動視暴雪 (ATVI) 2013 Q2 法說會逐字稿

Good day and welcome to Activision Blizzard's second-quarter 2013 results conference. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn today's call over to the Senior vice President of Investor Relations and Treasurer, Ms. Kristin Southey.

Good afternoon, and thank you for joining us for Activision Blizzard's second-quarter 2013 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 Hirschberg, CEO of Activision Publishing; and Mike Morhaim, 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 are forward-looking statements that are based on current expectations and assumptions that are subject to risk and uncertainty. As indicated on the slide that is showing, a number of important factors that could cause the Company's actual future results and other future circumstances to differ materially from those expressed in any forward-looking statements. Such factors include without limitation sales levels; current macro-economic conditions; increasing concentration of titles; shifts in consumer spending trends; our ability to predict consumer preferences among competing genres and hardware platforms; maintenance of key relationships, including the ability to attract, retain, and develop key personnel, and developers that can create high quality hit titles; 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; the adoption rate and availability of new hardware and related software, particularly during the console transition; the rapid changes in technology and industry standards; the current regulatory environment; litigation and associated costs; protection of proprietary rights; counter-party risks; economic, financial, and political conditions and policies; foreign exchange and tax rate; potential changes associated with geographic expansion; capital market risks; the possibility that expected benefits related to the recently announced transactions may not materialize as expected, and the transactions not being timely completed, if completed at all.

These factors and other factors that potentially could affect the Company's financial results are described in the Company's most recent annual report on Form 10-K, our quarterly report on Form 10-Q for the period, and 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 changes in such factors and the Company's assumptions or otherwise. The forward-looking statements in this presentation are based on information available to the Company as of the date of this presentation, and while we believe them to be true, they may ultimately prove to be incorrect. The Company undertakes no obligation to release publicly any revision to any forward-looking statements to reflect events or circumstances after today, August 1, 2013, or to reflect the occurrence of unanticipated events. I'd 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 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 a full GAAP to non-GAAP reconciliation and further explanation. 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 be also be posting a 12 [course] financial overview highlighting both GAAP and non-GAAP results on a one-page summary sheet. Further, you can find a PowerPoint overview of the recently announced transaction on our website.

Now I would like to introduce our CEO, Bobby Kotick.

Thank you, Kristin, and thank you all for joining us today. As you know, on July 25, we announced that we reached an agreement with Vivendi that will, upon closing of the transaction, make us an independent Company again. We believe that the transactions described last Thursday represent a tremendous opportunity for our Company and all of our shareholders. Activision Blizzard will acquire approximately 429 million shares and certain tax attributes from Vivendi in exchange for $5.8 billion in cash, or approximately $13.60 per share, before taking into account any benefit to the Company from these tax attributes.

Separately, in a related transaction, an investor group led by Brian Kelly and me will acquire approximately 172 million shares from Vivendi for $2.3 billion in cash. Brian and I are personally investing a combined $100 million of our own money to purchase Company shares from Vivendi through the investor group. Following completion of the transaction, the majority of shares will be held by public shareholders. The shares purchased by the Company will no longer be outstanding, which will deliver meaningful accretion for our shareholders. We expect to emerge from these transactions even stronger than we are today, an independent Company with a best-in-class franchise portfolio and the focus and flexibility to drive long-term shareholder value and expand our leadership position as one of the world's most important entertainment companies. Later in the call, Dennis will provide more detail about the transaction and its expected benefits to Activision Blizzard shareholders.

Turning now to our second-quarter results, we're, of course, pleased to announce that Activision Blizzard delivered another quarter and first half of strong financial results. For the first six months of the year, Activision Blizzard was the number-one video game publisher in North America and Europe combined, including toys and accessories. Skylanders was the number-one video game title in North America and Europe, including toys and accessories, and Call of Duty-Black Ops II was the number-two video game title in North America and Europe combined. Additionally, Blizzard Entertainment's World of Warcraft remains the largest subscription-based MMORPG in the world, ending the quarter with approximately 7.7 million subscribers. Our remarkably talented and dedicated employees drove our success this quarter, as they have in each of the other quarters. They continue to develop and build the great franchises that attract our highly engaged communities and deliver great entertainment to our audiences around the world.

While we've had a solid first half, we do expect the remainder of the year to have its challenges, for many of the reasons we've highlighted previously, and a few I'll share with you now. As excited as we are about our holiday launches, we face a more crowded competitive landscape than we have in the past. We face titles that compete more directly with our offerings and past offerings, including highly anticipated heavily marketed games launching around our launch dates. To address the effects of this competition, we'll likely further increase our sales and marketing investments this year. Also, while the transition to new consoles should bring great long-term opportunities, it creates risk in the short term. Both Sony and Microsoft are planning to release very advanced new game systems, but launch dates, promotional plans, and launch quantities remain uncertain. Furthermore, console transitions can create purchase hesitation and otherwise affect consumer spending.

Our concerns about competition, macroeconomic effects, and the console transition period heading into the back half of the year will not change the basic strategy that has served us very well in the past. To continue to prudently invest in our established franchises and selectively invest in new opportunities like Skylanders or Destiny that have the potential to become established franchises, while always managing our costs very carefully. Regardless of near-term risks, our focus and disciplined approach has served us well for over 20 years, and we expect it to the continue to deliver superior shareholder returns over the long term. We're optimistic that our leadership position, scale, infrastructure, and talent will allow us to take advantage of the positive long-term fundamentals of our industry.

Looking ahead over that longer-term time horizon, we see many exciting opportunities, including new platforms, new geographies, and new business models. We're continuing to invest against these opportunities, and while near term there are challenges, particularly those related to the console transition that are real, they are not unique. We've faced similar challenges many times in the past. Our product pipeline and go-to-market plans, both for the remainder of the year and for the future, are strong; our strategy is sound; and our talent is unmatched, all of which gives us confidence in our future, now as an independent Company with a very heavily invested management team.

Now I would like to turn the call over to our Chief Financial Officer, Dennis Durkin, who will review the transaction and our Q2 financial performance and our outlook for remainder of the year. Dennis?

Thank you, Bobby. Good afternoon, everyone. Today I will start with a brief recap of the Vivendi transaction we announced last week, followed by a review of our June quarter results and our outlook, both pre- and post-transaction for Q3 and for the remainder of the year. The transaction, which was unanimously approved by the special committee of the Board of Directors for Activision Blizzard, as well as our overall Board, is expected to close by the end of September 2013, subject to customary closing conditions. Following the closing of the transaction, Activision Blizzard will no longer have a controlling shareholder, as approximately 63% of our outstanding shares will be owned by public shareholders. 24.9% will be held by an investor group led by Bobby and Brian, and 12% will be held by Vivendi. As part of the transaction, Activision Blizzard will buy back approximately 429 million shares, or approximately 38% of our outstanding shares for $13.60 per share, or a 10% discount to our pre-announced price, or a 24% discount to yesterday's closing price. Activision Blizzard will fund the deal, including estimated transaction fees and upfront interest, with approximately $1.2 billion of balance sheet cash and $4.75 billion of newly issued debt.

In addition, we also expect to establish a $250-million revolving credit facility, which will be undrawn at closing. We have already received committed financing for the transaction from Bank of America Merrill Lynch and JPMorgan. On a closing, we expect to pay Vivendi approximately $5.83 billion for their shares, which would leave us with more than $3 billion in cash on hand, most of which is foreign cash and all of which helps secure future financial stability. Going forward, we believe that our free cash flow generation will support the debt we are taking on, while also allowing us the flexibility to continue to invest in our business and drive value for our shareholders over time. Following the closing of the transaction, Activision Blizzard will have a new capital structure, which reduces our weighted average cost to capital and nearly doubles our return on equity.

Now turning to our better-than-expected Q2 results, which we announced on a preliminary basis last week. Please refer to our earnings release for full GAAP to non-GAAP reconciliations. For the quarter, on GAAP basis, we generated revenues of $1.05 billion, record Q2 operating margins of 41%, and EPS of $0.28. On a non-GAAP basis for the quarter, we generated revenues of $608 million and operating margin of 20% and EPS of 0.08. Our Q2 revenues and earnings were lower than in the prior year, as expected, because we didn't have a comparable to the record-setting launch of Diablo III in May of last year. During the quarter, revenues were driven by Call of Duty, Skylanders, and Blizzard's World of Warcraft. Digital channels generated a record 63% of total Q2 non-GAAP revenues led by World of Warcraft and Call of Duty.

Turning to the specific P&L items, please note that all percentages are based on revenues. For GAAP in Q2, product costs were 22% and total operating expenses were 37%, both better than our outlook due to the product mix and timing of expenses. For non-GAAP in Q2, product costs were 26% and total operating expenses were 55%, again, favorable to our outlook due to product mix and expense timing. In terms of cash flow, we generated Q2 operating cash flow of $109 million and free cash flow of $90 million. And for the first six months, we generated record operating cash flow of $434 million and record free cash flow of $398 million. During the second quarter, we also paid $216 million to shareholders via the $0.19-per-share dividend we distributed in May. From a balance sheet perspective, as of June 30, we ended the quarter with no debt and $4.6 billion in cash and investments, or nearly $4 per fully diluted share. Of that amount, approximately 60% was held outside the US.

Now moving to our outlook, we have had a solid first half and a good start to the year, but as we have been saying since last November, we believe that the back half of this year will be challenging, due to a more crowded competitive slate and continuing uncertainties relating to the console transitions that are still in front of us. While these factors continue to keep us cautious, we are raising our GAAP full-year outlook, as the vast majority of our GAAP revenues and earnings occur in the first half of the year and are now behind us. Conversely for non-GAAP, where the majority of revenues and earnings are still in front of us in the second half of the year, we are maintaining and affirming our full-year outlook, given the risks I just mentioned.

Now on to the numbers. First, on a pre-transaction basis, starting with the third quarter. Our guidance reflects the launch of Activision Publishing's third [in source] DLC map packs for Black Ops II and the September 3 launch of Blizzard Entertainment's Diablo III for PS3 and Xbox 360. For the September quarter on a GAAP basis, we expect net revenues of $635 million, product costs of 23%, operating expenses of 68%, a tax rate of 26%, and a fully diluted weighted average share count of 1.17 billion, which can be used for both GAAP and non-GAAP in Q3 and Q4. Finally, we expect GAAP EPS of $0.03. On a non-GAAP basis, we expect net revenues of $585 million, product costs of 25%, operating expenses of 66%, a tax rate of 27%, and non-GAAP EPS of $0.03. For the December quarter, we expect GAAP net revenues of $1.3 billion and GAAP earnings per share of $0.06. On a non-GAAP basis, we expect net revenues of $2.25 billion and EPS of $0.54. For the full year on a GAAP basis, we expect net revenues of $4.31 billion, product costs of 24%, operating expenses of 48% and a tax rate of 26% for the full year. Our 2013 fully diluted weighted average share count is expected to be 1.16 billion for both GAAP and non-GAAP, and GAAP EPS is expected to be $0.77. On a non-GAAP basis, we expect net revenues of $4.25 billion with product costs of 26%, operating expenses of 44%, a tax rate of 27%, and EPS of $0.82. Again, all the numbers I just referenced are on a pre-transaction basis, consistent with how we have reported and forecast in the past.

Now let's look at the numbers on a post-transaction basis, as we expect they will be reported in our financials for the balance of the year. As we said, we expect the transaction to close in late September, and today, we are also providing a post-transaction outlook, as it will be reported with only one quarter of accretion. To keep the modeling simple, we've assumed that our new capital structure will be in place at the start of the fourth quarter. Any Q3 impacts are expected to be relatively immaterial to the Q3 outlook I just provided. For GAAP, we expect Q4 EPS of between $0.01 and $0.04, depending on our final financing costs, based on a fully diluted weighted average share count of 743 million shares, which can be used for GAAP and non-GAAP. For the full year, we expect GAAP EPS of $0.80 to $0.82 based on a fully diluted weighted average share count of 1.05 billion, which can be used, again, for both GAAP and non-GAAP. On a non-GAAP basis, we expect Q4 EPS of between $0.76 and $0.79, again, depending upon our final financing costs. For the full year, we expect non-GAAP EPS of $0.85 to $0.87. Keep in mind, the full-year reported EPS is based on full-year net income divided by the time weighted average shares outstanding in the year, not the sum of the quarters. Given the reported numbers will only show the lower share count in Q4, as well as the corresponding interest payments in that period, the pro-forma full-year EPS may give a better sense of our earnings trend, particularly as you look to future periods.

So let's take a look at the numbers object a pro-forma basis, assuming the transaction took effect January 1, 2013. In that case, our GAAP EPS outlook would be $0.91 to $0.99, and our non-GAAP EPS outlook would be $1.01 to $1.09, reflecting as much as 29% and 33% accretion on a GAAP and non-GAAP basis respectively. The significant accretion reflects the 38% reduction in shares outstanding at closing, partly offset by approximately $150 million to $225 million in incremental after-tax interest expense associated with the new debt. These accretion trends may be useful in thinking about our 2014 outlook, which we will provide more detail on in future calls.

So in summary, although we had a solid Q2 and first half of the year, we remain cautious about the short term and back half of 2013. Longer term, we are excited about the future for our Company and industry and committed to continuing the strategies that have successfully guided us through many difficult market transitions in the past. Notably, focus on doing a few things exceptionally well, managing our costs very carefully, and delivering superior long-term value to both our customers and our shareholders. Our new ownership structure should make it easier to stay true to this mission. ¶ With all that said, let me now hand the call over to Eric to discuss our Activision Publishing business.

Thank you, Dennis. I'm pleased to report that in Q2, Activision Publishing delivered another record quarter with record digital revenues and operating income. This follows a record Q1 and record years in operating income in 2011 and 2012. We currently have the industry's number-one and number-two titles year to date, including toys and accessories with Skylanders Giants and Call of Duty-Black Ops II. This made Activision Publishing the number-one video game publisher in North America and Europe combined in both Q2 and year to date. Such remarkable success would not be possible without the talent and passion of our employees and the support of our partners around the world.

Year to date, Skylanders was the number-one title in North America and Europe. Since its launch, Giants software and toys units are up significantly over Skylanders-Spyro's Adventure in the prior year. Franchise continues to break new ground and create new revenue streams. In fact, during Q2 Skylanders was named best overall -- license -- overall best licensing program of the year in 2013 by the Licensing Industry Merchandisers Association, a remarkable achievement for a franchise that is still less than two years old. Skylanders continuing success is based on sustained innovation and superior game play. The team has delivered outstanding execution and inspired creativity in all aspects of the game, which has helped the franchise shatter records, generate over $1.5 billion in retail sales through July 31 since launching October 2011.

On October 13, Skylanders-Swap Force will introduce an all-new play pattern with dynamic swapability, which creates all new play options. Swap Force will be our deepest and most immersive Skylanders world yet. Both the characters and the game looked great at E3. The press have been incredibly positive, and retailers have committed over 25% more space than last year. While this genre we've created will face more direct competition than ever before, every indicator tells us that Skylanders franchise is solidly on the rise and has both the cultural momentum and the product innovation to keep it that way.

Now let's turn to Call of Duty, one of the world's largest entertainment franchises and which grew strongly in Q2 and in the first half of this year. During the quarter, the scale of our on-line community and on-line play both set records. The level of engagement drives visual sales, which in turn drives more engagement in a virtuous cycle. In Q2, Call of Duty set digital sales records which grew over 100% year on year. And at retail, Black Ops II sales exceeded Modern Warfare III sales in the prior year. Later this year, we expect to launch Call of Duty-Ghosts on the Xbox 360, Playstation 3, Xbox1, Playstation 4, PC, and Wii--U. Call of Duty-Ghosts is a new sub-brand developed by Infinity Ward, the studio that created the original Call of Duty and the seminal Call of Duty-Modern Warfare series, and features an all-new world, story, characters and experiences, all powered by a new, next-gen engine.

As one might expect in this console-transition year, pre-orders for Call of Duty-Ghosts are well below the record-setting pace set by Call of Duty-Black Ops II last year. However, our quantitative consumer research indicates that hesitation amongst past [cog] pre-orderers is primarily due to not knowing which platform they will be playing on, which is natural at this time in the console transition. It's worth mentioning that Ghosts pre-orders are over double those of Call of Duty-Black Ops, which was the last time we launched a new sub brand for the franchise. It's also worth mentioning that our other key engagement metrics from the number of people playing per month to the number of playing daily to DLC sales to video views to community engagement are all significantly ahead of past years. We also have in place the most aggressive marketing, retail, and digital programs in the history of the franchise. We've made substantial investments to make Ghosts a showcase for the next-gen consoles and also the best current-gen Call of Duty title ever.

Looking to 2014 and beyond, in addition to our portfolio of annualized titles, as you know we are developing Call of Duty online with Tencent for the massive Chinese online gaming audience, although we have nothing new to announce today. And as many of you saw at E3, we've been working with Bungie on Destiny, the breakthrough game that brings first-person action gamers together in a shared, persistent online world. The game is on track for a 2014 launch. The reception at E3 was nothing short of inspiring, with Destiny receiving over 50 awards, including 20 Best-of-Show accolades. We strongly believe that we are on-pace to set the all-time pre-order record for a new IP. Based on what we have seen, we believe Destiny has the potential to become the third active $1-billion franchise in the Activision Publishing portfolio.

While we're excited about our fall pipeline and feel good about our go-to-market plans, the rest of this year will be competitive. We expect more direct competition for Skylanders, and Ghosts will launch into an even more crowded holiday slate than previously expected. In addition to the uncertainties brought about by new consoles, the new consoles themselves will be competing for our fans' time, attention, and dollars. So in summary our record results in Q2 affirm our focused strategy of delivering the best AAA titles in the industry, which drive year-round engagement and monetization. This strategy build Call of Duty and Skylanders and is the cornerstone of our pipeline of new intellectual properties. It has served us well in the past, and we expect it to help us expand our leadership in the future. Now I will turn it over to Mike Morhaime.

Thank you, Eric. Q2 was a relatively quiet quarter when compared against last quarter, which included StarCraft II-Heart of the Swarm launch, and Q2 2012, when we launched Diablo III. We've been making great progress on Diablo III console and Hearthstone, along with other ongoing projects, which I will discuss shortly.

Starting off with World of WarCraft, we ended the quarter with about 7.7 million subscribers worldwide, with the decline split about evenly between east and west. The most recent content update in late May has had a positive impact on stabilizing the churn rate in both regions. Our next major content update, Siege of Orgrimmar, is currently in the public testing phase. This update includes a massive new raid dungeon and new questing area, as well as some new features. Proving Grounds is a way for players to learn the skills they need for end-game content. And flexible raids allows groups of varying sizes to enjoy end-game raiding. This will make it easier for players to experience compelling end-game content with their friends. In addition to sustaining engagement for existing players, we believe these features can help make the transition back to the game more compelling for returning players as well. We look forward to releasing this update in the coming weeks.

Before I get into the other game updates, I want to say a few words about our unannounced project, code named Titan. We're in the process of selecting a new direction for the project and re-envisioning what we want the game to be. And while we can't talk about the details yet, it is unlikely to be a subscription-based MMORPG. I also want to re-iterate that there has not been an official announced or projected release date. What I can say is that the commitments quality that has always been at the core of Blizzard values -- and we've gone through this type of iterative development process several times in the past on the way to creating genre-defining games. As we continue our assessment, we have shifted some of the resources from the team to our other franchises, including World of Warcraft and Blizzard All-Stars, which we believe will add immense value to those project.

On the Diablo III side, we announced a September 3 street date for the Xbox 360 and Playstation 3 versions of the game. Our showing at E3 was a great opportunity to reintroduce ourselves to the console gaming audience. The development team has done a lot of work to tailor Diablo III for a living-room experience. And these subtle changes have been very well received by the press. We'll be sharing more Diablo-related news at Gamescom later this year.

Moving on to StarCraft II, we just launched Heart of the Swarm in China a couple of weeks ago, and in these early stages have seen a jump in currency in the region. In addition, our year-long StarCraft II world-championship series is currently in its second season with the season finals taking place later this month at Gamescom in Germany. We've also been putting a lot of focus on Blizzard All-Stars, our upcoming free-to-play online game. Action RTS games have become increasingly popular over the years. As we have in the past with games like World of Warcraft and the original Diablo, we're looking to put our own spin on this genre and challenge some of the existing design paradigms. We've reached a significant internal milestone with Blizzard All-Stars, going into wider internal testing, and will have more to say about the game later this year.

Rounding out our announced game projects is Hearthstone, our new free-to-play digital collectible card game. Hearthstone will launch initially on Windows and Mac PC, followed by iPad soon after. We've made great progress polishing the game through internal testing, and we'll be reaching the external test phase very soon. Our promotions in the last quarter, which included several live-stream game-play demos have generated great buzz for the game since we revealed it at PAX East in March. Not only will this be our first game on iPad, it will be the first time in a very long time in a very long time that we have announced a game and launched it within the same year. This reflects the philosophy behind the small team of Blizzard veterans developing Hearthstone to create Blizzard-quality games on a smaller scale.

Looking ahead, we have BlizzConn coming up on November 8th and 9th at the Anaheim Convention Center. The show will be a good one, with the latest Blizzard news, hands on with games in development, and of course, the global finals for our StarCraft II World Championship Series. We hope to see you there or following along via the on-line stream or on DirecTV. As we enter the back half of 2013, what we're showing at Blizzard is a broadening of our gaming portfolio. Just three years ago, we had one active game. Moving into the rest of 2013 and beyond, we will have several active and vibrant games across three major franchises on multiple platforms and with different business models. We'll continue to work hard on creating epic game experiences for our players and look forward to delivering those experiences in a variety of ways. Thank you, and I'll turn the call back over to Kristen.

Thank you, Mike. Operator, we'll go ahead and open it up for questions.

Thank you.

(Operator Instructions)

We ask that you please limit yourself to one question on today's. Brian Pitz, Jefferies.

With respect to holiday competition, can you give us your latest thought on marketing efforts for the holidays? Will there be a new strategy here? Should we expect marketing dollars to be up or down, or are you going to spend smarter dollars rather than more dollars? And with respect to the WoW subdeclines, I think last quarter was more Asia-based. Now it seems to be ramping up more in the west. Can you give us more color there on the split? Thank you.

I'll take the marketing portion of the question. This is Eric. As Bobby mentioned, I believe, in his comments, we expected marketing costs might well be up year over year. That said, we do have extremely strong plans already in place, and I think we've shown best-in-class marketing efforts in our ability to make our launches into real cultural events and make the unignorable. That's what we plan on doing this year.

On the WoW subdecline, in aggregate, in Q2 we did see a smaller decline than we saw in Q1. And I think it's very important to note the impact that our content updates have had since the most recent update mid-May. We have seen a very positive impact on the turn rate. At that's across both respects.

Got it. One more follow-up on WoW. There's been rumors in and out of the press of a potential movie set with the WoW theme. Any updates there?

I don't have any updates other than to say that we are continuing to work with Legendary Pictures. Duncan Jones has been selected as the writer-director, who has been actively working on the movie. And we continue to be very excited about it.

Colin Sebastian, Robert Baird & Company.

I have a question I want to follow up. First Mike, in the scenario that WoW were to continue declining, I'm wondering whether your priority, ultimately, would be to protect profitability of the franchise or to continue spending on potential growth initiatives? And then on the strategic priorities following the buyback, Bobby, you mentioned before perhaps acquisitions as one opportunity. I wonder if you care to provide any profile of what you might be looking for and maybe ranks some of the strategic options as well. Thank you. On the World of Warcraft side, our priority is to continue delivering great content to our players. We feel that WoW continues to be the top most compelling actively multi-player online role-playing game available. And we think it still has a very long life ahead of itself. We think that over time, we have seen players come and go and return to World of Warcraft. And we recognize that there's a lot we can do to make the experience of coming back to World of Warcraft -- the transition back into the game and meeting up with your friends, much easier than it currently is. And so I think that's a big opportunity for us.

And no, I can't comment on future acquisition plans.

Arvind Bhatia, Sterne, Agee.

Following up on the last one, want to give it another shot on the margin side for Blizzard, you have seen obviously a lot of fluctuation, depending on the mix of product. You had the best margins last year, close to 60%. And this quarter, because of the mix, are closer to the high 20%s. Where do you feel comfortable? I think historically, it's been in the high 30%s, low 40%s. Again, the balance between growth and profitability. Can you give us some ballpark of how you guys are thinking about margins?

So I'll just answer that from my perspective. Dennis can jump in if he wants. I think that the margins are very much influenced by our release schedule. And so World of Warcraft has much more stable margins, but when we release something like Diablo III, that's going to have a huge impact to the margins in that quarter.

I think in the past, you have that it is very release-dependent, like all of our businesses. Content ends up being a stimulus for the install base. But we're going to continue to invest to drive growth within the community and making sure we're balancing the customer experience and the player experience with our profitability goals. And we think you can do those two things hand in hand.

Drew Crum, Stifel.

One for Dennis, want to get your thoughts on securing interest rates on your debt below the 5% to 7% range you suggested last week. And then for Eric, talk about how your outlook has changed on Skylanders for the holidays and some of the movement around timing for the Disney product.

This is Dennis. With regards to your first question on financing costs, I think that range is the appropriate one, based -- and how you should think about what the potential could be. We're obviously going to do our best to maximize and optimize towards the low end of that range and try and build as much flexibility into our financing package as we can. We're moving as quickly as we can to try and market the deal and get the deal completed. Obviously we're in an interest-rate environment that has some volatility in it, although it has stabilized over the last 60 days. So we'll be watching that closely and moving as quickly as we can, but that's essentially the range that we're expecting to end up in.

On Skylanders, frankly, our outlook hasn't changed. The competition launching closer to our window is neither here nor there for us. We're focused on delivering what we think will be the best Skylanders game we've delivered yet, with another break-through, [play mechanic] with swappability, and the strongest marketing and retail support yet. Just when we thought we couldn't get any bigger after last year's retail presence, we've increased it by 25% again this year. For all those reasons, our financial outlook hasn't changed.

Edward Williams, BMO Capital Markets.

Eric, I want to go to Call of Duty on-line for a moment. What are the steps that we should be looking for next before that product actually gets a commercial release? Then as we think about it, the key thing for me is trying to get a sense as to the size of what that could be and when the contributions really kick in.

In terms of the next steps, we are still solidly in the development process and focusing on creating a great game. And we're taking the time that's necessary to make sure that we deliver that. As for the next steps, Tencent is a great partner. They're the ones who will really be leading the path to commercialization through governmental approvals, through the beta, through that sort of thing. So we're going rely upon them to guide us through that process. Our priority is getting the quality right. We feel that the production is going well.

I would add that I think Tencent's investment in the Company was recognition of the enthusiasm that they have for the opportunity.

Daniel Ernst, Hudson Square Research.

Question for Bobby and Mike. In the five years since you guys joined forces in the Vivendi transaction the first time around, there was a lot of hope and anticipation for synergies between the two Companies. And I wonder if you could comment on the things that you have accomplished over those five years together that you couldn't have done separately. And then comment on what you think you might be able to do in the next five years in working together, now that you're an independent Company without Vivendi.

And then, Bobby, on the console transition, as we move past the uncertainty of the timing and the launch quantities, what is your perspective longer term about the size of this coming cycle, with so many different options out there in gaming? Do you think this cycle could be bigger, smaller, the same size as the cycle that we're finishing now? Thank you.

Good questions. So we'll start with my perspective of the synergies. I think, remember that part of the original thinking behind the merger was that there were categories of business that Blizzard operated in that Activision didn't. So rather than us spending $1.5 billion like other competitors have investing in MMOs, as an example, without any success we viewed the merger would give us the opportunity to get insight and understanding about areas like Battlenet. And the impact of things like the insights we developed from Battlenet are really profound on Call of Duty. But we largely wanted to keep the culture of the Companies, the operations of the business independent. The things that were easy and obvious were the corporate functions, worldwide retail execution, which has been in the benefit of having a single-focused worldwide retail distribution organization has been hugely helpful.

There were process improvements that we made across the Company that got implemented both within Activision Publishing and in Blizzard. There's been talent moving between the businesses. I think one of the great benefits and insights that we developed as a combined Company was the opportunity in China. When we started out, Blizzard was successful in China, but probably one of the most successful western entertainment companies in China. And I think that you put that in perspective, I'm not just saying game Company. I think when you look at the success that Blizzard has had in China, it's probably the most successful western entertainment Company in China. And that insight has been hugely helpful in shaping the combined Company thinking about how to address China.

Obviously then, on things like purchasing scale and leverage, on servers and data centers, and negotiating all the things that relate to the back end of products like Call of Duty or World of Warcraft, and I think will you continue to see the first few years, were really focused on just continuing to operate and execute. The next few years, we had the benefit of really starting to understand synergies, and I think the next five years, you are going to see a lot of the benefits of the combination. This year in particular, the launch for the first time of a Blizzard console game, as an example. But I think when you think about the relationships that we have with first parties, they've certainly benefited Blizzard. We could probably spend the conference call talking about all of the benefits that we've seen in the way that we manage our talent development process and evaluate performance in establishing metrics for evaluating performance and rewarding performance. But I think you will see the next five years a lot of the benefits of the synergies that we've really explored over the last few.

Just a couple points that Bobby may not have mentioned. I think that when we first did the merger, I think we all recognized that there were certain complementary areas of expertise that Blizzard had and that Activision had. And I think that there is definitely an ongoing benefit. Even if we're not contributing directly on each other's products, there is some really good knowledge-sharing that's happening between the two Companies, the two divisions, in giving each other advice and sharing the lessons that we've learned in various aspects of game making. And so I think that that's helping us on the console side of the business. And I think that there are things that as we move into different business models, Activision and Blizzard both have complementary experience dealing with different types of games that potentially could be applied, or at least help us navigate new space.

But at the end of the day they are separate business operations with separate management, separate strategy, separate business plans, and we've viewed that as a big benefit. One thing to point out is, when we did the original merger, it was with Vivendi Games, and there was a whole Vivendi game operation independent of Blizzard that needed to be dismantled, projects that needed to be terminated, canceled, or sold. And so there was a fair amount of synergy getting that just came from eliminating unproductive investments that had been made in the Vivendi Games side of the business.

Got it. On the new cycle?

What was the second question?

On the new cycle, your thoughts on the scale of the coming console cycle, whether it could be bigger, smaller, same size.

If you look back in history, what you've seen is that every new cycle has been larger than the prior cycle. I don't know that we've had the same number of competing platforms or opportunities to deliver interactive entertainment, but I will say this. I think that most manufacturers are delivering on the promise of excellent hardware. We have much more visibility today than we even did three months ago, and I think we've both made great progress. I think they're going to put more marketing money against the launches than ever before. I think they have both learned a lot about how to improve and enhance supply chain and manufacturing efficiencies. I think when you look at all of these new benefits that will come from direct digital distribution, the ability to have an always-on device, I think there's a lot that you look at in terms of features and capabilities, whether it's social gaming, whether its some of the enhancements, improvements you see in graphics processing, or the efficiencies in Sony's case, in reducing all of these parallel processing devices to a much more clean architecture.

But my sense is that I think consumers are going to be excited about this hardware. And I think that over the long term, they'll probably be if not as long as what we've seen in the current cycle, roughly the same amount of time. And I think that you are going to see new kinds of software that has not been available in this current generation. I just see in the things that we're working on and the things that we're developing, things that we've never been able to do before that I think will excite audiences in ways that we haven't seen before.

Doug Creutz, Cowen and Company.

One for Dennis. Could you just confirm that the share count you're giving for the back half of the year seemed a little higher than I would've expected. Is that due to some additional dilution created by the rise in the stock price? And then for Eric, you said the fall window is going to be even more competitive than you had -- were projecting. What's changed in the last three months to alter your view on that? Thank you.

Thank you, Doug. I'll handle the first one, and then hand it over to Eric. Since our guidance, with the stock price move we had more diluted shares, as well as, as you go through the year, we're granting more shares to employees. So you want to make sure you're comparing the right periods in there. When you look on the slide in our deck here that has the different pre transaction, post transaction, the Q4 number is really probably the closest, because that's the weighted average for that Q4 post-transaction number, the 743 million number. That's probably the best number to use when you start thinking about next year as a fully diluted number. And it is as a result of the increased share price and all the other things that have happened during the course of the year.

As far as the competition in Q4, the relative statement was versus last year. And also there have been some key competitors that have moved into the fall quarter, the Q4 of closer to our launches. That's what I was referring to.

And I would like to turn the conference back over to Kristin Southey for any additional or closing remarks.

Thank you. On behalf of everyone at Activision Blizzard, we want to thank you for your time and consideration. And we look forward to speaking to you in the future. Thank you.

Again, this does conclude today's conference. We thank you all for your participation.