動視暴雪 (ATVI) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Activision Blizzard's Q1 2012 results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Kristen Southey. Please go ahead, Kristen.

Good afternoon, and thank you for joining us today for Activision Blizzard's first-quarter 2012 conference call. With me today are Bobby Kotick, CEO of Activision Blizzard; Thomas Tippl, COO of Activision Blizzard; Dennis Durkin, 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, and are subject to risks and uncertainties. As indicated on 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 expressed in any forward-looking statements.

Such factors include, without limitations, sales levels, increasing concentration of titles, shift 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 pricing, 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, counter party risks, economic, financial, and political conditions and policies, foreign exchange and tax rates, identification of acquisition opportunities, and potential changes 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 reports on Form 10-K for the period ended December 31, 2011, and in the Company's other SEC filings. The Company may change its intentions, beliefs, or expectations made at any time and without notice, based upon any such changes in such factors and the Company's assumptions or otherwise.

The Company undertakes no obligation to release publicly any revision to any forward-looking statements to reflect events or circumstances after today, May 9, 2012, 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 a change in deferred net revenues and related cost of sales with respect to certain of our online-enabled games.

Expenses related to stock-based compensation, expenses related to restructuring, the amortization of intangibles and impairment of intangible assets, and goodwill and the associated tax benefits. Please refer to our earnings release, which is posted at www.ActivisionBlizzard.com for full GAAP to non-GAAP reconciliation and further explanations.

There's 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 12-quarter financial overview, highlighting both GAAP and non-GAAP results, and a one-page summary sheet. And now, I would like to introduce our CEO, Bobby Kotick.

Thank you, Kristen, and good afternoon. We're pleased to announce that Activision Blizzard delivered another quarter of better-than-expected financial results, driven by the remarkable talent of our employees, strong partnerships, and our continued ability to develop and build large franchises with highly engaged communities. This ability, developed over the 21 years we've been leading this business, is illustrated by our portfolio of leading franchises and the industry's best development teams.

Building $1 billion franchises takes many years and requires significant financial, creative, technical, distribution, marketing, and customer service resources, as well as management continuity and discipline. Our strong cash flows, significant capital resources, and long-term view of our business provide us the unique ability to thoughtfully invest in major new growth and margin expansion opportunities, like Skylanders.

We continue to build the portfolio of mega franchises. In 2012, we expect to have at least four franchises that generate significant operating margins and contribute meaningfully to our Company's profitability. And looking beyond 2012, we have the strongest pipeline of new potential mega franchises in our history, including Bungie's new Universe and Blizzard's new MMORPG, as well as an expansion of Call of Duty to China.

We continue to focus our resources on our largest and most promising opportunities, a formula that has produced strong results over the long-term, and which we expect will continue to do so in the future.

Our pipeline includes some of the most ambitious titles we've ever developed, including such highly anticipated games as Blizzard Entertainment's Diablo III, World of Warcraft - Mists of Pandaria, and StarCraft II - the Heart of the Swarm, as well as Activision Publishing's Skylander Giants and Call of Duty Black Ops 2, each of which we hope will set new benchmarks for quality, immersion, innovation, and great game play.

All five franchises have built large, loyal communities with demanding expectations, and we believe that by attracting and retaining the industry's best talent, anticipating trends, and understanding our audience's needs locally, as well as globally, we'll be able to create new entertainment experiences that continue to set the quality standards in all of entertainment, as we have for more than two decades.

We are leading the year with Blizzard Entertainment's Diablo III, which features an innovative auction house that allows players to trade objects using real world currency. Consumer feedback from the beta test has been remarkable, and preorders have already set a new record for Blizzard.

Blizzard has also been hosting a large-scale beta test for World of Warcraft - Mists of Pandaria, which will add a tremendous amount of new content and innovation to the unmatched World of Warcraft experience. We expect that the new features, story lines and game play mechanics will be embraced by the WoW community worldwide. Later on the call, Mike will outline the progress made on both titles and the others in development, like StarCraft II - Heart of the Swarm.

Activision Publishing is celebrating the extraordinary success of Skylanders Spyro's Adventure. Based on our current internal estimates, we believe that Skylanders toy sales in Q1 exceeded those of Star Wars toys, which had been the number one action figure line. And to further build on the Skylanders momentum, this fall we'll launch Skylanders Giants, which expands the breakthrough play experience that brings toys to life.

Skylanders Spyro's Adventures has been our biggest ever IP launch, and is on track to deliver outstanding return on one of our biggest investments. Later in the call, Eric will share with you some of our plans for Giants, which brings a new level of innovation to the game, the toys, and our marketing and retail strategies.

Similarly, we believe that the recently announced Call of Duty Black Ops 2 will redefine the Call of Duty franchise through new levels of innovation and game play. We believe that it has the potential to be the best Call of Duty ever. Along with our retailers, we hope to make Call of Duty the biggest entertainment experience of the year.

We continue to heavily invest in our large franchises in order to further widen the moats that surround these successful properties. The value of these investments is demonstrated by our unique ability to create immersive online experiences that aggregate large and vibrant player communities around our brands and keep them connected in the 24/7 world.

Today, we have substantial resources dedicated to online product development and services that allow our players to communicate and collaborate with each other, while also giving us a way to interact with and support our players.

We have approximately 50 million monthly active users across all of our franchises, and through high-margin online offerings like subscription and membership-based services, digital downloads, and value-added services, we are already able to deliver more value and choice to consumers than ever before.

The just-upgraded Battle.net platform connects over 10 million players across the entire Blizzard portfolio, and this is expected to increase with the upcoming launch of Diablo III. Activision's Call of Duty Elite is already one of the fastest-growing entertainment services ever and continues to grow with over 2 million premium annual paid members, and a total of over 10 million registered users.

We expect that in the future, by continuing to offer innovative connected entertainment experiences, we'll further grow our player communities and our services, and not just through Battle.net and Call of Duty Elite, but also through Call of Duty Black Ops 2 multi-player game play, our upcoming Call of Duty microtransaction game for China, the new Skylanders Web World, Blizzard's Mists of Pandaria, and the upcoming StarCraft II - Heart of the Swarm.

And our two largest online opportunities for the future, Bungie's genre-defining new intellectual property, and Blizzard's new MMORPG. In addition to building our player communities and service platforms for the benefit of our shareholders, I'm pleased to say that we've again strengthened our leadership team with the appointment of Dennis Durkin as our new CFO. Thomas has been serving as both our CFO and COO since 2010, and will now be putting all of his efforts into the COO role, for which we are very grateful.

Our 2012 and future product and service pipelines have never been stronger. Looking ahead, while there are many risks to our business, especially as we continue to compete with other forms of entertainment for players' leisure time and dollars, our leadership in digital, our strong franchise portfolio and platform capabilities, our long-term business strategies, and our solid financial foundation should enable us to deliver another year of record earnings and extend our track record of long-term growth and shareholder value creation.

Now, I would like to turn the call over to our Chief Financial Officer, Dennis Durkin, who will review our financial performance. Dennis?

Thanks, Bobby. Good afternoon, everyone. It is a pleasure to be joining you for my first earnings call. I know many of you from my previous roles at Microsoft, and I look forward to building relationships with those of you I have not yet met. Before I get into the financials, I would like to take a moment to say how pleased I am to be part of the Activision Blizzard team, a team which has an incredible track record of creating franchises and platforms with enduring value for shareholders.

I have long admired their relentless focus and drive for innovation, their commitment to excellence, and their ability to build immersive consumer experiences in connected communities. These are the ingredients I believe are key to the long-term success and value creation in our industry, and were key to the turnaround that I had while I was part of the great leadership team at Xbox.

Thank you, Bobby, Ryan, the board, and the entire leadership team for the warm welcome you have given me in my short time here. It is greatly appreciated, and I'm personally thrilled to be a part of the team here at Activision Blizzard.

Now on to the March quarter results, followed by a review of our outlook for 2012. Please refer to our earnings release for full GAAP to non-GAAP reconciliations. For the quarter, on a GAAP basis, we generated better-than-expected results, with revenues of $1.17 billion, an operating margin of 44%, and EPS of $0.33.

As expected, our results were down versus the prior year due to tough comps and lower subscribers for Blizzard's World of Warcraft, lower sales of Call of Duty, including fewer and later a la carte DLC releases, and the impact of revenue recognition for Elite, as well as increased sales and marketing spend for our new IP end services.

On a non-GAAP basis for the quarter, we generated better than expected results, with revenues of $587 million and operating margin in excess of 15%, and EPS of $0.06. Our performance for the quarter was driven by our products with breakthrough innovation, online integration, and digital revenue streams, including Blizzard's World of Warcraft, Activision's Call of Duty, and our newest IP, Skylanders.

Turning to the specific P&L items, please note all percentages are based on revenues, except for the tax rate. For the quarter, GAAP product costs were 27%, operating expenses were 29%, and our tax rate was 25%. Non-GAAP product costs were 34%, in line with our outlook, and non-GAAP operating expenses were 51%, lower than our prior outlook, primarily due to revenue outperformance. Finally, our tax rate came in as expected, at 27%.

Now, turning to the balance sheet. On March 31, we had no debt and $3.5 billion in cash, or nearly $3 per share in cash and investments. During the quarter, we generated operating cash flow of $153 million, and we repurchased 22 million shares for $261 million.

The strength of our balance sheet and the consistency of our cash flows are major competitive advantages for us. They afford us the ability to invest for future growth in internal opportunities with the highest return on invested capital, like Skylanders, Call of Duty China or Blizzard's new MMO. They also allow us the ability to invest for future growth through attractive external opportunities, such as our 10-year exclusive arrangement with Bungie, and finally, they allow us to return value to shareholders in the form of dividends and share repurchases.

We began 2012 with financial strength, strong market fundamentals for digital and an expanding portfolio of category-leading franchises and unique online service capabilities that offer expansion opportunities for the long term. We remain focused on strengthening our operations at retail, expanding our digital footprint, and adding innovation and new business models to each of our properties to continue to drive growth.

As previously discussed, we have three key priorities for 2012. First, we expect growth from Blizzard, driven by the expected launch of at least two titles this year, including Diablo 3, which we'll launch next week, with its real money auction house. Second, Activision Publishing is focused on this year's new Call of Duty title, Black Ops 2, on Call of Duty Elite, and on continuing to expand our scale of the Skylanders franchise.

And finally, we plan to continue expanding our operating margins. In 2012, margins should benefit from an increasing mix of higher-margin revenues, including above-average margin, Skylander toys, and the high-margin Blizzard product slate. In addition, we remain focused on productivity improvements across multiple areas of operating expenses.

Now, let's move on to our outlook. For calendar year 2012, on a GAAP basis, we are raising our outlook modestly and now expect net revenues of $4.2 billion, up $50 million from our prior outlook. We expect product costs of 28%, and operating expenses of 48%. We expect a tax rate of 26%, a diluted share count of about $1.15 billion, and GAAP EPS of $0.65. As a reminder, our GAAP results are expected to be down versus the prior year, due to significantly larger deferrals from 2012 into 2013, driven by Blizzard's slate and Call of Duty Elite.

For 2012, we now expect non-GAAP net revenues of $4.53 billion, a $30 million increase from our prior outlook and up versus the prior year. This year, we continue to expect non-GAAP revenues growth from Blizzard and from the core Activision Publishing business, primarily offset by a reduction in revenues from our distribution and affiliate businesses, and negative FX assumptions year-over-year.

We now expect 2012 non-GAAP product costs of 27% and operating expenses of about 40%. We expect a tax rate of 27% and a diluted share count of about 1.15 billion, both of which can be used in our quarters. We now expect non-GAAP EPS of $0.95, a new record.

Now, moving on to the June quarter, on a GAAP basis, we expect net revenues of $950 million, product cost of 29%, and operating expenses of 50%. The tax rate and share count are the same as the full year. Finally, we expect GAAP earnings per share of $0.13.

For the June quarter, on a non-GAAP basis, we expect record revenues of $805 million, driven by our large line-up, including Activision Publishing's Prototype 2, as well as the Amazing Spider-Man, and most importantly, Blizzard's highly anticipated Diablo 3. We expect non-GAAP product costs for the quarter of 27%, and operating expenses of 54%.

Operating expenses are expected to be higher than the prior year, due primarily to increased investment in sales and marketing for our large Q2 lineup and continued support of Skylanders. For the quarter, we expect non-GAAP EPS of $0.10.

So in summary, Activision Blizzard delivered strong financial performance in Q1 and we expect record non-GAAP revenues in Q2. And although we have the vast majority of our product launches in front of us, we believe that the quality we are seeing in our titles and our strength in retail and digital, combined with our ability to create new revenue streams and our ongoing cost containment efforts, position us in 2012 for another year of margin expansion and record EPS. Let me hand it over to Eric to discuss our Activision Publishing business.

Thanks, Dennis, and hello, everyone. Today, I'm going to start with a few brief industry comments and then I'll get into our slate. The [metrocality] of the global market fundamentals for interactive entertainment remain strong, driven by the largest install base ever, which is still growing, and the continued growth in digital, especially in Asia, and the fact that consumers are spending more time playing games than ever before. These positive dynamics further expand what are already significant global opportunities for games, with large passionate audiences.

Our objective is to continue building our strong and growing global player communities, and we remain focused on five key areas that are well-aligned against the market fundamentals that we believe will drive growth over the next few years. They include, one, expanding Call of Duty through continued momentum of the franchise, as well as both geographic and platform expansion.

Two, enhancing and growing the Call To Duty Elite online service platform. Three, building on the momentum of Skylanders. Four, laying the foundation for the new Bungie Universe. And five, investing in high potential new IP technology, platforms, and business model. We're pursuing each initiative aggressively, while also investing in our current slate of games.

First, with respect to Call of Duty, as of March 31, the Call of Duty franchise had approximately 40 million monthly active users. In 2011, Call of Duty Modern Warfare 3 was the number one bestselling title in the US and Europe and today remains by far the most played console game. In addition, gamers are playing Modern Warfare 3 more often and to date, have logged more than 2 billion total online game sessions, which is a 19% increase over Black Ops for the comparable period.

With respect to our new online service, Call of Duty Elite now has over 10 million registered members, including more than 2 million premium members at the end of April, representing a very strong start. Engagement with Elite is increasing. Since January, we have seen a 33% increase in premium memberships. Additionally, our multiple-screen 24/7 strategy is working. We've launched Elite on the PC, TV, and mobile devices.

We are also expanding features such as HD streaming Elite TV to our console apps and plan to continue expanding this accessibility via the rapidly growing smart devices such as tablets. Finally, clans are a huge hit. The consumer-related clan features have taken off with our players, with over 850,000 user-created clans, or teams, created within Elite today. These clans are extremely active, sticky and social, with millions of members participating in our proprietary Elite clan competitions.

Although we're pleased with our progress to date, we still have a lot to do. Building a service of this kind in addition to launching our content a la carte takes time, effort, and input from our players. Going forward, we'll continue to refine our service and give our players the best overall value and experience.

On November 13, we expect to further expand the franchise and the Elite service with the launch of Call of Duty Black Ops 2, the sequel to the bestselling console game of all time, Call of Duty Black Ops. Today, player engagement for the original Call of Duty Black Ops remains incredibly high, more than 17 months after the launch.

Black Ops 2 is hands-down our most ambitious Call of Duty game to date and pushes the franchise's boundaries more than ever before. Treyarch is challenging assumptions on every front, with meaningful innovations in single-player campaign, multiplayer, zombies, facial animation, and graphics technology.

They have created an authentic fiction rooted in credible near-future conflicts. The game features advanced weaponry, robotics and drone warfare, many of which are already in the arsenals of today's superpowers or being prototyped as we speak, as well as advanced graphics technology that will drive the stunning cinematic action to new heights.

In addition, and running in the multiplayer engine for the first time, zombies will give players a bigger and more diverse set of game play experiences, as well as entirely new ways to wage war with the undead. In multiplayer, they're embracing all levels of playing styles to give players more ways to engage in what would be hands-down the most visually enhanced multiplayer experience ever on a console.

We are all in on this game, and we believe Black Ops 2 could redefine the franchise and be the best Call of Duty game we've ever made. Today, Black Ops 2 has exceeded every internal milestone, and the initial external media feedback has also been incredible. After just our first reveal, Official PlayStation Magazine said Black Ops 2 was quote, the most innovative Call of Duty in years. Destructoid said Black Ops 2 was quote, impossibly beautiful, and from G4TV, Black Ops 2 is quote, the most ambitious Call of Duty game ever.

We've also been extremely pleased with early consumer response and engagement. The Black Ops 2 reveal trailer was the most watched video of the day on YouTube and views were up 82% compared to the reveal trailer for Modern Warfare 3. During our launch, we had five of the top nine US top trending topics on Twitter at the same time, and Facebook traffic was 43% higher than the prior year.

And finally, although it's very early, we're also incredibly pleased with the preorders, which in the first week since reveal are tracking ahead of the record-breaking pace set by Call of Duty Modern Warfare 3. Overall, we think this game and the move to the near future setting is the biggest step for the franchise since leaving World War II and bringing Call of Duty into the modern era. We look forward to sharing more details with you in the coming months.

In addition to focusing tremendous time and effort on expanding the Call of Duty franchise this year, we're also focused on driving the momentum of Skylanders, which is expected to easily cross the $500 million mark in life-to-date sales in 2012. This year, Skylanders offers us multiple expansion opportunities.

First, simply catching up with toy demand for our best-selling family franchise, Skylanders Spyro's Adventure. Skylanders Spyro's Adventure was the number three best-selling video game in Q1 and per our internal estimates, we believe it was also the best-selling action figure line, outpacing even Star Wars. To put our performance in perspective, Skylanders had over $100 million of sales in the first quarter alone, which exceeded what Rovio, the developer of Angry Birds, reported in total Company revenues for all of 2011.

As strong as a start we've had, the global toy industry is an $80 billion opportunity and Skylanders still has plenty of room to grow. Even after shipping over 20 million toys in 2011, demand was so high following the holidays, we were out of stock for much of the first quarter. We've substantially increased capacity, and believe that we will now be in a better position to meet demand going forward.

We also continue to build the brand beyond the game. Today, we have more than a million registered Web World users and expect to increase that number by offering more content and features, some of which will be monetized.

In early April, we launched our first mobile Skylanders game, Skylanders Cloud Patrol, which quickly became a top-selling iOS game, and has received strong 5-star quality reviews. Cloud Patrol continues our progression into mobile gaming, where we can pursue new business models and opportunities for our existing franchise, as well as our large portfolio of catalog profits.

We also have a comprehensive licensing program underway for the franchise, and have announced partnerships with FritoLay, as well as opportunities in apparel, back-to-school, plush toys, and more. And later this fall, we'll be bringing Skylanders Giants to market. Giants will build on Skylanders' breakthrough innovation with eight supersize Giants figures and eight all-new Light Core characters.

Gerald Storch, the CEO of Toys R Us, who joined us for the launch of Skylanders Giants at New York Toy Fair, said, quote, he expects Skylanders to become one of the most successful toy franchises in history, unquote. We believe we have a highly innovative product pipeline, as well as the supply chain, retail and marketing capabilities to live up to this promise.

Looking beyond this year, we continue to develop, plan and prepare for two of our largest growth opportunities, Bungie's genre-defining new IP and our [free-to-play] microtransaction Call of Duty game for the large and rapidly growing Chinese market. Development on both of these large scale projects is progressing very well and we look forward to sharing additional details on their game play mechanics and business models in the future.

In summary, our slate this year, our future pipeline, and our expanding service platforms are well aligned with the market opportunities and the passions of our players. I'm looking forward to updating you on our plans and performance as the year unfolds, and we will also have more details in the upcoming weeks to share with you at E3 in early June. With that, I would like to now turn it over to Mike Morhaime, to provide us an update on Blizzard.

Thank you, Eric. 2012 is already shaping up to be a busy and exciting year at Blizzard, as we're poised to deliver fresh content to our players in all of our major franchises. I'll begin discussing our financial updates with World of Warcraft. At the end of Q1, global subscribership for World of Warcraft remained at 10.2 million. Maintaining our subscriber levels puts us in a great position, as we drive toward the launch of Mists of Pandaria later this year.

We opened the beta in late March and have rapidly expanded testing to a good portion of our community, including the 1.2 million players who signed up for the World of Warcraft annual pass. That program closed at the end of April and was very successful. Thus far, the feedback we've collected from the Mists of Pandaria beta test have been great and development continues to move at a good pace, as we open up more of the expansion content to players.

Mists of Pandaria will offer a brand-new continent to explore, a new player class, the monk, and more importantly, new game modes that will help World of Warcraft continue to engage its diverse audience. Scenarios will offer for a more relaxed way of playing in a group that's less structured than traditional vengeance. Challenge modes will give hard core players and guilds new ways to compete with each other, while earning cool rewards. And the pet battle system will offer players a light-hearted diversion from regular questing, vengeance, and PvP.

On the Diablo front, we are less a week away from launching. In preparation, we recently conducted an open beta stress test for Diablo III, where anyone could download and try out the game. The response we got was huge, with more than 2 million people worldwide participating in the open beta.

All the testing we've done over the past several months has been critical for us in polishing and preparing Diablo III for launch, particularly in the case of the auction house feature. We believe having this convenient method for item trading integrated within the game will enhance the overall player experience.

Now, all that's left is to get the game into the hands of our players. Official midnight launch events for Diablo III have been announced for locations around the world, including the United States, Europe, Korea, Taiwan, and southeast Asia. More than 8,000 retail locations across North America and Europe will also be open at midnight to celebrate the launch.

Our players are clearly excited about Diablo III, as it's already set a Blizzard record for preorders, including those who signed up for the annual pass. We look forward to providing more definite sales update in the coming weeks.

Most importantly, I'm proud of all the hard work that the team has put into Diablo III. This game has been a long time in the making, and our community has been supportive of us every step of the way. I'm confident that their patience will be rewarded next week, when we launch our best Diablo game yet.

Meanwhile, the StarCraft 2 development team continues to forge ahead. The team has begun early testing on the arcade update that will make big improvements to the custom game experience on Battle.net. In fact, the team is already working with map creators in the StarCraft 2 community to update their maps and take full advantage of the new functionality. We're aiming to make the new arcade system live in the next coming months.

In addition to the work being done on arcade, development on Heart of the Swarm is going very well. Just a few weeks ago, we announced that we would offer a beta sneak peek of Heart of the Swarm to attendees of Major League Gaming's Spring Championship. The event will take place at Anaheim Convention Center from June 8 to June 10. It won't be too long after the MLG tournament that we'll be ready to announce plans for our beta.

We'll also be running our own USA national finals for our own StarCraft 2 World Championship Series Event at the same event. This is just one of the many such events that we're running with partners in countries around the world. Our goal is to identify and foster local heroes in various countries and have them compete in the StarCraft 2 global finals.

New developments from Korea also bode well for StarCraft 2 eSports. Just last week, we announced partnerships with the Korean eSports Association, and ON GameNet, a cable television station, to create new StarCraft 2 leagues in Korea. These new leagues will complement GOMTV's successful global StarCraft 2 league, providing viewers with even more options for StarCraft 2 eSports. This news has created tremendous excitement in the StarCraft community, as many of the popular pro gamers from StarCraft 1 are preparing to compete in StarCraft 2.

As I mentioned earlier, 2012 is already a busy year at Blizzard. With Diablo 3 launching next week, Mists of Pandaria well into beta testing, and Heart of the Swarm close to beta, we are well-positioned to deliver multiple titles in the coming year, which means Battle.net is going to be an even more exciting place for online gamers. Thanks, and I'll turn the call back over to Kristen.

Thanks, Mike. Operator, we'll open it up for questions.

(Operator Instructions). We'll take our first question from Edward Williams with BMO Capital. Good afternoon. Just a quick question on Skylanders. Can you comment a little bit about what supply is like -- it was out for much of the quarter. But could you comment on how supply is at the moment and then as we look through the year as a whole, how much of the Skylanders revenue should we see this year as coming from toys versus coming from games?

Well, in terms of supply, despite some pretty, you know, optimistic and aggressive planning, we, as I said, we were out of supply for much of the quarter. But we've increased our capacity greatly and we think we're catching up to supply now, which is one great growth opportunity, in and of itself. We've also increased capacity for the holiday and for the launch of Giants.

And just on the split between games and toys, at this point, we're not providing revenue or future guidance as it relates to the two of those, although as Eric points, we have seen some channel normalization over the last few months. The one point we would make though, is attach rates are extremely strong on toys.

And we'll take our next question from Neil Doshi, Citigroup.

Two really quick questions. One, it seems like some publishers announced are now starting to spend money on Gen 4 R&D. Just wanting to know, is that something you guys plan to do? Secondly, it looks like Blizzard op margins grew sequentially, which is nice. Just want to know when you might think we'll return to that kind of 40% or even 50% operating range for Blizzard? Thank you.

Well, with respect to next generation development, we're not going to comment on that. And who wants to take--

On operating margins, is that the second part of your question?

Neil?

Yes, yes, it was.

Okay. So, on the last earnings call, we are very optimistic about the prospects of Blizzard profitability they have a strong slate ahead of them that they had in a long time and as you know, we are in the scale business, particularly the PC online business, which has above average margins because obviously there are no other parties participating in the PC platform as a revenue stream. So we would expect to see continued improvement in margins as the slate rolls out over the next couple of quarters.

And we'll go next to Colin Sebastian, with Robert Baird and Company.

Dennis, first, congratulations on your position. Mike, I want to follow up on World of Warcraft. If you look at engagement levels and usage levels in World of Warcraft to date, is it fair to say the game has stabilized at this point and a comment if subscriber levels have changed at all since the end of the quarter? Thanks.

We don't provide intraquarter updates on subscribership. What I can say is we made a large content update towards the end of Q4, which did help us out a lot on player engagement. And we expect to see increased engagement with the launch of Mists of Pandaria.

Thank you.

We'll go next to Eric Handler with MKM Partners.

With regard to Modern Warfare and comparing it to Black Ops, you said sales of packaged goods are down, and I know it's not quite apples-to-apples in terms of comparing digital this year versus last year, but just for your full year, do you think with the digital options that you have, should the total Modern Warfare 3 revenue be up versus Black Ops?

So you're right. Just to kind of tease your question apart a little bit, at least on the life to date numbers, we feel very good about where Modern Warfare 3 is relative to Black Ops. It was more front-end loaded, which obviously is good for us as a business in terms of getting more of the front line pricing. So but life-to-date on the HD platforms, they're roughly equivalent, if not slightly up for Modern Warfare 3.

The digital business year-over-year is not comparable, as you point out, relative to what was mentioned in the previous conference call about not only the timing of the map packs, but obviously with Elite launching and the great success that I think we have with the 2 million subscribers of Elite. On a full-year basis, I think we feel good about that business, where that will end up relative to where we were this past year. So we feel, again, with the launch last week of the new trailer, we're very excited about the future for Black Ops 2.

(Operator Instructions). We'll go next to Brian Karimzad with Goldman Sachs.

I guess first question is with the continuing growth of Call of Duty Online play time and my assumption is that's translated over to the 360 platform and Xbox live subscriptions. Any thoughts on how you might better capture the economics that Microsoft is receiving there? And then, the other would be on your capital allocation, any consideration on the way you think about dividends versus buybacks now as you do establish some more of these steady cash flow streams?

Yes, Brian, I think the performance on Call of Duty online continues to be stellar. I think we built this business working together with our partners, both on the Xbox platform, as well as the PlayStation platform. We don't see that, we don't see that changing, we both spurring unique capabilities to build this business, and I think it has played out for everybody involved in a very economically attractive way, and we don't see that changing going forward.

Relating to the second point that you had, I guess second question was around capital allocations. I think you know the Board buyback that was approved in the April timeframe or just before that, so the Board has authorized that, and obviously the dividend went, we went ex-dividend in March and that will be payable in the coming -- actually next week. So, those are Board-level decisions, but I think directionally from those you can see a strong proclivity to get cash back to shareholders through either of those avenues.

Okay. And if I may just pop one more in on Skylanders, given the strength of the attach rates, any consideration to adjusting the opening price point for it in the fall to juice up some of the addressable market?

We haven't made any decisions yet on what the pricing is going to be for the fall. In the meantime, I think we have a great opportunity even running up to the holidays from all the existing Skylanders products, which continue to sell well. We had a great Easter holiday, with tremendous amount of retail support. We are expanding the shelf space even ahead of the holidays because it's one of the best selling products in toys and for kids in video games full stop, so we are not waiting for the holidays to continue to drive the install base and we'll make our holiday decisions, including pricing and the support we're going to put behind it in due time.

Okay, thank you.

And we'll go next to Doug Creutz with Cowen and Company. Please go ahead.

Obviously, a lot of people are excited about the Diablo 3 launch. I was wondering if you could comment about what plans you may have to bring Diablo 3 to China. There's been a fair amount of silence about that, but I assume it's a market that you're targeting. Thanks.

So we are excited about the potential for China, but our focus really has been on executing the smooth launch for the rest of the world. Following the launch, then we'll turn our attention to China and work on putting some plans together today. Nothing to announce at this stage.

Ladies and gentlemen, this does conclude today's question-and-answer session. I will turn conference back to your speakers for any additional or closing remarks.

Well, thank you, everyone. On behalf of Activision Blizzard, we appreciate your time and consideration and look forward to seeing many of you at E3. Thank you.

Ladies and gentlemen, this does conclude today's conference. We do appreciate your participation. You may disconnect at this time.