動視暴雪 (ATVI) 2013 Q4 法說會逐字稿

Good day, and welcome to the Activision Blizzard quarter four 2013 results conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn today's call over to Kristen Southey. Please go ahead, Kristen.

Good afternoon, and thank you for joining us today for Activision Blizzard's fourth-quarter 2013 conference call. With me today are Bobby Kotick, CEO of Activision Blizzard, Thomas Tippl, COO of (technical difficulties) 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 making statements that are not historical facts. These are forward-looking statements that are based on current expectations and assumptions that are subject to risks and uncertainties.

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, including the factors discussed in the risk factor section of our SEC filings, including our most recent Quarterly Report on Form 10-Q, which is on file with the SEC, and those indicated on the slides that are showing.

The forward-looking statements in this presentation are based on the information available to the Company as of the date of this presentation, and while we believe them to be true, they ultimately may prove to be incorrect. The Company undertakes no obligation to release publicly any revision of any forward-looking statement to reflect events or circumstances after today, February 6, 2014, or to reflect the occurrence of unanticipated events.

I'd like to note that certain numbers we will be presenting today will be given 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 [video] games, expenses related to stock-based compensation, the amortization of intangibles assets, expenses related to the purchase transaction and related debt financing, and the associated tax benefit. Please refer to our earnings release which is posted on www.activisionblizzard.com for the 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 12-quarter financial overview, highlighting both GAAP and non-GAAP results and a one-page summary sheet.

This quarter we also [evaluate] a number of EBITDA metrics to our earnings release and slides for our new (inaudible) investors and analysts.

And now I'd like to turn it over to our CEO, Bobby Kotick.

Thank you Kristen, and thank you for joining us today.

2013 was a transformational year for Activision Blizzard and for our industry. On October 11, Activision Blizzard became an independent company once again. The majority of our shares are in the hands of public shareholders, many of whom are long-term committed investors, including our Chairman, Brian Kelly, and me.

Our transaction with Vivendi delivered immediate benefits to our public shareholders in the form of significant earnings per share accretion. Even more importantly, this transaction gives the Company new focus and flexibility.

Our combination with Blizzard five years ago brought together in one company the two most creative talented groups of employees in our industry, and a collection of some of the most valuable intellectual property in all of entertainment. The merger also came with the majority shareholders, whose interests, understandably, were not always aligned with the interest of Activision Blizzard.

The challenges and constraints that came from being a controlled company, have all been eliminated, and we believe, as an independent company, we can generate strong returns for all of our stakeholders, as we have for over 20 years. For the full FY13, Activision Blizzard delivered better than expected financial results, based on the continued success of our gains.

On a non-GAAP basis, we generated over $4.3 billion in revenues, a 31% operating margin, earnings per share of $0.94, and operating cash flow of over $1.26 billion. Our Board of Directors authorized an increase in our annual cash dividend to $0.20 per share, and an accelerated debt repayment of $375 million, based on our strong cash flows.

Over the past five years alone, we've returned almost $10 billion to our shareholders in the form of dividends and share repurchases. This may be more value than the enterprise value of most of our major competitors combined.

Our great results this year and every year are due to the remarkable talent and relentless commitment to excellence of our employees around the world. Their efforts, aligned with our long-term strategy and operating discipline, continue to produce industry-leading creative and commercial results.

We were once again the number one independent console and handheld publisher in North America and Europe combined, including toys and accessories. We have the most successful based MMORPG of all time, and we continue to lead our industry in our ability to generate free cash flow from operations.

Here are some of the highlights from 2013, which you'll be hearing more about later in the call. Activision Publishing's Call of Duty Ghosts was the number one game across all platforms, and the number one next generation game on PlayStation 4 and Xbox 1 in both North America and Europe in the fourth quarter, establishing Ghost as the third sub-brand for the Call of Duty franchise, in addition to Modern Warfare and Black Ops.

For 2013, including toys and accessories in North America and Europe combined, Skylanders was the number three overall video game franchise at retail across all platforms. And in the fourth quarter, Skylanders was the number one children's franchise again. In 2013, Blizzard Entertainment's StarCraft 2 Heart of the Swarm was the number one PC title in North America.

Diablo 3, following its record-breaking success on the PC, was the first Blizzard game to come to console in more than a decade, launching on Xbox 360 and PlayStation 3 in 2013. And Diablo 3 ended the year with over 15 million units sold through cumulatively across all platforms, which bodes well for the upcoming launch of the Diablo 3 PC expansion pack in March.

And World of Warcraft remained the number one subscription based MMORPG, ending the year with approximately 7.8 million subscribers. Much to our positive surprise, the Xbox 1 and PlayStation 4 sold over 7 million units combined in 2013, faster than their predecessors did at their launch.

Not only did these devices deliver faster processing and better graphics, but these new consoles and continuing improvements to broadband infrastructure worldwide, provide new and improved capabilities for online gaming, including same-day downloads, improved social features, and new opportunities for emerging potentially higher margin business models, like the sale of virtual items, downloadable content, and other value-added online services that will provide a greater flexibility for our audience to access, consume, and pay for content. The new consoles should be catalysts for growth in margin expansion, and over the next 2 to 3 years, as their install base grows, we expect to have greater opportunities to capitalize on a rapidly expanding audience, broader international penetration, and more profitable business models.

In 2013, we also saw, for the first time, large creative opportunities, coupled with sizeable financial returns on mobile devices and tablets. These categories had much more limited potential in the past, but we believe our careful investments over the last few years will likely result in great new types of games, as well as strong financial returns beginning this year, and growth and international expansion in the future, particularly in geographies like China.

In particular, free-to-play games have achieved scale that should now allow us to realize great returns from the investments that we have been making in this area. Over the next few years, we plan to introduce at least three potential groundbreaking franchises operating on our free-to-play transaction systems, designed to appeal to players across numerous platforms and in numerous geographies.

These games, including Hearthstone, Heroes of Warcraft, Blizzard's Heroes of the Storm, and Call of Duty Online all have enormous potential. We released Hearthstone in closed beta in 2013 and in open beta earlier this year on PC only.

It is off to an incredible start, attracting millions of players in both the West and in China, with strong engagement and monetization. Hearthstone is on track to join World of Warcraft, Diablo, and StarCraft as Blizzard Entertainment's fourth mega franchise.

In 2014 we plan to launch Hearthstone on tablets and smartphones. This is a first for Blizzard, and it will enable fans around the world to play Hearthstone on hundreds of millions of additional devices. In many countries, the mobile internet is the fastest-growing entertainment platform, and Hearthstone is well positioned for great success.

Heroes of the Storm, which we showed at BlizzCon and are continuing to develop, will bring together for the first time iconic Blizzard characters from across all franchises in an accessible free-to-play online universe. And Call of Duty Online, which will be launched first in China with our partner Tencent, will bring the leading video game franchise to Chinese audiences in a free-to-play game and in a genre that is now a leading game category in China.

Over the next few years, we expect to realize the broad potential and increased opportunities for monetization from these games, and we'll be bringing our focused expertise at developing and investing against these franchise for the long term to excite audiences for many years to come. We believe our new games have the potential to be among the largest and most profitable in their respective categories, and could generate meaningful profits over the next few years.

In addition to our established brands, we are currently deep in development with the richest slate of new IP in the Company's history, which should position us well for long-term growth. In 2014 we expect the global video game industry will grow, and we plan to release several new games that we hope will set new benchmarks for innovation, and should enable us to grow revenues year over year and well into the future.

In 2014, Activision Publishing plans to release new games based on Call of Duty and Skylanders, as well as Destiny, our new game from Bungie, which has the potential to be our next billion dollar franchise. Destiny delivers a groundbreaking new universe and it capitalizes on advances in connectivity to create an innovative shared-world action experience. We expect that Destiny will become the best-selling new video game IP in history when it launches across Xbox and PlayStation consoles on September 9.

In 2014, Blizzard Entertainment plans to deliver more new content to its audiences than ever before. I already mentioned Hearthstone, its great start, and our plans for the year to expand it to new platforms.

On March 25, Blizzard will release Diablo 3, Reaper of Souls, the PC expansion to the record-breaking Diablo 3. Blizzard is also working on an exciting new expansion for World of Warcraft, Warlords of Draenor, which it unveiled to great excitement at BlizzCon.

Blizzard continues to work on Heroes of the Storm, which I mentioned earlier. Although like Call of Duty Online, no launch date has been announced, we look forward to sharing more about this game with you in the future.

2014 is our first full year with new consoles from Sony and Microsoft, our first full year of renewed independence, and our first year of commercializing broad appeal free-to-play games. In 2014 we also plan to launch the biggest new IP in our Company's history, Destiny, and perhaps the best Call of Duty game ever created.

We remain well positioned to pursue the many opportunities throughout all of interactive entertainment, whether new business models, new platforms, new geographies, or new genres. In 2014 and beyond, we're well positioned to take advantage of these trends to provide great games for our fans and strong returns for our stakeholders.

Now, Dennis will review our results and share our outlook with you.

Thanks, Bobby. Good afternoon, everyone. Today I will review our better than expected Q4 and full year 2013 financial results, and then I'll review our outlook for growth in 2014. From nearly every perspective, 2013 was an important year for Activision Blizzard.

We've been talking about the risks and volatility associated with the console transition for more than a year now. As expected, these risks materialized in Q4, as strong next gen demand was unable to offset the decline in current gen software.

We also saw a significant amount of consumer spending shift from software to hardware with the new console launches. Despite the volatility and uncertainty of this transition, Activision Blizzard still produced better than expected financial results, achieved a non-GAAP operating margin of 31%, and generated operating cash flow of more than $1.26 billion.

In addition, this year we returned to independence, and improved our capital structure in a highly accretive way by our 429 million share repurchase from Vivendi. We also paid out over $215 million in dividends.

Operationally, we were the number one Western publisher, and established a leadership position on next gen consoles. We also continue to invest our capital in the strongest pipeline of new opportunities in our history.

In summary, 2013 was an important year that delivered solid financial results amidst a challenging backdrop, while setting the stage for portfolio expansion, revenue growth, and record EPS in 2014.

Turning to our financial results, please refer to our earnings release for full non-GAAP to GAAP reconciliations. Also, the numbers I'll be quoting are compared to the prior year, unless otherwise noted.

Our Q4 results were better than expected, with revenues in the quarter driven by Activision Publishing's Call of Duty Ghost, Skylanders Swap Force, and Blizzard Entertainment's World of Warcraft. Turning to the specific P&L items, please note all percentages are based on revenues, except for the tax rate.

For Q4 on a GAAP basis, we generated better than expected revenues of $1.52 billion and an operating margin of 19%. We had interest expense of $51 million, and our tax rate was 25%.

Our GAAP and non-GAAP fully diluted share count was 780 million, and GAAP EPS was $0.22. On a non-GAAP basis for the quarter, we generated better than expected revenues of $2.27 billion and a better than expected operating margin of 38%. Our non-GAAP tax rate was 23%, and quarterly non-GAAP EPS was a record $0.79.

Our solid Q4 results capped a better than expected year. For the full year on a GAAP basis, we generated revenues of $4.58 billion, operating income of $1.37 billion, a tax rate of 23%, and EPS of $0.95.

On a non-GAAP basis for the year, we generated better than expected revenues of $4.34 billion, non-GAAP operating income was $1.36 billion, reflecting an operating margin of 31%, adjusted EBITDA margin of 33%, with adjusted EBITDA being defined as non-GAAP operating income plus depreciation. Our tax rate was 23% and our EPS was $0.94. We exceeded the non-GAAP outlook we gave last February for revenues of $4.18 billion by 4% and operating income of $1.26 billion by 8%.

In terms of cash flow, in 2013, we generated operating cash flow of over $1.26 billion and non-GAAP free cash flow of $1.19 billion. As Bobby mentioned, over the past five years our strong cash flow generation has allowed us to return $9.8 billion to shareholders via dividends and share repurchases, and today our Board of Directors approved two important capital allocation matters.

Based on our better than expected financial performance, the Board authorized a $375 million repayment of part of our term loan, which will be paid in February. In addition, for the fourth straight year, our Board approved an increase to our cash dividend per share to $0.20, payable in May.

Turning to the balance sheet, as of December 31, we had $4.45 billion in cash and investments, of which $1.1 billion was held domestically. We had gross debt outstanding of $4.7 billion and net debt of less than $300 million, putting our net debt to non-GAAP adjusted EBITDA ratio at approximately 0.2 times.

Now let's turn to our 2014 outlook, which calls for non-GAAP revenue growth, record digital sales, and record EPS, driven by the strongest product slate in our history, and the full-year benefit of our new capital structure. Beginning with Blizzard. This year, Blizzard will launch a minimum of three titles, its most ever in one year, which include a brand new franchise and unique monetization models.

Hearthstone, Blizzard's newest franchise, moved to open beta in January and already has millions of players globally, and early engagement and monetization trends look very promising. On March 25, Blizzard plans to launch the PC expansion Diablo 3, Reaper of Souls, and later this year Blizzard is expected to deliver another great major game release.

This year, we expect Activision Publishing will launch a record three tent-pole franchise titles. In Q1 and Q2, we expect to generate revenues primarily from Skylanders and Call of Duty catalog sales and downloadable content, although we do not expect these will exceed the first half performance in 2013, due to weakness in current [tent] sales.

In Q3, we expect to launch a Bungie's Destiny to drive revenues, although we will incur significant marketing expenses and amortization of development costs, which will impact the initial contribution to operating income, consistent with launching large new scale IP like this. And in Q4, we expect to launch new highly innovative games based on Skylanders and Call of Duty, which Eric will talk about in just a moment.

As Bobby mentioned, this year we will continue investing in new games with long-term potential in the fastest growing global segments, including Activision Publishing's Call of Duty Online for China and Blizzard's free-to-play Heroes of the Storm. We have not factored contributions from these games into our outlook because we do not have confirmed launch dates at this point.

Now before reviewing the numbers, please note that our new lower share count could result in higher EPS variability, especially in the smaller quarters. Additionally, we are launching more than one new unproven IP this year, which always has risk.

For 2014, we expect a slower first half of the year. In addition, because the majority of our major launches are in the back half of the year, which will mean greater revenue deferrals into 2015, we expect lower GAAP revenues and earnings in 2014 than in 2013.

For 2014, we expect GAAP revenues of $4 billion, product costs of 24%, and operating expenses of 53%. For both GAAP and non-GAAP we expect interest expense of $211 million, and a fully diluted weighted average share count of 750 million. Our GAAP tax rate is expected to be 20%, and GAAP EPS is expected to be $0.76.

On a non-GAAP basis, we expect revenue growth of 6% to $4.6 billion, product costs of 25%, and operating expenses of 43%, higher year over year due to the new IP launches I previously mentioned. We expect non-GAAP operating income growth of 8%, resulting in an operating margin of 32%, and an adjusted EBITDA margin of 34%.

Our non-GAAP tax rate is expected to be 25% versus 23% in 2013, due to discrete tax benefits realized in 2013 and the lack of a federal R&D tax credit in 2014. For the year, we expect non-GAAP reported EPS to increase 34% to a record $1.26.

In addition, and as we have done in the past, our full-year outlook for both GAAP and non-GAAP is based on prudent foreign exchange assumptions to protect ourselves against some level of potentially adverse fluctuations in currencies. The difference between our planning assumptions and current spot rates equates to about $0.07 of EPS.

For the March quarter, we have one major launch, Diablo 3 Reaper of Souls, arriving late in the quarter on March 25. And as I mentioned, we also expect current gen console sales, including DLC to be down year over year.

On a GAAP basis for the March quarter, we expect net revenues of $885 million, product costs of 33%, and operating expenses of 45%. We expect GAAP and non-GAAP interest expense of $54 million, a GAAP tax rate of 20%, a GAAP and non-GAAP share counts of 745 million, and GAAP EPS of $0.15.

For the March quarter on a non-GAAP basis, we expect revenues of $675 million, product costs of 24%, and operating expenses of 55%. We expect a non-GAAP tax rate of 26% and non-GAAP EPS of $0.09.

In terms of seasonality, we expect the year to be more back-end loaded, as our major new releases are scheduled to be in the back half of the year. So in summary, Activision Blizzard delivered better than expected financial results during a transformational year, which saw us return to independence, improve our capital structure, and establish a strong position on next gen consoles, while making progress developing significant new games and high margin business models.

In 2014, we expect to generate non-GAAP revenue growth and record non-GAAP EPS. We have never had larger opportunities, and have never had a better pipeline to address them.

As always, our focused strategy of doing a few things extremely well, while keeping a close eye on costs, has served us well, and we expect it to continue to serve us well in the future.

Now we'll turn the call over to Eric Hirshberg to discuss Activision Publishing.

Thanks, Dennis.

2013 was another year of industry-leading performance for Activision Publishing. We were the number one console and handheld publisher in North America and Europe combined.

We delivered non-GAAP operating income of nearly $1 billion, despite significant headwinds from the ongoing console transition. Our performance was driven by our two blockbuster franchises, Call of Duty and Skylanders, which, including toys and accessories, were two of the top three franchises in North America and Europe combined.

We also had 4 of the top 10 games of the year in both North America and Europe. Additionally, Call of Duty Ghost was the number one game in the fourth quarter in both North America and Europe, and was the number one game on both next gen consoles.

In 2013, Call of Duty was the number one franchise in North America for the fifth consecutive year. Call of Duty also delivered franchise record digital revenues and industry-leading engagement levels.

Also, in 2013, Call of Duty had 4 of the top 10 most-played games on Xbox live for Xbox 360. In addition, Black Ops 2 alone was played for 4 billion hours in 2013.

Skylanders was the number three franchise of the year in North America and Europe combined, and worldwide life to date has sold through approximately $2 billion at retail, including approximately 175 million toys. Skylanders reached these milestones faster than any property from an independent publisher in video game history. Also, Skylanders had the number one kids game for the third year in a row in North America and Europe.

We also continued to make progress on Call of Duty Online for China, and our next tent-pole franchise, Destiny. Destiny won over 50 awards at E3 and best-of-show at GamesCon.

Destiny finished 2013 as the most pre-ordered 2014 game and is on track to become the most pre-ordered new IP ever. We also believe we are on track to make this the biggest new IP launch in the industry's history.

In 2014, Activision Publishing, for the first time, has plans to deliver three tent-pole AAA franchises, positioning us well for growth. None of this would be possible without the tremendous creativity, effort, and dedication of our development teams, our employees around the world, the incredible support of our global retail and platform partners, and most importantly, the passion of our fans worldwide.

I want to thank Infinity Ward, Raven, and Neversoft for making a great game that our fans love with Call of Duty Ghost, and Vicarious Visions for making Skylander Swap Force the highest rated game in Skylander's franchise history.

Turning to our industry. In 2013 we estimated video games drove consumer spending in excess of $60 billion worldwide, which we expect to grow in 2014. We have never had more or larger opportunities.

The console cycle has started strong, and demand for next gen games was higher than expected, partially offsetting weaker than expected demand for current gen titles. In 2014 we expect demand for next gen games to grow; however, we again expect that to be offset by lower demand for current gen games. Long term we expect the new consoles to drive industry growth and expand our opportunities.

Let's talk about Call of Duty. Today we are announcing two significant changes to our development process that are both designed to insure even greater levels of innovation and creative excellence for each Call of Duty title. For the first time, this year's Call of Duty game and future Call of Duty games are being built on a three-year development cycle.

There are several advantages to doing this. The first is, of course, quality. This will give our designers more time to envision and to innovate for each title. Simultaneously, it will give our content creators more focus on DLC and micro DLC, which, as you know, have become large and high margin opportunities and significant engagement drivers. Finally, it will give our teams more time to polish, helping insure that we deliver the best possible experience to our fans each and every time.

In order to implement the three-year development cycle, we needed a third studio capable of delivering the level of excellence required for the West's biggest interactive entertainment franchise, which brings us to our next change in approach this year.

The development of this year's Call of Duty game is being lead by Sledgehammer Games. Sledgehammer is a AAA studio built from the ground up around proven talent with a 90-plus rated pedigree, both in studio leadership and throughout the organization. They've demonstrated their skill on Call of Duty Modern Warfare 3, and on their past highly rated games.

They are the perfect choice to support our new approach and bring fresh ideas and creativity to this great franchise, and to raise the bar for next gen games overall, which we believe they can do. We look forward to sharing more details on future calls.

During 2014, we also have exciting digital plans, including full game downloads, DLC, and micro DLC for Call of Duty Ghost. On January 28 we released Onslaught, the first DLC pack for the Xbox, which will be launched on other platforms shortly.

We're also once again offering Season Pass, which provides four Ghost DLC packs for a discounted suggested retail price of $50. In 2013, we introduce micro DLC items for the first time, and they've been very successful. This year for Ghost, we are expanding our micro DLC offerings, giving players a wider range of options to personalize and customize their experience.

So let's turn to Skylanders. In North America and Europe combined, Skylanders was the number three best-selling franchise in 2013, including toys and accessories, and we are focused on maintaining our leadership again this year.

For 2014, the latest wave of Swap Force toys arrived on retail shelves in January, and we have more toy releases planned for this year than we ever have before. For this Skylanders game, Toys for Bob, the originators of both the franchise and the genre are back at the helm. We expect our new game to once again move the category we created forward with yet another creative breakthrough and new play pattern. We will share the details with you soon, however for competitive reasons, we will be revealing the Skylanders game this year later than we have in previous years.

Now turning to Destiny. As Bobby said, we believe Destiny can be Activision Publishing's third billion dollar franchise, and we're working hard to make it the biggest new IP launch in video game history.

Bungie's last franchise was Halo, which sold over 50 million games on Xbox and Xbox 360, with an average 90 rating on their watch. The potential of pairing the creators of Halo with the publishers of blockbuster franchises like Call of Duty and Skylanders should be self-evident.

Together we are bringing gamers an ambitious and innovative game, which combines the intensity of great first-person action with the character investment and social connections of an RPG in a immense connected universe. We believe the game is on track to deliver record pre-orders for a new franchise. A public beta is planned for summer, and we expect to launch the game on September 9 on PS4, Xbox1, PS3, and Xbox360. We look forward to expanding this universe for years to come, and you'll see much more in the months ahead.

In addition to our 2014 slate, we are also focused on bringing the biggest console franchise in the West to the biggest online gaming audience in the world with Call of Duty online for China. Our partner, Tencent, redefined the free-to-play action game model in China, and is working closely with us to optimize Call of Duty Online for Chinese fans. This is a new and important opportunity for us and we look forward to updating you on our progress on future calls.

So to summarize, in 2013, Activision Publishing generated nearly $1 billion of operating income, and in 2014 we are focusing both on strengthening our leadership positions with our existing blockbuster franchises, while adding new, exciting pillars to our portfolio, each of which has massive commercial and creative potential. Our early success on the next gen platforms and our larger slate in 2014 should enable us to deliver even better financial results in the future. ¶

Now I'll turn it over to Mike Morhaime.

Thanks, Eric. Hello, everyone.

2013 ended on a strong note with our most successful BlizzCon yet,. More than 4.5 million viewers around the world tuned into the show, where we debuted two new games, Heroes of the Storm and the next expansion for Worlds of Warcraft, Warlords of Draenor.

More than 24,000 attendees got a chance to demo those games, in addition to Diablo 3, Reaper of Souls on PC and PS4, and Hearthstone, our free-to-play digital card game. We received very positive player feedback and press coverage on all of our games at BlizzCon, giving us great momentum as we head into 2014.

Before we look ahead, let's review World of Warcraft in Q4. Global subscribership in the quarter ended at 7.8 million subscribers worldwide. That's slightly above where we ended Q3, meaning that the player base has remained pretty stable for three successive quarters.

We attribute the strength in Q4 to a few factors. Excitement from BlizzCon, seasonality from the holidays, and our refresh of the recruit-a-friend program, which offers special tested mounts to players for bringing friends into World of Warcraft.

As we head into Q1, we're not going to benefit as much from the same factors that drove Q4, but we will continue to support ways to drive engagements as we move closer to the release of the next expansion. Warlords of Draenor will reintroduce players to some classic setting and characters from our Warcraft strategy games.

In addition to a new continent and new dungeons, Warlords will include garrisons, which is are personal fortresses within the game. Players can collect computer-controlled followers to work in their garrisons, customize the space with structures for special benefits, and invite friends to explore their personal piece of Azeroth.

Players will also get the ability to instantly boost one character to level 90 when they purchase the expansion. We recently announced that players will get access to this boost when they pre-purchase the game. So they will be able to enjoy their new max level character right away (inaudible)

We think that this is a great feature that will make it easier for friends to play together in World of Warcraft. It's also attractive for veteran players who have already experienced the leveling process multiple times and want to quickly raise a new character to do end-game content.

We also have some exciting news for Diablo 3, Reaper of Souls in Q4. The game will ship for Windows and Mac on March 25, and we began taking pre-orders in December.

We also kicked off beta testing in December, and feedback from players has been positive. The expansion will add a new class, the Crusader, as well as new areas for players to explore and new features, like adventure mode and Nephalem Rifts, which enhanced replayability. An overhauled loot system will make playing and collecting gear even more satisfying. We're also removing the auction house from the game on March 18, a change that has been welcomed by players.

I'd also like to talk a bit about Hearthstone, our free-to-play digital collectible card game. Players build decks of cards that consist of familiar spells and creatures from World of Warcraft, and battle against other players using the cards. Players can collect new cards simply by playing the game, or purchase cards with real currency. Entry into a special game mode, called Arena, can also be purchased with in-game gold or real currency.

Millions of players across North America, Europe, Asia Pacific, and Latin America participated in Hearthstone's closed beta test. And a couple weeks ago, the game transitioned into open beta, which means that anyone can now download the game without any special invitation. Concurrency across the globe has grown steadily since open beta started, and Hearthstone continues to be one of the most popular games watched on Twitch.

The launch of open beta is a great follow up to the success we had at BlizzCon, where 100,000 concurrent online viewers watched the finals of our Hearthstone Invitational Tournament. We also announced at BlizzCon that we're working on an iPhone and Android version of the game, which we expect to ship this year. In the near term. We hope to quickly transition into launching on iPad.

Hearthstone isn't the only free-to-play game on our slate. At BlizzCon, we also announced Heroes of the Storm, a new free-to-play online team brawler. Players can choose from an array of iconic Blizzard characters, customize their abilities, and team up with friends to battle other players.

Heroes takes a more fast-paced, accessible approach to a genre that has grown extremely popular in online gaming over the past few years. Players and press were very excited about the game at BlizzCon. We also showcased Heroes at G-star in Korea, where it was named most anticipated new game by a poll of G-star attendees.

Rounding out our franchises is StarCraft 2. The heart of this [one] expansion was the number one selling PC game at North American retail last year. And a couple weeks ago, we made the StarCraft 2 arcade available to anyone via the free starter initiative.

We're hoping this change will encourage new players to try StarCraft 2, and boost visibility on the thousands of user-made games and maps created using our in-game tools. Since the patch, we are seeing increased player engagement.

Going forward, we're continuing our e-sports efforts with the World Championship series. And we're hard at work on the final chapter to the StarCraft 2 saga, Legacy of the Void.

To sum up, Q4 was quite busy and exciting quarter for Blizzard. We drove excitement for all of our games with a very successful BlizzCon, and look to make 2014 a great year for Blizzard gamers with multiple game watches.

Thanks, and I'll turn the call back over to Kristen.

Thanks, Mike. And we'll start with questions. Operator?

Thank you.

(Operator Instructions)

We'll take our first question from Edward Williams. Please go ahead, sir.

Just looking at a couple things, if I could quickly. You guys continue to generate quite a bit of cash. Could you give us a sense as to how you prioritize dividends and stock buybacks, debt reduction and M&A activity? And then secondly, you alluded to it a little bit, but could you give us a sense as to the console transition, what we should look for, for demand for legacy software, adoption of new software from new systems, and what you're seeing at current retail inventory levels?

Hello, Ed, it's Dennis. Thanks for the question. I'll start with the first one, then maybe I'll hand it over to Eric to talk about some of the console transition trends. Obviously, our priorities with our new capital structure are around debt repayment and debt servicing. We're very comfortable with the leverage ratios that you see inside of our capital structure. It's very modest, and we obviously are committed to making sure that we're delivering value to all of our stakeholders. You see that via the dividend today.

We currently don't have a share repurchase authorized by the Board currently, but like all things, whether it's M&A or other activities, we're going to be opportunistic relative to new opportunities, whether those be inorganic opportunities, but with the same discipline that we've always used in terms of evaluating those and making sure they are going to be accretive to the things that we do as a Company. So I think those are largely the priorities relative to our cash.

As for the second part of your question, I'll take that. The console transition, there's really no surprise here for us. We've discussed consistently on previous calls that we expected the console transition to create some headwinds, and it has. The good news is that next gen is off to a great start, better than expected. The demand for current gen software is down perhaps a bit more than expected. And for those reasons we do have supply in the channel, but we also think we have great retail plans and proper funding in place to sell this inventory through.

Okay, great. Thank you.

We'll take our next question with Brian Pitz from Jefferies.

Thanks. Question's for Michael or maybe Dennis. Heroes of the Storm is going after a big market opportunity, and the game looks great so far from what we've seen. Given that Heroes, though, is a trickier free-to-play model, how should we think about the impact? How many users would really be required to deem it successful? And then quickly, on the level 90 boost for Warlords, what impact could this policy change essentially have on the WoW sublevels, longer term? Thanks so much.

On the Heroes side, from my perspective, I think it's too early to tell. Our focus right now is just getting the game right. On the level 90 boost and its impact to long-term sustainability of the game, I think actually we view this as a positive. I think on the one hand, I think it really helps with winning back players and making it easier for them to catch up to their friends. And also from a content creation standpoint, it allows your developers to really focus on the end game, which is where most players are anyway, and making that the most fun.

I would just maybe add two comments on top of Mike's to build on that. On the Heroes side, obviously that's a huge market opportunity. And we like to go after very large market opportunities, and we feel like we have a great IP to go after that. But it is about building a great game for that market. So that's the key to that as I mentioned in my remarks, it's not in our guidance for the full year.

And then the second one on the level 90 boost, to add-on to Mike's comments, another big factor is making it easier for returning players to come back to the game, which we think is obviously very important for those players who have lapsed out of the ecosystem. So we think that's obviously a positive as well.

Just real quick as a follow-on, any sense for potential pushback from the community on the level 90 boost for the guys who haven't left the franchise?

Well, we announced the plans for this at BlizzCon, and I'd say that the community reaction was very supportive.

Great, thank you.

Our next question comes from Colin Sebastian with Robert Baird and Company. Please go ahead, sir.

Thanks. One question first off, on Destiny. Just given how important that new franchise is in terms of growth this year. How secure should we feel with respect to the release timing, and ultimately who makes that decision, if there are any changes necessary, is that at the publisher level or developer level?

And then secondly in terms of World of Warcraft, Mike, the user base, any chance you can provide a split, or at least some indication around the trend line of users in western markets versus the lower value markets? I'm assuming, given the higher online subscription revenues, that this growth came from the west. Thank you.

So, this is Eric. I'll take the first question on Destiny. The best way for me to answer the question about the release date is that we have a very strong history of meeting our dates once they are announced. And we have every confidence that the game looks great and is on track, and we will deliver that -- we're planning on delivering that date.

As far as the second question, as with everything we do on Destiny, it's a partnership with our partners at Bungie. Our interests are completely aligned, and we're building this as a 10-year franchise, and we need the best game possible. So we make any decisions as we have in the past, as a partnership.

And the other part of the question was on the east/west split. So in Q4, we were slightly down in the east and slightly up in the west.

Thanks guys.

Thanks, Colin.

Our next question comes from Doug Creutz with Cowen.

Yes, thanks. I wonder if you could talk about Call of Duty a little bit. I think you acknowledged a little earlier in the call that you did have some inventory in the channel. Does that imply that the game underperformed what you were expecting going into the launch? And given that, and given the competition, the shooter genre coming into 2014, how should we think about your expectations for performance this year? Thank you.

Well, I think that I addressed it the last question about the channel inventory and the fact that there's really no surprise there. We expected the console transition to create some headwinds, and they have in the ways that I described. We think that we're properly funded to sell that inventory through. Looking forward to 2014, as both Bobby and I said, we have a superlative game in the works. And that we have some new approaches this year that we think are going to be very positive with the three-year development cycle, with the injection of some new creative leadership from some very talented folks at Sledgehammer Games, and that we think the 2014 game is going to be one of, if not the, best Call of Duty game ever.

Okay, thank you.

And our next question comes from Eric Handler with MKM Partners.

Yes, thanks for taking my question. It's been reported in the media that China's Ministry of Culture approved the Call of Duty Online back on December 4. And I'm just curious, what's holding back the official launch of that game? And same goes for Hearthstones as well. And then secondly, with Hearthstone, how much of your financial contributions do you expect to come from Asia versus the rest of world? And what type of financial, or what percentage of people, do you expect might be paying for the game?

So on Call of Duty Online, it's great to have the government's approval early in the process, and that removes a potential obstacle later, but that's very separate from the game development process and making sure that we have a great game, which is what's driving our launch schedule. And so we're approaching this as a sizeable long-term opportunity for the Company, and we're taking the time to polish the game and make sure that it's right before we launch it.

So then on the Healthstones question, Mike, you want to start with that and I can (multiple speakers)

We do have approval from the government to release Hearthstone, which allowed us to go live with the open beta in China concurrent with the rest of the world. With respect to financial contribution, we don't provide that type of guidance, but what I can stay is we are seeing similar trends globally in terms of very healthy engagement and monetization.

Great, thank you.

Our next question comes from Drew Crum with Stifel.

Okay, thanks. Good afternoon, everyone. So want to ask about Skylanders. Give us your thoughts on the competitive landscape in 2013, what you're anticipating for 2014, and any changes that might be brought to the game play. And then separate from that, Dennis, if you could comment on the timing and recognition of the NOLs you acquired as part of the Vivendi transaction. Does any of that contemplate in your guidance for 2014? Thanks.

Sure, Eric?

I'll take the first part on Skylanders. As far as the competitive landscape, again there's really nothing new for us here. We always have competition in every category we operate in, that's nothing new. Actually, what was new was not having competition for a brief spell on the Skylanders franchise because we invented the category. But as we've said a number of times, it was only a matter of time before competition entered the category, given the success of Skylanders. I think that the important thing to note is that we were able to grow the business in 2013, despite both the console transition and new competition for the first time. We grew and the category grew. We think that also shows the staying power of the play pattern, and we were able to outsell our competition from their launch forward and from our launch forward.

As for the future and any game play changes, as I said, we are not reviewing that just yet, but we remain focused on the thing that got us here, which is breakthrough creativity and breakthrough innovations and Toys for Bob is back to the helm this year. And all I can tell you is that we have a great game in the works that we're very excited about.

And then on the second question related to the NOLs, as you may recall from our comments last summer and then again in the fall, the $200 million tax benefit from the NOLs and the related indemnity from Vivendi are largely going to have a balance sheet impact and not a P&L impact. So they will effectively lower our cash tax payments over the course of the next four years when they are utilized, and essentially they will offset the purchase price per share that was paid. So lowering the $13.60 per share amount and equity. On a go-forward basis, our tax rate, including the interest tax shield from the debt that we now have from the transaction, is expected to be 25%, as I mentioned in my prepared remarks.

Thanks guys.

Thank you.

Thank you. Our final question of the day will come from Neil Doshi with CRT Capital.

Thanks, guys. Mike, wanted to know if you could talk about Diablo III Reapers of Souls, and how should we be thinking about the opportunity for that game, especially as it hits the consoles later on? And then also broadly speaking, what do you think could help reignite growth at World of Warcraft within the first subs for World of Warcraft beyond this year, but trying to get back to the levels that you guys had a couple years ago? Thanks.

Well, we're very excited about the upcoming expansion to Diablo. There's a lot of excitement in the community about new Diablo content. We don't provide forecasts in terms of how we think it will perform, but I guess if you want to compare it to previous expansion releases, Diablo does have a very large base, and it is larger than the Wings of Liberty base (inaudible) timely launched (inaudible) last year.

In terms of World of Warcraft, we think that the ongoing engagement of the game really is dependent on ongoing content, and we're continuing to invest in growing the World of Warcraft development team and creating new content, and really looking forward into getting into beta on Warlords of Draenor. We think there are a lot of great features that will drive engagement with the game and hopefully bring players back to the game.

Thank you.

Great, okay. On behalf of everyone at Activision Blizzard, we want to thank you for your time and consideration, and we look forward to speaking with you soon.

And that does conclude today's conference. We thank you for your participation.