動視暴雪 (ATVI) 2011 Q3 法說會逐字稿

Good day and welcome to the Activision Blizzard's third quarter 2011 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn today's call over to Ms. Kristen Southey. Please go ahead.

Good afternoon, and thank you all for joining us today. With me today are Bobby Kotick, CEO of Activision Blizzard; Thomas Tippl, COO and CFO of Activision Blizzard; Eric Hirshberg, CEO of Activision Publishing; and Mike Morhaime 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 subject to risks and uncertainties. As indicated in the slide that is showing, a number of important factors could cause the Company's actual future results and other future circumstances to differ materially from those discussed in any forward-looking statements.

Such factors include, without limitation -- sales levels; increasing concentration of titles; shifts in consumer spending trends; current macroeconomic and industry conditions and conditions within the video game industry; our ability to predict consumer preferences among competing genres and hardware platforms; the seasonal and cyclical nature of our industry; changing business models, including digital delivery of content; competition including from used games; possible declines in prices; product returns; price protection; product delays; adoption rate and availability of new hardware and related software; rapid changes in technology and industry standards; litigation and associated costs; 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; counterparty 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 other factors that potentially could affect the Company's financial results are described in the Company's Annual Report on Form 10-K for the period ending December 31, 2010, and in the Company's other SEC filings. The Company may change its intentions, beliefs or expectations made at anytime and without notice, based upon any changes in such factors in the Company's assumptions or otherwise.

The Company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after today, November 8, 2011, or to reflect the occurrence of unanticipated events. I would also like to note that certain numbers we will be presenting today will be made on a non-GAAP basis, excluding the impact of the change in deferred net revenues and related cost of sales, with respect to certain of our online-enabled games, expenses related to share-based payments, expenses related to the restructuring of our Activision Publishing operations, the amortization of intangibles and impairments of intangible assets and the associated tax benefit.

Please refer to our earnings release, which is posted at www.activisionblizzard.com for a full GAAP to non-GAAP reconciliation and further explanation. There is also a PowerPoint overview which you can access with the webcast and which will be posted to the website following the call. In addition, we will also be posting a new 12-quarter financial overview highlighting both GAAP and non-GAAP results. Now I would like to introduce our CEO, Bobby Kotick.

Thank you, Kristen. And thank you all for joining us today. As you can see from our quarterly results, and our updated outlook, Activision Blizzard is having a year of many records. While we have powerful franchises, fantastic brand recognition, and some of the industry's finest technologies and marketing skills, what enables us to achieve records every year, the highest game rankings, record-setting sales, stand-out marketing programs, or stellar financial results, what enables these accomplishments is a team of people around the world committed to excellence.

Our conference calls focus on our financial statements but our balance sheet doesn't reflect the incredibly talented, driven, enthusiastic people who come to work at Activision Blizzard every day. We're one of the world's best entertainment companies because of the dedication and hard work of an extraordinarily talented group of people who are the driving force behind our superior financial performance. The passion and dedication that our teams around the globe bring to each and every project is truly remarkable.

As we assess our success this year, we're entering rarefied territory. Life-to-date sales for World of Warcraft and Call of Duty now rank with globewide box office sales for Star Wars and Harry Potter, two of the most successful entertainment franchises of all time. And our industry-leading capability to develop original, globally appealing, innovative intellectual property, which we do exceptionally well, continues with Skylanders.

For the third quarter, Activision Blizzard delivered better-than-expected results driven by record revenues from online channels, and the continued strength of our online-enabled franchises. Today, we're raising our 2011 revenue and EPS outlook, and now expect to deliver record operating margins and earnings per share, reflecting the strength of our business and confidence in our ability to engage audiences with our uniquely immersive experiences.

We remain the largest, most profitable independent interactive entertainment Company. For the past three consecutive years, we've delivered record operating margins and earnings per share, something few companies have been able to achieve, especially in a volatile economic environment.

Our consistency and success are driven by two things. Our collaborative corporate culture, which attracts the industry's most talented, creative and capable people, and our focus on our long-term objectives, which are a commitment to our audiences to build successful franchises through innovation, strengthening our global execution capabilities, selectively developing new intellectual property, and emphasizing financial discipline across all levels of the organization to provide superior shareholder returns.

These core tenets have served us well for more than 20 years, and allowed us to successfully leverage the changes in entertainment driven by technology advancements. Through many platform and business model transitions, we've emerged a stronger, more capable leader, and today, we are better positioned than ever before to capitalize on the opportunities afforded by the expanding digital entertainment landscape.

By delivering rich content and engaging persistent online experiences, we've developed some of the largest, most dedicated communities in the world. Our scale expertise, and strong balance sheet provide us with a competitive advantage, and allow us to invest heavily in our service platforms to deliver 24/7 entertainment experiences to our audiences around the world.

Today, our online platforms, Battle.net and Call of Duty Elite support millions and millions of unique users and allow us to deliver content and capabilities directly to them. As a result, we continue to build stronger relationships with our audiences than ever before.

We're pleased to announce that 12.01 AM this morning, we launched Call of Duty - Modern Warfare 3, and Call of Duty Elite. First, I would like to thank the immensely talented teams at Infinity Ward and Sledgehammer Games, who have delivered Modern Warfare 3 which seems on track to be the most successful Call of Duty game ever.

Pre-orders for Modern Warfare 3 set a new industry record and we're well ahead of last year's record-setting Black Ops, which went on to become the best-selling video game of all time. The launch of Modern Warfare 3 was the largest in Activision Blizzard's history, and our global organization remains laser-focused on delivering the largest entertainment launch of all time for the third consecutive year, and to exceed the record set by Black Ops life-to-date.

I'd also like to thank our BeachHead and DemonWare teams, who built the innovative online platform, Call of Duty Elite, from the ground up. Elite represents the next step in social connectivity and should set a new standard for online entertainment.

Also, with respect to industry firsts, I want to thank everybody at our wonderful studio, Toys For Bob, for all their inspired work on Skylanders. The game has received outstanding critical response and although it's early in the quarter, so far Skylanders is performing ahead of our expectations. Modern Warfare 3, Call of Duty Elite and Skylanders are all extraordinary examples of how we continue to redefine entertainment around the world.

2011 is turning out to be another year of records, and looking ahead to 2012, we expect to deliver profitable growth based on the strength of our content and our services. And for the future, we expect great things from a strong portfolio of online-enabled properties, our service platform capabilities, new business models, and increased revenues from casual, social, and mobile entertainment.

We remain well-positioned for the many opportunities we believe lie ahead, and we'll pursue them with the most talented, passionate people in our industry. Now I'd like to turn the call over to Thomas.

Thank you, Bobby. I'll begin with a recap of our third quarter and year-to-date results, followed by a review of our increased outlook for the fourth quarter and full year and provide some initial comments for 2012.

For your reference in the press release, there's a set of schedules that provide non-GAAP comparables, and these will be the numbers I'm referring to unless otherwise noted. Please refer to our earnings release for a full GAAP to non-GAAP reconciliation. Also note that the numbers I'll be quoting are compared to the prior year unless otherwise noted.

For the third quarter, on a GAAP basis, we generated revenues of $754 million, and record earnings per share of $0.13. For the third quarter on a non-GAAP basis, we generated revenues of $627 million, and EPS of $0.07, representing our 13th consecutive quarter of non-GAAP EPS generation.

As expected, our results were below prior year due to the fewer large-scale launches, but were well ahead of expectations as revenues from digital channels increased to a new third-quarter record of $186 million. Our strong performance for the quarter and year-to-date has been driven by our products with online integration and digital revenue streams, including Blizzard's World of Warcraft and Activision's Call of Duty.

For the first nine months, GAAP revenues from digital channels including subscriptions, value-added service, downloadable content, and full game downloads increased 25% over the prior year, and accounted for 38% of total revenues, driving a record 39% operating margin and record EPS, which increased 62% over the prior year.

On a non-GAAP basis, year-to-date revenues from digital channels increased 16% over the prior year, and accounted for 60% of total revenues, driving a record 23% operating margin and record earnings per share, which were up 15% over the prior year.

Turning to the P&L line items for the third quarter, please note that all percentages are based on net revenues, except the tax rate. For GAAP, product loss was 26%, operating expenses were 52%, and our tax rate was 11%. Non-GAAP product costs were at 30%. This is down from our prior outlook due to digital performance.

Non-GAAP operating expense was 57%, significantly lower than our prior outlook, due mainly to operating leverage from strong digital top-line performance and some movement of expenses from Q3 to Q4. Also, our tax rate came in lower due to discrete benefit items resulting from the September filing of our 2010 tax return. This benefit amounted to about $0.01 of EPS.

Turning to the balance sheet, on September 30, we had no debt and approximately $2.9 billion in cash and investments roughly in line with the prior quarter. Our receivables balance was $139 million, down $107 million versus the prior year, due mainly to fewer releases.

Inventories of $207 million increased sequentially, ahead of the Skylanders launch, but were down $51 million versus the prior year due to a reduction of peripheral inventory. Capitalized software development costs were $264 million, a decrease of $21 million versus the prior year, also due to fewer titles in 2011.

With respect to cash flow for the three months and 12 months, our operating cash flow and free cash flow were over $1 billion, despite significant investments in the most robust pipeline of new products and services Activision Blizzard has ever had. Our ability to not only invest but also generate returns on investment is what continues to set us apart from most of our competitors.

So, let me now move on to our outlook. As we have said, this year we are focused on 3 initiatives to drive operating margin expansion and long-term growth. So, let me quickly recap our progress. First, we continue to focus on our high margin digital business and online-enabled franchises.

To put our strength in perspective, for the trailing 12-months, we generated $1.7 billion in digital revenues, up more than 22% versus the prior 12-months. Importantly, these digital revenues generated operating margins in excess of 50%.

Our digital scale and operating income generation is also well ahead of anyone in our industry, and looking ahead, we have more online products and services in development than ever before. Our second initiative to drive operating margin this year is to streamline the Activision Publishing business for higher profitability and online expansion, and this year, Activision Publishing alone is projected to generate record digital revenues and a record operating margin of more than 26%.

And as I mentioned a minute ago, we are investing for the future, to build our pipeline, extend our digital leadership, and expand our core brands. We continue to allocate the vast majority of our internal investments to our biggest franchises and online product and service capabilities, including Call of Duty, and the Elite online service, the new Call of Duty micro-transaction game for China, Bungie's new gaming universe, World of Warcraft, StarCraft, Blizzard's next-generation MMO, Battle.net, and Diablo III, with its new real money auction house model and our social and mobile initiatives.

So, in summary, we continue to execute against each of our stated goals, and our strong execution this year has enabled us to increase our financial outlook for the third time this year.

So, now onto the specifics of our outlook. In terms of our 2011 GAAP outlook, we now expect revenues of $4.33 billion, up $150 million from our prior outlook, and EPS of $0.76, up $0.08 from our prior outlook.

For the calendar year, we expect GAAP product cost of 25% and operating expenses of 48%. We project a GAAP effective tax rate of about 25%, and a diluted share count of about $1.2 billion.

On a non-GAAP basis, we are increasing our revenue outlook to $4.25 billion, up $200 million from our prior outlook, and we're increasing our non-GAAP EPS outlook to $0.85, up $0.08 from our prior outlook. In February, when we gave our initial calendar year outlook, we have increased our earnings per share expectation by more than 20%, and are now on track towards another year of record EPS, even without a single Blizzard front-line release.

2011 is expected to mark the third year in a row since our merger that we have generated record earnings despite the economic downturns. For the year on a non-GAAP basis, we expect product costs of 28% resulting in the highest gross profit margin in our history driven by our continued transition to digital products and services. We also expect operating expenses of about 41%, projecting an effective tax rate of 26% and a diluted share count of about $1.2 billion.

For the calendar year, we continue to expect the combination of our strong online-enabled franchises, and the streamlining of our Activision Publishing business to produce a record GAAP operating margin of 27% and a record non-GAAP operating margin of 31% for the combined Company. And we see more opportunities for future margin expansion as we continue growing our share of digital revenue which, for us, generates significantly higher margins than our corporate average.

Now, moving to the December quarter. On a GAAP basis, we expect revenues of $980 million, product cost of 27%, and operating expenses of 86%. We project an effective tax rate of 24%, and a basic share count of 1.2 billion, and a GAAP loss per share of $0.08 due to revenue deferrals.

In terms of non-GAAP, we expect revenues of $2.17 billion, product cost of 26%, and operating expenses of 34%. We project an effective tax rate of 27%, which is in line with the prior year and a diluted share count of 1.2 billion. We expect EPS of $0.55, which reflects our increased product expectations, offset somewhat by the movement of expenses from the third to the fourth quarter.

In summary, the year is progressing with great momentum and this gives us greater confidence that the growth objectives we presented at our recent Analyst Day are achievable. In fact with our increased outlook for the year, we are generating shareholder value even faster than anticipated.

The early look at how our 2012 slate is coming together suggests another year of profitable growth and record EPS is ahead of us. As always, we look forward to sharing with you the details of our 2012 annual operating plan on our February call. So, now let me hand it over to Eric to discuss our Activision Publishing business.

Thanks, Thomas. Today I'm going to start with some high-level comments on the industry, and then I will discuss Activision Publishing's performance in Q3 and year-to-date and provide some commentary around our recent launches, the groundbreaking Skylanders Spyro's Adventure, our best-in-class digital platform, Call of Duty Elite, and what is but just about any metric the most anticipated game of all time, Call of Duty - Modern Warfare 3.

Starting with the industry, the biggest and best titles continue to grow, fueled by the expanding HD console installed base which counts for a larger share of the industry's revenues and profits than ever before. Gamers increasingly prefer online multiplayer games, which is one of the reasons the games that do the best job igniting connected communities of gamers continue to get bigger.

We're seeing more and more gamers' time and dollars invested in the true must-have games. These trends underpin our strategy of focusing more of our creative talent and capital on our biggest and best franchises. And our performance continues to validate this strategy.

Now, let's talk about hardware. We ended the third quarter with an installed base of 291 million current GEN systems in North America and Europe, and we expect to end the year at 312 million units, the highest ever, and up 16% over the prior year. Within that, we expect the installed base of online-enabled consoles, specifically Xbox 360s and PS3s to increase even faster by 24% to 92 million.

In addition to seeing growth in online-enabled consoles games at retail, digital sales remain the fastest growing, most profitable part of the industry. We estimate that in the US and Europe, sales for digital content grew double digits in the third quarter, and continue to expect similar rate of growth for the full year.

Today, more consumers than ever before are engaged in interactive entertainment driven by the largest hardware installed base ever of current GEN systems and the tremendous installed base of browser-based devices. The proliferation of all these platforms continue to create significant global opportunities for the best games with the most passionate audiences, especially online-enabled franchises, such as Call of Duty.

Year-to-date, Call of Duty - Black Ops has been a driving force behind both retail and digital sales. For the first nine months of the year, Black Ops has remained a number-one title in US and Europe generating more revenue than any major new console release.

In addition to retail sales, Call of Duty - Black Ops has sold more than 20 million Map Packs. The revenues generated from Map Packs alone would make it the third-largest console title of the year.

In the September quarter, we released a fourth Map Pack, something we've never done before, and not only did it positively impact our quarterly results, but it further demonstrates there is continued consumer interest in new content even 11 months after the launch, making playing Call of Duty truly a year-round activity, for millions of our fans. This should bode well for Call of Duty Elite, the key feature of which is providing a constant stream of new digital playable content to our fans throughout the year.

Now, I want to spend a few moments talking about our largest launches of the year, as they exemplify the approach we're taking to our business. First, we continue to focus on growing our proven franchises to investment and innovation, and second, we selectively developed new intellectual property which we believe has unique differentiating and breakthrough appeal to gamers as well as having long-term franchise potential.

We think we have found such a franchise with Skylanders Spyro's Adventure which launched on October 16. It's a great example of how we're approaching new, innovative online-enabled IP. Obviously, we put a tremendous amount of passion, imagination and innovation to the creation of Skylanders and the result is the world's first truly cross-platform game which brings the world of toys, video games, and the Web, and mobile together like never before.

Separately, the market for toys and games each represent big opportunities. In fact, in the West, the market for toys is actually bigger than the market for video games, so a franchise like Skylanders which brings these two audiences together represents a significant opportunity.

In terms of creating awareness and excitement, Skylanders is already on many of the most influential lists for the top toys of the holidays, including the Toys "R" Us Hot Holiday Toy Lists, the Toy Insider Hot Toy List, and Time to Play's Power Up Holiday Toy List. We will also be supporting the game with our largest marketing campaign ever for a new property, which includes a heavy TV campaign in the US and Europe, an extensive mall and home tour to generate hands-on trial, as well as the two-minute 3-D trailer in theaters, which runs in front of a number of holiday movies including Puss in Boots, Happy Feet 2, and the Muppets.

Even though it's a new intellectual property, our retail partners have embraced Skylanders as though it were an established franchise, giving us an unprecedented shelf space and store presence. This includes thousands of powered interactive kiosks where kids can take any toy off the peg, place them on the portal still in their packaging, and bring them to life right in the store. This is a critical feature for a game where our most powerful form of marketing is demonstration.

So, what have we seen since launch? Well, games reviews have been incredibly strong, especially for a kids' title. Games received an average 87 ranking across 5 platforms according to gamesrankings.com. And my favorites are some of the reviews from the hard-core gamer press, who really seem to love it.

In addition, we've heard some incredible stories of how the toys are sparking kids' imaginations and how parents are embracing the game, not only as a game for the kids but to play with their kids. And while it's still very early in the holiday selling season, the game is performing ahead of our expectations in both starter pack sales, and the sale of individual toys.

As of today, there are millions of toys in the hands of children around the world. Of the 30 plus characters, some are already very hard to find, and we've already seen Skylanders characters sell for as much as $70 on eBay. Finally, after only a few weeks in the market, literally all of our major retail partners across all territories have already placed reorders.

We talked about Skylanders many ovations and the one critical receptions it has received, but I want to take a moment to talk about its value. For $69.99, kids get free toys, the portable power, a video game with 30-level single player mode, Co-Op Gameplay and endless hours in battle mode. It also comes with a vast connective web world at no extra charge, as well as a poster and trading cards.

We you consider that 3 average toys with no interactive capabilities whatsoever and an average new video game would cost you more than the Skylanders starter pack. I think it's fair to say that this is an exciting value proposition for the holidays. And as excited as we are about the game's performance to date, like any new IP, Skylanders will take time to reach its full potential.

We have momentum going into the peak holiday selling season, and have strong plans to continue building awareness and demand for the game. I look forward to updating you on our holiday performance and the growth of Skylanders in coming quarters.

Now, I'd like to spend the rest of my time today discussing today's launch of the most successful -- one of the most successful entertainment franchises ever, and the only entertainment property to set launch records for two consecutive years and, hopefully, three consecutive years, Call of Duty.

By all metrics, the hours of engagement, digital content sales, purchase intent and most recently, record shattering pre-orders, Call of Duty franchise continues to grow. Pre-orders for Call of Duty - Modern Warfare 3 outpaced pre-orders for Call of Duty - Black Ops by a wide margin setting a new industry record and making it the most pre-ordered game of all time.

In fact, we had more than 1.5 million people stay up and stand in line at thousands of midnight events at stores worldwide to be the first to buy the game. The momentum of the franchise over the last two months has been unprecedented, even in the face of a number of aggressive competitive launches.

Not only did our pre-orders of Call of Duty - Modern Warfare 3 continue their record-setting pace during last few months but remarkably, before, during, and since our competitors' launches, Call of Duty - Black Ops maintained its status as the most played game on Xbox Live, and Call of Duty - Modern Warfare 2 remained the second most played game on Xbox Live.

This is pretty incredible given that these titles are 12 months and 24 months old, respectively, and are still ranked ahead of several much-hyped titles launched this year. That, combined with a record-setting pre-sales of Call of Duty - Modern Warfare 3, should serve to demonstrate that our fan base is more engaged than ever, the strength in the Call of Duty brand is stronger than ever. In fact, is still on the rise.

Which brings us to the next chapter in this great franchise, Call of Duty - Modern Warfare 3. MW3 offers gamers the complete package. It offers the most epic cinematic adrenaline-pumping single player yet, the most refined balance and innovative multiplayer yet, a dramatically improved co-op mode with spec ops, and an all-new survival mode and with the addition of Call of Duty Elite we have now added one more key pillar, which is to help all of our players at every level play together better.

We believe that the free Elite service is the best free service in the industry and dramatically increases the value of buying the game for all of our players. And the premium subscription for Elite, quite simply, resets the bar for the multiplayer experience, with several industry firsts in innovations and services.

And although it's still extremely early, we've been very pleased with the attach rate of the purchase of Call of Duty Elite premium subscription with the pre-order of Modern Warfare 3 when available. In terms of establishing expectations for an unproven model like this, it's very hard to forecast but if you look at companies with a similar fee-based subscriber model like Xbox Live or Netflix, it took each of them at least a year to reach 1 million paid subscribers.

And based on our Elite pre-orders alone, we expect to meet that milestone a lot sooner. It's also important to note that those players, who still prefer to purchase the downloadable content a  la carte at their discretion throughout the year, will still be able to do so. We have taken nothing away from our players. We've added a tremendous amount to the value of the game with the free service, and the premium service will deliver a new level of social connectivity for Call of Duty gamers around the world.

We've already had an incredible response to Call of Duty Elite from the moment it went live. Player registration requests for our new live services have exceeded even our most optimistic expectations, which have created some bottlenecks in the registration process.

We've already registered over 1 million players and we've been working around-the-clock to increase registration capacity as quickly as possible. Keep in mind these issues have no impact on players' ability to play Call of Duty - Modern Warfare 3.

The record number of pre-orders for Modern Warfare 3 drove the largest day-one shipments in our history and in the industry's history. In addition, we kicked off the launch at 12.01 AM this morning with more than 13,000 retail events around the world, making it the largest retailer release in Activision's history and in the industry's history.

And finally, we could not be more pleased with the global game reviews which punctuate the amazing job that our incredible teams at Infinity Ward, Sledgehammer, and Raven have done. But don't take my word for it. As of this morning, Call of Duty - Modern Warfare 3 already had 11 perfect scores posted, and has received an average 90 rating from both Metacritic and gamesrankings.com.

Specifically, IGN says -- the multiplayer is, hands-down, the best it has ever been, with more features, more modes, and a ton of new levels, and some new levels in ways to interact via Call of Duty Elite. Joystick says, "The Modern Warfare franchise has twice set the bar for what this blockbuster shooter should be, and Modern Warfare 3 doesn't break the streak." UK Telegraph says, "The game not only lives up to hype, but exceeds it. " And Planet Xbox 360 said, "If you have only $60 to spend this holiday season, it should be on the best Call of Duty game ever created and that game is Modern Warfare 3. We really hope people listen to that one.

So, in summary, this year, we have delivered innovation with both Skylanders and Call of Duty - Modern Warfare 3 and Call of Duty Elite which are firsts for the industry. We also expect to generate the highest operating margin in Activision Publishing history, which shows that our strategy of focusing our time, investment and creativity against our highest potential opportunities is working.

We're excited about our pipeline of online-enabled properties and services and remain committed to providing the very best interactive entertainment to our players around the world. I'm looking forward to updating you on our holiday performance on the next call. Now I'd like to turn it over to Mike Morhaime to update you on Blizzard Entertainment.

Thank you Eric. So, Blizzard just enjoyed another successful BlizzCon a few weeks ago, sharing exciting news with 26,000 live attendees, and more than 1 million online viewers from 144 countries around the world. We made several big announcements.

These included the world premiere of our new World of Warcraft expansion, Mists of Pandaria, and a showcase of the multiplayer side of our StarCraft II expansion, Heart of the Swarm. We also featured our upcoming Blizzard DOTA, free to play online game and generated even more excitement for Diablo III.

We hosted packed crowds for our most exciting eSports tournaments yet and finally, we announced our World of Warcraft annual pass. I will go into more detail on everything in a moment, but first, I want to touch on our results for the past quarter.

Our revenues for the third quarter of 2011 are down versus last year, which included the record-setting launch of StarCraft II. World of Warcraft finished the quarter with 10.3 million active subscribers worldwide, which is down from the previous quarter. While the majority of these declines are coming from the east, World of Warcraft continues to be one of the most popular online games in China, and remains by far the most popular subscription-based MMO in the world.

That said, we know there are improvements that we can make in game content. The level of content in Cataclysm is some of our best work, but it was consumed quickly compared to our past expansion set, Wrath of the Lich King. Once players reached max level, the end-game content in Cataclysm is more difficult.

Balancing this content for our diverse player base can be very challenging. Our development team is constantly analyzing the game, and we're continuing to explore ways that we can adjust the game to better satisfy both hard-core and casual players.

To that end, our next free major content update for World of Warcraft is already in testing and will be available for players in the coming weeks. This is our largest update since Cataclysm launched. It will include our biggest and best content raid content ever, featuring the iconic dragon Deathwing as well as a new raid finder feature. The raid finder will make it easier than ever for casual players to experience end- game content and it will open a big part of the World of Warcraft to more of our players.

Looking beyond our next content update, the development team is already hard at work on our next expansion set, Mists of Pandaria. We introduced the Pandarian race to the Warcraft universe with Warcraft III and players have always been eager to see them introduced to World of Warcraft. We're finally making them a playable race, in Mists of Pandaria, and the announcement trailer has already collected more than 3 million views on YouTube.

We'll be introducing a number of new features to World of Warcraft this expansion set, but one that's gotten a lot of positive buzz from players and press is our new pet battle system, which we believe will be very appealing to casual players. For hard-core players, we have plans to focus the story heavily on the Horde-Alliance conflict. Combined with some new PvP features, we believe the new expansion will have a lot of appeal for our diverse audience.

Aside from the new expansion set, we made another exciting announcement at BlizzCon, the World of Warcraft annual pass. The annual pass is an initiative we created to reward the loyalty of our current subscribers as well as welcome back lapsed players. The deal is pretty simple. If you make a 12-month commitment to World of Warcraft, we give you Diablo III for free, along with an invitation to the next World of Warcraft beta, and an exclusive end-game mount.

This is a limited time offer that's only available to players who had already created a World of Warcraft account as of October 18. We have received a tremendous response to this promotion, and we believe it's a great way for us to leverage the size and passion of our World of Warcraft player base to drive even more momentum around Blizzard games. We have other aggressive marketing plans in the coming months for World of Warcraft, but we're not ready to share details yet.

Closing out our discussion on World of Warcraft, we have recently announced that a new localized version of the game will hit the Brazilian market on December 6. As we mentioned in the past, Brazil is one of the fastest growing markets, in terms of online connectivity and is already in the Top 10 countries, in terms of broadband users. We're looking forward to seeing how our expansion into Brazil, and new content updates and other initiatives contribute to the growth of World of Warcraft.

Moving on to StarCraft II. We showed off the multiplayer aspect of Heart of the Swarm at BlizzCon for the first time. Players were very excited to try out the new units, and the game has generated a ton of buzz. The new sizzle trailer that we released for the game has also gotten a lot of press and attention with more than 1 million views on YouTube.

In addition to Heart of the Swarm, the StarCraft development team has been hard at work on a new free to play online game, Blizzard DOTA. This game was created by our development team using the StarCraft II engine and we debuted a new version of it at BlizzCon.

Blizzard DOTA drew a lot of positive interest from press who attended the show and it will be our entry into an increasingly popular genre of online games. Similar gains in the market operate on a free-to-play basis with micro-transaction elements. With that in mind, we're currently exploring what type of business model will work best for Blizzard DOTA and look forward to sharing more information about the game in the near future.

On the Diablo III front, we are still targeting an early 2012 launch. We've been collecting great feedback from our ongoing beta test and BlizzCon, and the team is using that feedback to continue polishing and improving the game. We've also been testing the gold Auction House functionality through the beta, and are gearing up to test the real money systems very soon. We have very high expectations for Diablo III. The buzz surrounding the game continues to be tremendous, and our debut of a new trailer for the game at BlizzCon was one of the highlights of the show.

In closing, 2012 is shaping up to be one of the busiest and most exciting years in Blizzard's history. We plan on having at least 2 major releases, and as BlizzCon demonstrated we have a lot of great games coming down the pipeline. We continue to invest in development and customer service to support long-term growth, but for now, the Company is focused on execution, and getting these great games out to our players. Thank you, and I'll turn the call back over to Kristin.

Okay. Operator, we're ready to take questions.

(Operator Instructions) Brian Pitz with UBS.

Great. Hi, and congrats on another Call of Duty successful launch. Can you give us some additional color on what's happening to engagement and subscriber levels for World of Warcraft, particularly following the big expansion pack announcement? Where do you think the subscribers are actually going? And I've got a quick follow-up.

Well, as you know, we don't provide a forecast on subscribership levels. What I'll say is the announcements at BlizzCon were incredibly well received. There's a lot of excitement around the expansion, and the upcoming content in the next patch, which will be introduced in the next couple of weeks, it is currently in test on our public test realm, and we're very excited about that content. I guess I can say this. The majority of the declines were in the East. China still represents more than one-half of our global player base. And historically, December has been a very good month for subscriber trends. We have a number of initiatives planned. We plan to be very aggressive in terms of our marketing promotions, and we're looking forward to the end of the year.

Great. And maybe this is a question for Thomas as well. How should we think about the Diablo III promotional offer that's being provided with the annual subscription option? Thanks.

From our perspective, the reception to the offer has been phenomenal. As you would expect, I think it's a tremendous value offer for existing and lapsed WoW players, so we're not surprised. I think it's going to continue to help broaden and deepen the engagement of the Blizzard community overall. I think that's particularly desirable for us because as we look into the future, I think we recognize there's more competition heading into the MMO genre overall, because it's a very attractive genre. So we want to make sure we continue to offer our players not only the best content but also the best value.

And should we assume that's a margin neutral event, for the most part?

Well, we think that it is -- the more interest that we drive towards Diablo III, we think the more interest our players will continue helping to drive towards Diablo III.

And I think from a margin perspective, I think that it still remains to be seen, as you know, Diablo III launches with real money auction house, so it provides an opportunity to potentially generate high-margin revenues from additional Diablo players, which we might not otherwise get to. But I think it will [definitely] be in its early days, and we'll find out about that once see the product in the market.

Great, thanks for the color.

Neil Doshi with Citi.

Hi, guys, congrats on the quarter. Thomas, had a question about the Blizzard operating margins. Looks like margins have been coming down from the traditionally high 50% range to now, 40%. How would you think about margins going forward? Would we continue to see continued pressure on Blizzard margins? Or has most of the development been done there and we can hope to expect margins get back in that 52% range?

I don't think it's a surprise that this year the margins are down, because we are developing a whole host of products within Blizzard, effectively we have 5 products in development, none of which has launched this year. So you've got all of the development costs, and none of the revenue. So next year, we are seeing it at Blizzard, as Mike mentioned earlier, a minimum of 2 releases. So I think with that additional leverage on the top line, I think you will see this trend reversing.

Great. And then --

On things like the auction house, where it's still -- we haven't shared a lot of detail about what the margin structure looks like, but obviously, it's a very high-margin component of the overall franchise.

Yes. I think it's a difficult comparison this year, because if you look at last year, we had 2 major launches. This year, zero.

Understood. Okay. And then, Mike, on the Diablo beta, what learnings have you found so far from players and the community? How's the auction house testing going relative to your expectations?

Feedback and testing have been extremely positive in the beta. Keep in mind, the amount of content that we are exposing to players is very limited because we do want to save the vast majority of that content for the actual release. But even within that small amount of content, people are playing it over and over, experiencing with the various characters, and we've been reading the feedback and talking to people at BlizzCon. One of the most common questions that I got asked at BlizzCon was just -- they want to get their friends into the beta. How do they do that? Of course, it's very difficult to do.

Great. Thank you, everyone.

Connor Irvine with Deutsche Bank.

Yes, hi, it's Jitu Patel. A couple of questions. One, as you look at the Diablo, Warcraft bundling strategy, I guess is the idea behind that is to get as many users on Diablo and the real opportunity for monetization standpoint will be auction house in terms of the transactional flow there? I'm curious, how much do you think there will be in terms of cannibalization of prepackaged software sales due to the bundling strategy? And then second, on Warcraft, 10.3 million subs, what's your best guess as to where that number settles in at as we look out over the next 12 months or so?

All right. First, Jitu, on Diablo, I think the benefits that we see from the Diablo offer are really twofold. I think one, it's going to -- because it requires a 12-months subscription to World of Warcraft, it's going to extend the subscriber life, and as a result, it's going to generate more revenues, more high-margin revenues, at World of Warcraft. And in addition, as Mike and Bobby mentioned earlier, we also think that the larger the Diablo community is, the larger the marketplace around Diablo's real money transaction auction house is, the greater the opportunity to also generate income and have a long tail behind Diablo. And then on the subscriber, as Mike mentioned earlier, we're not providing any subscriber forecast. We haven't done so in the past. We're not starting right now. I think we're providing you a financial forecast, which includes as always, proven assumptions, around all of our variables that go into our financial plan.

Maybe if you look at auction house going backwards to the prior Diablo or maybe what you're seeing in early testing, can you talk about how many transactions the average player typically does in a given month? Is there any way to quantify that?

There isn't really because the experience that we are going to offer is going to be so much better than anything players were able to see in the past on Diablo, so where we're really looking is -- so that's number one. Number two, I think the general acceptance of gamers for a different type of business models than they've see in the past and that there are more micro-transactions based, has increased substantially, over time. So we are really looking more for benchmarks, really, outside of currently relevant micro-transaction based games, and as you know, those trends have been very encouraging but for us, we'll have to see until we get into the marketplace. I mean, if we didn't think it was a significant opportunity we wouldn't be doing it.

Let me just add to that. It's really impossible to extrapolate behaviors from the limited [beta] experience we're offering to the more open-ended ultimate Diablo III experience. But if you look at Diablo II and even Diablo I player behaviors, there was a big need to trade items between players, and we found that a lot of our players were going to third-party sites to perform that trading. And so, the main reason that we're doing this is to provide them a safe and secure environment to perform this trading. We think it's going to make for a better game, we think it's going to lead to longer engagement with the game. But in terms of the volume, I think it's very difficult to predict.

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Hello?

Mr. Patel, do you have anything further? Eric Handler with MKM Partners.

Hi, appreciate you taking my question. Just out of curiosity, when you've had big patches before with World of Warcraft, what type of subscriber uplift do you typically see? And then going to an alternative question with Skylanders, I'm just curious what type attach rates you're seeing with the action figures with the game purchase?

Well, historically, with the content updates that we've done, it's really not intended to go out and drive new user acquisition. That's a whole other strategy. But it does drive engagement with the game and so that will impact churn if we do it successfully. And eventually, we'll drive winback as players tell each other about the content they are enjoying, we'll hopefully see a lift in our ability to winback players that may have already turned.

And in terms of Skylanders, we're not going to discuss exactly the attach rate but it is -- we can say that it is higher than we expected.

It's surprising, this early in the game because people are going in the store and they're not just buying a starter pack, but because of the attractiveness of the toys and the value proposition of the toys itself, we're seeing a lot of initial purchases including already toys beyond the starter pack.

Thank you.

Doug Creutz with Cowen and Company.

Yes, thanks. I was wondering if you could talk a little bit about where you are in terms of your plans to expand Call of Duty to China? Thanks.

What we would say is the development process is going exceedingly well. We already have operable versions of the game on the proper technology, and it translates beautifully in to that market. We've built a micro-transaction engine and it looks -- the game, I think, looks revelatory compared to what is currently available in the genre in the market. So development goes very, very well and our plans are ahead of schedule.

Great. Thanks.

Edward Williams with BMO Capital Markets.

Good afternoon. Just a quick question, Eric. If you can just give us a little bit more color on Call of Duty Elite, what -- how significant is that, Thomas, this may be more directed for you but how significant is it in the current quarter? And Eric, how should we think about it going into calendar '12 where I imagine the impact is considerably larger?

Well, I think, Ed, in the short term, I don't think it's going to move the needle significantly on our December quarter results, and that's largely driven by the fact that we're going to amortize the 12-month membership over the 12-month period. So there's not enough time left to really move the needle dramatically into the December quarter but obviously, we are setting up (inaudible) to generate revenues particularly for 2012.

And in terms of how to think about it going forward, I think a lot of it depends on the adoption rate. I think that, at the very least, we want it to significantly expand the value proposition around the franchise and create greater value for every player which we've done with the free service significantly. And depending on the adoption rate, it could really fundamentally change the way that the community plays the game, which is our hope because it's the best way for us to deliver continuous content throughout the year, and to do some of the innovative things we're doing like manage community-wide competitions for real prizes. The greater the adoption rate, the greater potential it has to really change the game.

I can tell you, Ed, it is a key strategic priority for the Company. And there are a lot of resources focused on it. And we're very enthusiastically supporting it.

Okay, great, thank you.

Okay. Well, thank you all. And on behalf of everyone at Activision Blizzard, we thank you for your time and interest, and look forward to talking to you soon. Thank you.

And again, this does conclude today's conference call. Thank you for your participation.