Presenting an increase of $50 million in revenue and $0.02 in EPS versus prior noon-GAAP outlook. For the full year we expect GAAP product cost of approximately 33% and operating expenses of about 47%.. We project GAAP effective tax rate of about 27% in the diluted share count of about 1.24 billion. On a non-GAAP basis we expect product costs of 32%. Most manufacturing margins are expected to expand meaningfully year-over-year due mainly to Blizzard's high-margin slate and double-digit growth in visual revenue strength..

We expect non-GAAP operating expenses of almost 39% This is higher than a year ago due to our (inaudible) Also Blizzard is continuing its increase investments and development and customer service to drive long-term growth. For the calendar year we expect a record non-GAAP operating margin of 29% we expect to achieve our 300 basis point margin expansion target by focusing on the core consumer retail combined with a continued emphasis on our high-end margin online business. We expect our effective non-GAAP tax rate to be about 29% and expect it diluted share count up about 1.24 billion.

Now moving to the outlook for the fourth quarter of 2010. For the quarter we expect GAAP net revenues of approximately $1.26 billion we expect GAAP product costs up 37% and operating expenses of about 63%. We project the share count up 1.21 billion and a GAAP loss per share of $0.01.. We expect non-GAAP net revenues of $2.2 billion for the quarter and EPS of $0.47. Net revenues and EPS expected to be down to the prior year with about half of the difference driven by low FX and the remainder reflecting low expectations for Activision Publishing versus the prior year. Make no mistake that this year's Call of Duty released Black Ops is great momentum. However our financial plans prudently assume performance below last year given the record breaking success of Modern Warfare Two in a less competitive environment. We expect non-GAAP product costs of 31%, non-GAAP operating expense of 32% and non-GAAP effective tax rate of 29%. We also project diluted share count of 1.22 billion.

In summary we believe our combined Company strength in the retail and online segments are continued cost containment efforts and our significant financial strength position us to drive another year of record non-GAAP operating margin earnings per share. So now let me hand it over to Eric to discuss Activision Publishing business.

Thanks Thomas and hey everyone it's great to be here. As you might imagine many people over the last month or so have been asking why I left a great 20 plus year career in advertising to come to Activision. The answer for me is simple. I believe that video games are revolutionizing entertainment and are poised to become the entertainment medium of the 21st century. Both as a marker and as a life long gamer I am a huge fan of Activision's portfolio the brands and the fact that Activision has what I believe is the best in class retail and online capabilities give me a very solid foundation to stand upon.

For me this is a chance to take everything I know how to do in my career from identifying consumer trends, leading the creative process, to building a culture centered around ideas and creativity and apply it to one of my personal passions, video games. All those things combined to make this an easy decision for me. As you know in just a few days we will be launching the game that I currently can't stop playing namely Call of Duty-- Black Ops which we believe has the potential to be the biggest entertainment launch of the year. If it is, this would mark the second consecutive year that the franchise has delivered the largest first week sales of any entertainment property in any medium. To my knowledge there is no other entertainment franchise in history that has done this two years in a row.

Another big draw for me is the opportunity to join Activision at a time when the increasing digitization of our world is transforming how consumers learn about games buy games and play games. This is a time not just for executing the formula but for inventing new ones. Because of the strength of its portfolio and infrastructure Activision has been voted to lead in a changing environment. This is particularly important when you consider positive factors that should continue to drive the industry over the next few years. First of all, there are more consoles in more households in North America and Europe been there ever have been before.

On September 30 there were 242 million consoles and handheld units an increase of 29% over the prior year. For the PS3 and 360 platforms along the increase was 40% over the prior year. Second in terms of software that core gamer platforms namely the PS3 and 360 will regenerate the vast majority of our operating income are collectively up 17% year-to-date in the US and Europe. In addition PC and online sales continue to expand rapidly and are expected to grow double digits this year.

Finally we continue to see the top 10 titles in the industry grow disproportionately year-over-year particularly those that are online enabled introduced expanded content like Call of Duty and Bungee's Halo. Now turning to the September quarter. Our performance was driven in part by two new launches, Spiderman Shattered Dimensions which launched in early September is one of the highest-rated Spiderman games ever and has received global critical acclaim. And in the last week of September we launched Guitar Hero Warriors of Rock with an innovative marketing promotional campaign and a new rock inspired guitar that makes the perfect holiday gift . We expect both Spiderman Shattered Dimensions and Warriors of Rock will continue to generate consumer and retailer excitement will into the holiday selling season were expect to sell through the majority of units.

In addition, the quarter was driven by the sustained retail and online strength of the Call of Duty franchise. Year-to-date Call of Duty ranked as the number one third-party franchise overall in the US and Europe. In addition to down loadable content which is up significantly year-over-year the brand continues to create a more engaging player experience deeper into product life cycle than it ever has before. In July we reached Call of Duty Modern Warfare, to resurgent pack on the PS3. Year-to-date the resurgence pack and the stimulus package that we launched before it have generated significant sales ranking Modern Warfare to max packs alone among the top retailer leases of the year.

Now turning to the December quarter. I think it is important to start by noting that over the past few years sell through for the US and European software has been very consistent with about 15% of sales for the quarter coming in October, 35% in November and 50% in December . So with that as a backdrop it is clear that both the opportunities and the risks are expected to ramp up as the quarter draws to a close. Overall retailers are taking a cautious approach to inventories but we've seen this holiday like in the past two holidays retailers will chase the winners. This trend has played in our favor in the year's past and we expect this holiday to be no different.

Historically around nine of the top ten games in any year are based on established franchises At our Q4 releases are 100% focused on proven franchises. A lot of it is based on some of the biggest brands in entertainment including DJ Hero Two which has been called a music game of the year and features a soundtrack that has been called is a soundtrack of any music game. Tony Hawk Shred which will the first time skateboarding and snowboarding this game is perfect for kids we hope may Shred one of the must have gifts of the season.

We're are also launching two James Bond titles. A new game second set in the Goldeneye universe exclusively on the Wii. This title has only been out for a few days but it's already outselling last year's Modern Warfare Two, we skew for the comparable period. We also have Blood Stone an action title which will be available for all other key platforms and combines fighting,shooting and driving into one gaming experience. We'll also launching all new (inaudible) Defenders of the Corp based on the award winning toy line and children's television shows which was a success for us last holiday.

Finally on November 9 we will release what we expect to be the biggest game of 2010 by far our largest title of the year Call of Duty-- Black Ops. Black Ops released on more platforms than last year's record-setting Modern Warfare Two and continues to pace ahead in terms of consumer awareness metrics. Today pre-orders of Black Ops have already broken the industry presell records set by last year's Call of Duty. With unprecedented levels of support both from our retail partners and from the first parties all of whom are vested to make this the entertainment launch of the year.

Black Ops delivers state-of-the-art quality gameplay and 70 multiplayer features which we believe will raise the bar for the genre. Black Ops will also be playable in stereoscopic 3-D. This is an incredible breakthrough. The game looks truly amazing in 3-D. We don't expect it to materially impact the number of units sold this year speaks more towards our dedication to innovation and creating the best possible experience for our fans. As we look at 2011 we expect a benefit from the growing installed basic consoles and increase online sales especially for the core gamer platforms. We will provide more information about our 2011 slate on our next call as we always do but today I want to give you a sneak preview of a few of the highlights.

First, there is no doubt that the Call of Duty brand represents one of our biggest launch (inaudible) opportunities and demands one of the largest retail and online entertainment properties ever. This is evidenced by the more than three billion online hours of Call of Duty has been played on Xbox live alone.as Modern Warfare Two is released last November. Strong demand and closer to a decade of solid performance gives us the confidence to continue investing heavily in this brand should offer more opportunities for long-term growth than ever before.

We remain focused on continuing to bring the Call of Duty experience to new consumers around the world and 2011 we expect to enter the year with strong momentum for continued sales of Black Ops and the rest of the Call of Duty catalog. We have added significant resources to the brand and next year we will offer the Call of Duty community our largest lineup of exciting new digital content ever. In the back half of 2011 we are launching new large-scale Call of Duty first person action title. The creative talent and resources that we now have devoted to the Call of Duty brand are unprecedented and given the game play we've seen to date we could not be more excited about next year's release.

And finally as you know we are working on a number of Call to Duty initiatives we should continue to expand a franchise with new geographies including Asia with where the brand already has considerable awareness. Over the next few months you'll be hearing more about our plans to expand the franchise globally. In addition to Call of Duty in 2011 we will have new releases for our other proven franchises including the Hero brand, Spiderman, X-Men and Transformers which will be supported by what is expected to be another major blockbuster movie from Michael Day.

Also slated for release next year are two exciting wholly owned IP. The first in the foregoing action genre will be True Crime Hong Kong, which is inspired by classic Hong Kong cinema style action. The additional development time we invested in this game has really paid off with game playing mechanics that make the fighting, shooting as sophisticated as a driver which is something that is very hard to achieve in the open world genre. Today we're also announcing that we are in deep development on exciting new kids property that will feature innovative technology that has the potential to open up a whole new product segment for us. You'll hear more about this on the next call.

We also have other exciting IP's and development including new project from Bungee the acclaimed creators of the ground breaking Halo series. Although it no launch time has been announced for the new Bungee IP it will be an extraordinary addition to our franchise portfolio. Bungee's latest release Halo Reach was one of the highest rated games of the year and one of the most successful games ever on the Xbox and is currently a top title on Xbox live. Bungee's new game universal will line well against a largest and most profitable segment including online gaming and will provide yet another opportunity to drive (inaudible) growth well into the next decade.

I'm so excited to be at Activision we are focused on one thing and one thing only. Which is providing the very best interactive entertainment experience for all of our players around the world. Look forward to sharing more details about our plans and projects with you on the next call. With that I'll now turn it over to Mike Morhaime to provide an update

Thank you Eric We are now three quarters of the way through 2010 and Blizzard entertainment is having its biggest year ever. The third quarter in particular has been impactful with StarCraft Two breaking sales records worldwide and leading the PC industry in sales for the year. The launch of the game helps driver our Q3 revenue above higher quarter as well as year-over-year. Net revenue for the quarter was up 68% versus the same quarter last year and Blizzard's operating income increased 112% against last year's numbers.

While StarCraft Two was a major driver for our results, we are also seeing an increase in MMORPG sales for the September quarter year-over-year and for the first nine months of 2010 compared to the first nine months of 2009. We also expect to finish the full year with our MMORPG sales up compared to the entirety of 2009. In Q3, we also launched the revamped battlement platform alongside StarCraft Two laying the foundation for our all of our future online games as well as uniting the StarCraft in World of Warcraft communities. And finally our partners (inaudible) began operating rapid (inaudible) in China back in August. Players in that region have flocked to the game and as a result,we've seen our active global player base for World of Warcraft top 12 million.

As I go into more depth on our activities for the past quarter, I'd like to begin by the launch of StarCraft Two. The game has been a huge success on the last call I mentioned that StarCraft Two sold through more than 1.5 million copies and its first 48 hours. Later in the quarter we also announced that more than three million copies were sold through worldwide within the first month. In fact StarCraft to continues to show up at or near the top of Amazon's PC sales charts for the United States. This demonstrates that StarCraft Two continues to ride strong sales momentum and is likely to enjoy a long shelf life like many of our previous games. I think it is important to put these numbers into historical perspective.

When we compare StarCraft Two against the basic use of Blizzard's most recent games, StarCraft Two has been by far the most successful. As a matter-of-fact StarCraft Two has sold almost as many copies in its first month in North America and Europe as the original World of Warcraft sold in its first year on sale in those regions. We are obviously very pleased with StarCraft Two's performance thus far and will continue to build upon the momentum. As example, we are looking forward to launching alternative business model for StarCraft Two and Latin America and Southeast Asia in the near future.

These alternative pricing schemes provide a lower entry point for players and hopefully allow us to capture an even broader audience in these emerging markets. I like to give an update on StarCraft Two in Korea. Many of you may already know that back in September we ended the open beta for StarCraft Two in the region and began commercialization. We saw StarCraft Two rise into the top 10 for IGR market share in the wake of the commercial launch. Joining three other Blizzard titles War Craft Three, StarCraft One in World of Warcraft. In a nutshell StarCraft Two is fully gaining in popularity in the region.

The original StarCraft continues to be popular in Korea. We expect Korean players to gradually transition to StarCraft Two over time as StarCraft Two east port continues in popularity. We are making great headway in creating a foundation for StarCraft Two east ports in Korea thanks to our partnership with Gratech and their operation of a global StarCraft Two lead. The first season of the GSO concluded in October and we have seen a lot of interest in that league not only in Korea but around the world. Gratech has reported that more than 15 million views of GSO matches in season one were served including both live streams and video on-demand download.

With interesting about the numbers that 30% of those views were served outside of Korea. But not only are we seeing a lot of excitement about StarCraft Two east ports with in Korea but the numbers are telling us that there is growing interest in pro gaming around the world. This is great news for the prospects of building a lasting global community around the game. Season two of the GSO is already underway and promises to be even bigger than the first season thanks to the arrival of several top StarCraft one pros StarCraft Two seen including a player named Boxer widely considered the Michael Jordan of the original StarCraft.

Next up I'd like to talk about Battlement our advance online platform which was launched alongside StarCraft Two Wings of Liberty.. All StarCraft two and World of Warcraft players are connected to the service. Which includes cross game communications, staff tracking, and other cool services. Our developers have already released some improvements to service and we're looking forward to creating additional new features to meet player demand in the coming months. These include public and private chat channels for StarCraft Two, a new master and grandmaster leaks.

One of the bigger early success stories for Battlement is how much the public has embraced the tools that we put in place for them to make play and distribute player created content. Today more than 65,000 user created StarCraft Two maps and modes have been uploaded to Battlement in North America alone. The reason this is important is because user generated content helps drive replay value and longevity in games making sure that players can distribute this content easily is important for StarCraft Two in the long run. We will continue to improve these systems on Battlement over time to bolster the community. Moving on to World of Warcraft.

I mentioned earlier that our partners at Nedies launched (inaudible) in China this past August. The new content has been a tremendous success in the region and the influx of players has been one driver in the global player base pushing above 12 million. Another factor to take into account is growing anticipation for the upcoming Cataclysm expansion pack. In the past, we have seen players who take a break from the game come back shortly before a new expansion ships in order to reconnect with friends and the game. We have also seen that it expansion launches in the past have driven increases in the player base so we hope to see a similar effect when Cataclysm ships on December 7. To help generate even more excitement for this new expansion we ran a TV commercial during the Cowboys /Vikings game on October 17.

The full game trailer debuted on YouTube simultaneously and that video collected more than 1.25 million views in its first 24 hours online making our World of Warcraft channel number one viewed YouTube channel that day. There is clearly a lot of anticipation for Cataclysm and the developers have worked hard to ensure that this will be our best World of Warcraft expansion yet. This new content will improve the experience for all players including the casual and hard-core. With many of the original lands in areas of World of Warcraft shattered by upheaval our artist and designers have gone back to the games old content to make it better than ever. We're making it easier for players to get this expansion as well. As we recently announced that Cataclysm can be digitally pre-ordered and preloaded directly from us and will be unlocked the moment the servers go live. And new players will get the full game up and running faster than ever as we have already integrated new streaming technology with our trial clients.

By combining that new technology with an improved gameplay experience for new players we hope to attract and retain even more players to World of Warcraft. We are also improving upon the services surrounding World of Warcraft game experience as we head into the launch of Cataclysm. We recently announced that mobile Guild chat will soon be added to our World of Warcraft remote service alongside the remote auction house. In addition to buying and selling items from the in game auction house using their iPhone an android mobile phones subscribers to our premium World of Warcraft remote service will soon be able to chat with their World of Warcraft guild mates from outside the game..

Rounding out the new value-added services we talked about is a new World of Warcraft pet the moon hatchling which will go on sale later this month. We announced this pet at BlizzCon and that 50% of the revenue from the moon hatchling will go to charity. When we are introduced the World of Warcraft pets last year we donated half of the proceeds from one of the pets to make a wish foundation and amount that totaled $1.1 million. I like to take just a moment to talk about BlizzCon which we held a couple of weeks ago at the Anaheim Convention Center. This was our fifth BlizzCon and our best one yet.

Among the highlights was the announcement of the fifth and final class for Diablo Three, the Demon Hunter and the introduction of the games PVP mode. Players were able to try out this new content for themselves at the show and the game got a lot of great buzz from the community and the press. We also hosted a number of excited eastwards tournament including StarCraft Two invitational. More than 25,000 people attended the show with another 95,000 paid viewers following along via DIRECTV or the live Internet stream. Jaymor once again hosted costume and dance contest while Tenacious D. closed the convention with an amazing concert.

As we head into the final quarter of 2010 we are focusing all of our efforts on the successful launch of Cataclysm. These are exciting times for entertainment more gamers than ever before are playing Blizzard games and we look forward to the continued growth of the Blizzard community moving into 2011. Thank you and I will hand the call back to Kristen now.

Thank you. Okay operator, I think we are ready to open it up for questions.

Thank you. (Operator Instructions) We'll go first to Brian Pitz from UBS

Great, Bobby, we have a quick question on the Call of Duty franchise. You could grow the franchise in excess of the year-over-year growth rate and console install base over the next year and secondly can you provide us with your thoughts on a new motion control devices. Are you surprised by pre-order volumes, I know Microsoft put their number up in the past 24 hours and can you comment on how many titles you have available for 2011? Thanks.

So let's start with move and connect I think that anything that generates new interest in the console's is a very welcome innovation and I think that they have both done a very good job of creating products that can broaden audiences, offer new opportunities for the way that you interact with the games on the screen and so we are excited obviously that Microsoft is increased to forecast because I think it's just going to generate a lot of interest and enthusiasm for games overall.

I'll have to have Kristen give you the exact release date we obviously are supporting the both controllers for a lot of different products. As far as the Call of Duty franchise, I didn't exactly understand the question were you asking was possible for the -- well why don't you ask it again.

Is it possible to grow Call of Duty year-over-year above and beyond previous growth rates but also factoring in what the console install base estimates might be out there? Can you grow in excess of just console?

This is Thomas. We have a more development resources dedicated to Call of Duty than we have ever had before we think that there is a tremendous amount of appetite for Call of Duty (inaudible) as well as services. We have still a large geographic expansion opportunity ahead of us on Call of Duty so we are very bullish on the franchise and as it relates to our plans for 2011 we will do what we always do and that is give you the details and move on with our own budgeting exercise that we are going to right now and that is going to happen at the end of our January call.

But we believe the growth opportunity on Call of Duty has never been stronger than what it is today for us particularly given the strength of our development teams and a consumer excitement and the equity behind the plant. All the metrics that we are looking at reaching all time records so we are better very bullish about it. One thing I just want to clarify your asking for this year or for next year

For next year for 2011

I think is Thomas said your asking as a possible sure it's possible.

Thank you.

We'll go next to Justin Post with Bank of America Merrill Lynch

Yes following up on Call of Duty, just what does pre-orders tell you about units? How well is that metric work for you in the past and I think you mentioned action title next year. Is that a first-person shooter action title or have you defined that? And then lastly is there anyway to pick up your margins on Activision Publishing it looks like you lose money the first three quarters of the year they make it all back in the fourth-quarter in the Call of Duty. Any way to pick up margins as you look out to future years on Activision side? Thank you.

The answer to that question is probably yes across the board so first of all next year's Call of Duty will be first-person shooter so just to make sure there is no misunderstanding there. Then the second part of the question around Call of Duty was what?

Would you pre-orders tell you --

Pre-order is a directional item. It shows how much momentum there is usually a small part of the total amount of units that we are selling but whenever you set new records with pre-orders numbers that the industry has never seen before on any given title you think can feel pretty confident that you have a hit on your hands on top of that we track consumer buys consumer -- around eight it unaided awareness we track with a conversation, we track the (inaudible) of that. We track user registration for the Call of Duty web sites and we track video views of many trailers that we put out there and all of those metrics are showing new records for the brand so as a result we are pretty bullish despite the fact that we're facing a more competitive environment this year compared to last year

One of the things I think are Interesting about Black Ops we have to start looking at pre-orders in the context of not just a video game. But of all media. I think when you start looking at the day one sales or the weekend sales of books, music, movies, DVDs, I think Black Ops is one of those products that we're looking at the level of interest and enthusiasm beyond what we have seen in any medium.

Is there a third part to your only question

Yes. When you look at Activision margins you lost money the first three quarters of the year is their way to pick up the Activision side of the business in the first three quarters of the year as you look forward to future years?

Absolutely a think we have number businesses whether performance is not where we would like them to be. We are making some progress in those areas but clearly not enough and not fast enough. So we have undertaken some measures at the beginning of the year we have reset some of the product development targets particularly the casual and (inaudible) of our portfolio so we believe we can improve the margin performance on our publishing business and thave more consistent performance -- we also have not yet given up on delivering margin expansion and more profitable Activision publishing business for 2010 I think that is also still a possibility.

Right, thank you.

We'll go next to Jeetil Patel with Deutsche Bank

Great, couple of questions. Will first one is historically if you look at the publishing division or games like Call of Duty have always made money on the upfront software versus the back end claim it as other revenue.

I'm curious as you look at Black Ops would you think that mix is as you look at lifecycle of the game with a mix of the up front software versus the back end of other services and revenue would be as you look at that particular product cycle or service offering that you're looking at for not the next 12 to 18 to 24 months. And then I have a quick follow up.

As Bobby mentioned on the call earlier the tale of these part is getting fatter and that's because we are getting better at providing additional content and services behind following those large retail releases. And as consumer appetite for that continues to increase we continue to increase our capability around providing that content and providing those services I think we will take that to a whole new level with Black Ops. So I would not be surprised if Black Ops revenue is going to also be setting a new record in terms of percentage of total revenues for the franchise.

Would you say it's 10% of the overall value of the product or service that is available on the back end or 15% or anyway to give us a rough idea. Then second, you grew your operating profit as a Company about 34% in the first three quarters of the year, pretty impressive.

Just curious. Do you guys look at any sort of target operating profit growth of the business over the next several years? Is that in line with the industry better than the industry a rough idea of how you look at profit improvement on a year on year basis?

We have a track record of outperforming the industry in terms of growth and margin expansion and shareholder return and cash flow generation. And I think we want to continue to do that . The bar needs to be set ahead industry overall I think we are in a unique position where we have the assets whether it's the brands or the development talent or the infrastructure or the knowledge around online services or the global reach being the only Western publisher with a successful business in places like China that are growing very fast. So I think it's a good expectation for us to perform ahead of the industry as an average.

The with regards to your first question we won't get into the details of what percentage we expect to come from for our revenues. The percentage is growing I think we will continue to talk to you all about the progress we are making on the visual revenue side so as we progress with the continental services we will give you those numbers and then you'll see how much progress

How much did you do on Modern Warfare Two

How much did we do a Modern Warfare Two --

In terms of other revenue as opposed to the initial sales

We don't break out the sale of individual Map packs but we grew the sales on Modern Warfare Two first as well is the second Map pack over what we did the prior-year with World of Warcraft Map pack -- so there is gross there double-digit growth, I think you have to live with that much detail. Moving on

Next to Edward Williams with BMO Capital Markets

Good afternoon I'll ask another question along the same sort of topic. Which is can you give us some color as to the percentage of the console players that have purchased say Modern Warfare Two that are playing online now, and can you give us a little bit of color as to how that may have trended throughout the year on the launch of Modern Warfare Two and in leading into the release of Black Ops?

Very interesting because when we look at those trends we see a lot of similarities with what is happening at Blizzard and you see currency going up whenever we come up with new content or when we organize certain events like Double XP weekends et cetera.. We actually also applying and reapplying a lot of the learning that Blizzard has generated over the many years of running Modern World craft successfully the Call of Duty audience and make sure that the product continues to live up to their expectations create loyalty make the product very sticky and enhance our content and service offering to stay ahead of competition.

So the concurrency is not always the same. It usually peaks when we come with new content obviously it is very high within the first couple of months after launch. And that is why we try to then come back with new comp and little later than within three months or so of the launch of the initial product and I think we have still a big opportunity to do a better job there and better satisfy players demand around exciting new content new ways to play and new services that we will talk to you about in the future.

Okay and then if I could with Mike if you could comment a little bit about with World of Warcraft and 12 million subscribers, can you give us a little bit of color as to where they are geographic basis how much of a pick up to do get qualitatively if not quantitative out of China when (inaudible) King went live. Then also, how should we think of Cataclysm relative to the (inaudible) expansion pack and with that rollout maybe as far as China is concerned.

Okay. So for the first part of the question for competitive reasons we don't give out specific data on subscribership by region. I can say we are very pleased with the help of the World of Warcraft business. And certainly the launch of (inaudible) King in China was a major driver in reaching 12 million subscribers. So, we feel like we have a lot of momentum heading into the launch of Cataclysm we think that this expansion is uniquely positioned compared to our previous expansions.

To drive replayability especially in the old world and also we believe that some of these changes providing much better new user experience for new players. So we hope that that transition into higher retention when people try out the game. Historically with previous expansions we have seen that bring back players that may have taken a break from the game and has also been a big driver in outreach reaching out to new players. So we are very excited.

Okay great thank you.

Final question from Doug [Kirtz] with Cowan & Co.

Yes thanks.. Mike wonder if you could give some color on how the StarCraft Two revenues are split between packaged goods and the digital thus far and whether aside from the two expansion packs you have any other plans for driving additional revenues from StarCraft. Thanks.

Okay so we don't break out digital versus retail. I can say that the global retail launch of StarCraft Two exceeded all of our expectations. The success of the initial launch and the continuing growth of the StarCraft Two community set this up well to generate future revenue from expansions. We have are ready announced two of those.

Some of the drivers we think that will help contribute to the growth of the community are the success of these sports and we are you seeing progamers and spectators transition from StarCraft One to StarCraft Two. We have a lot of good momentum in that area there is a lot that we have to look forward to with respect to StarCraft Two franchise of course we haven't launched in China yet.

We have alternative business models in Southeast Asia and Latin America that will be coming online. And later on we still plan to launch the map marketplace which is sort of like our version of the App store for the StarCraft platform we have very powerful map editor with StarCraft Two that is so powerful really you can create your own game within the StarCraft platform.

We demonstrated some of the potential and power of the editor at BlizzCon recently but we are intent with map marketplace is really to provide some incentive and reward for players to create their own user generated content top map creators will be rewarded with a share of the revenue that is generated. We think this will drive better content at additional replayability and ultimately grow the size of the player base.

Thank you all for joining us today. We are obviously excited about two of the biggest launches in the history of interactive entertainment and another year of record profitability. And we will look forward to sharing our results for the fourth quarter with you sometime in late January or February. Thank you.

Thanks everyone.

Ladies and gentlemen that does conclude today's conference call. We would like to thank you all for your participation.