動視暴雪 (ATVI) 2014 Q3 法說會逐字稿

Good day, and welcome to Activision Blizzard's third quarter 2014 earnings conference call. Today's conference is being recorded.

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

Good afternoon, and thank you for joining us today for Activision Blizzard's third quarter 2014 conference call. Speaking on the call today will be Bobby Kotick, CEO of Activision Blizzard; Dennis Durkin, CFO of Activision Blizzard; Eric Hirshberg, CEO of Activision Publishing; Mike Morhaime, CEO of Blizzard Entertainment; and Thomas Tippl, COO of Activision Blizzard.

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 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 Factors section of our SEC filings including our 2013 Annual Report on Form 10K which is on file with the SEC and those indicated on the slide that is showing. 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 ultimately may prove to be incorrect. The Company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after today, November 4, 2014, 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 a change in deferred net revenues and related cost of sales with respect to certain of our online enabled games; expenses related to stock based compensation; the amortization of intangible assets; expenses including legal fees, costs, expenses and accruals related to the purchase transaction, and related debt financing; and the associated tax benefits. Please refer to our earnings release which is posted on www.activisionBlizzard.com for a full GAAP to non-GAAP reconciliation and further explanation.

There's also a PowerPoint review 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 financial overview highlighting both GAAP and non-GAAP results and a one-page summary sheet.

Now I'd like to introduce our CEO, Bobby Kotick.

Thank you, Kristin, and good afternoon, everyone. We've never produced as much great content in one year as we have in 2014.

In terms of entirely new franchises, we successfully launched two major franchises again, adding to our content portfolio which includes some of the most valuable franchises in any medium. Launching franchises that appeal to global audiences requires inspired creative talent, commitment to innovation, business and process discipline, best-in-class execution, long-term focus, and significant capital resources.

Our unyielding commitment to excellence resulted in launching Destiny as the most successful new IP in gaming history, and Hearthstone now has over 20 million registered users. This year, we're delivering some of the best content in our Company's history for some of the world's strongest and most recognizable entertainment franchises including Skylanders Trap Team and Diablo III: Reapers of Souls.

We remain committed to delivering the best quality entertainment experience to our audiences. Call of Duty: Advanced Warfare is the most ambitious Call of Duty released to date, and Blizzard's Warlords of Draenor is on track to be a great success.

We expect to deliver double digit non-GAAP revenue growth, record earnings per share, and strong cash flow in 2014. Most importantly, we continue to deliver to our audiences the types of experiences that they love and expect, while strengthening and expanding our franchise portfolio.

I want to thank all of our employees as well as the amazing team at Bungie for their extraordinary talent and dedication. Their incredible commitment, inspired creativity and operational excellence continues to produce world class experiences for our players and world class performance for our stakeholders.

As entertainment continues to evolve, demand for great premium content is only increasing. We have a more than 20 year track record of creating some of the world's most iconic entertainment brands with some of the largest and most engaged player communities in the world. Over the next few years, we will continue to expand our franchise portfolio and to invest in our rich franchise library.

Blizzard's Hearthstone exemplifies this. Blizzard brought iconic World of Warcraft characters to a digital card game optimized for PCs, tablets and soon mobile devices around the world with free to play access for our audiences. In the next year, we expect to release two more new free to play franchises, Blizzard's Heroes of the Storm and Activision's Call of Duty Online, and both are designed for new platforms, new regions, as new genres, and new audiences.

As much as we've achieved, we're only at the beginning of what we believe is a new era for Activision Blizzard. Our opportunities have never been greater, and I've never been more excited than I am now about our future.

Now, I will turn the call over to Dennis.

Thanks, Bobby. Good afternoon, everyone. Today, I will review our better than expected Q3 financial results, our outlook for the fourth quarter, and our increased outlook for 2014. Starting with our financial results, please refer to our earnings release for full non-GAAP to GAAP reconciliations.

For the quarter on a GAAP basis, we generated better than expected results with revenues of $753 million and a loss per share of $0.03. On a non-GAAP basis for the quarter, we generated better than expected and record results with revenues of $1.17 billion including 43% from digital channels and record Q3 EPS of $0.23, $0.12 better than our previous guidance.

During the quarter, we successfully expanded our content portfolio with the launch of Destiny which generated better than expected non-GAAP revenues of over $500 million and achieved non-GAAP profitability in the quarter. In addition to Destiny, Call of Duty and Skylanders drove the Activision Publishing business, and we saw strong contributions from Blizzard Entertainment's World of Warcraft, Diablo III, and Hearthstone's first expansion, the Curse of Naxxramas.

For the first time, six major franchises contributed during the quarter, highlighting the increasing breadth and depth of our expanding content portfolio with recurring revenue streams. Within our six franchises, we saw strong digital demand in subscriptions, paid extra content, value-added services and full game downloads. For Destiny and Diablo III on console, full game downloads drove a high-teens percentage of total console volume.

Through September, on a year-to-date basis, we generated non-GAAP revenues of over $1.15 billion from digital channels, up 25% year-over-year. Obviously the migration of our business to digital is happening rapidly, and we expect this trend to provide long-term operating benefits in the future.

Turning to specific P&L items, please note all percentages are based on revenues except for the tax rate. For Q3, GAAP product costs were 28%, and operating expenses were 71%. GAAP and non-GAAP interest expense was $51 million. Our GAAP weighted average basic share count was 718 million.

On a non-GAAP basis for the quarter, product costs were 25%, operating expenses were 53%, and operating margin was better than expected at 22% due to higher revenues and the timing of expenses. Our non-GAAP tax rate was 17%. Please note that about half of our Q3 overperformance was due to the timing of revenues and expenses.

In Q3, we generated non-GAAP adjusted EBITDA of $280 million, which we define as non-GAAP operating income, and then add back depreciation. Our adjusted EBITDA margin was 24% in the quarter. On a trailing 12 month basis, we generated approximately $1 billion of operating cash flow.

Turning to the balance sheet as of September 30, we had over $3.8 billion in cash and investments. We held over $550 million of that amount domestically. In summary, Q3 was a record quarter for Activision Blizzard, driven by the record setting launch of Destiny, the resurgence of World of Warcraft subscribers and our increasingly broad and diversified portfolio which generated strong digital demand across multiple titles, platforms and models.

Turning to Q4, our major launches include Activision Publishing Skylanders Trap Team, Call of Duty: Advanced Warfare, and Destiny's first expansion, as well as Blizzard Entertainment's upcoming World of Warcraft expansion, Warlords of Draenor. Now let's discuss the numbers.

In the December quarter on a GAAP basis, we expect net revenues of approximately $1.5 billion, product costs of 31%, and operating expenses of 47%. We expect GAAP and non-GAAP interest expense of $51 million, GAAP tax rate of 23%, and EPS of $0.28, based on a fully diluted weighted average share count of 748 million shares, including participating securities. This share count can be used for both GAAP and non-GAAP EPS for the fourth quarter.

For the December quarter on a non-GAAP basis, we expect net revenues of $2.2 billion, product costs of 27%, operating expenses of 32% and an operating margin of 41%. We expect a non-GAAP tax rate of 25% and non-GAAP EPS of $0.86.

For the full year 2014 on a GAAP basis, we expect net revenues of $4.33 billion, product costs of 28% and operating expenses of 48%. For both GAAP and non-GAAP, we expect interest expense of $203 million.

We expect our GAAP tax rate to be 21% with GAAP EPS of $0.91. For full year 2014 on a non-GAAP basis, we expect revenues of $4.8 billion, up over 10% year-over-year, product costs of 26%, operating expenses of 42%, an operating margin of 32% and a non-GAAP tax rate of 24%, resulting in record non-GAAP EPS of $1.35, $0.06 higher than our prior outlook.

In summary, we expect 2014 to be a record year, and as always, we remain laser focused on execution while keeping a keen eye on costs, all of which should deliver long-term growth, strong margins, and cash flows for our various stakeholders.

Now I will turn the call over to Eric Hirshberg to discuss Activision Publishing.

Thanks, Dennis. I'm pleased to announce we delivered a record Q3, posting the largest Q3 revenues and operating income in Activision Publishing's history.

Destiny lead the charge at September at the biggest new franchise launch in video game history. In fact, Destiny is one of the top 10 US video game launches of all time, and the only new franchise launch to ever crack the top 30.

Even more important is the player engagement we've seen since launch. We have over 9.5 million registered users, and players are averaging over three hours of game play per day.

Other key engagement metrics like how often players return to the game, peak concurrencies, and the depth of use across all modes of play are among the best we have ever seen for any of our games. A critical reason for the success is the incredibly talented development team at Bungie which not only created the world's first shared world shooter, but has also listened to community feedback since the launch and has implemented scores of improvements. We see Destiny as a living universe which our community is actively helping to shape.

Players are already asking for new content, and on December 9, we plan on satisfying that demand by launching our first expansion pack, the Dark Below, with all new maps, missions, gear, weapons, and a brand new raid. Work has also begun on future expansion packs as well as on our next full game release. We're very pleased with the launch and continuing engagement and we will update you on our progress on future calls.

Moving to Skylanders. This year's game, Skylanders Trap Team, launched on October 5 and adds to our streak of innovation in the toys-to-life category which we created and continue to lead. Critics, fans and retailers agree, with Trap Team receiving the largest retail shelf space and support and the most positive review sentiment in franchise history.

I'm particularly excited about the tablet version, where for the first time we've enabled the full console experience to be available on hundreds of millions of tablets worldwide. As one perfect review score said of the tablet game, quote, there haven't been sacrifices, there haven't been stumbles. This is a console game you can play on your tablet instead of your TV, and it's flawless.

We are the only kids' video game to make the holiday top toy list from Toys R Us, Target, Toy Insider, National Association of Parenting Publications, and to appear on many more. Skylanders as a franchise has now sold over 200 million toys and continues to outsell the number one best selling action figure line in North America and Europe for the third consecutive year. We think we once again have created the must-have gift for the holiday season and that Trap Team will help us increase our lead as the number one franchise in the category.

Now let's move to our third and biggest tent pole franchise, Call of Duty. Yesterday we launched the Day Zero Edition, a special 24-hour early access SKU with additional digital content for our most dedicated fans, and our day-one sales began this morning at midnight. While it's obviously too early to predict the game's ultimate sales performance, we're very pleased with our initial Day Zero results and were emboldened by a number of key indicators.

Advanced Warfare was the most preordered game of the year and so far has the highest game ranking of the last three Call of Duty titles. Furthermore, our quantitative research shows purchase intent numbers that are well above last year's at this time.

And Nielsen's unaided first choice? Call of Duty leads the industry. We expect that Advanced Warfare will go on to become the biggest game of the year, the most digitally purchased game in console history and the largest next-gen title in history, and all of those by wide margins.

Our highly acclaimed internal studio, Sledgehammer Games, has brought significant innovation to cross every game mode, a great story and dramatically improved graphics, and our upcoming season of digital content will offer players more than ever before. This is the first year of our three-year development strategy on the Call of Duty franchise, and we feel that strategy has paid off with Advanced Warfare and will continue to pay off in years to come.

Finally, let's discuss Call of Duty Online in China. I shared in August we had just entered large-scale beta testing with our partner, Tencent. We have now successfully passed every development milestone, and we now plan to launch unlimited access beta testing in Q1 2015, which means the game will begin monetizing throughout China.

Call of Duty Online is a major opportunity to expand our reach and build what may be our largest player community with year-round revenues. We look forward to sharing more about it in the coming months.

So in closing, Activision Publishing had its biggest third quarter in history and now looks ahead to a fourth quarter with three tent pole properties that we expect will continue to lead their respective categories, along with a fourth soon to launch next year in China, serving the largest gaming audience in the world.

Thanks, and now I will turn it over to Mike who will talk about Blizzard.

Thanks, Eric. Blizzard Entertainment enjoyed a strong quarter on the strength of returning World of Warcraft subscribers, and the launches of Diablo III Ultimate Evil Edition for console, and the Curse of Naxxramas adventure for Hearthstone.

World of Warcraft subscribers were up 600,000 to a worldwide total of over 7.4 million at the end of the quarter, driven by excitement for the upcoming Warlords of Draenor launch and the release of that expansion's opening cinematic. The East/West mix of subscribers stayed about the same, remaining within historical ratios.

Returning subscriber trends remain strong, and we're also seeing increased engagement in recent weeks thanks to the recent launch of the pre-expansion content update. This increase in players gives us great momentum as we head into the launch of Warlords of Draenor next week. The China launch will follow as soon as possible, pending government approvals in that region.

Diablo III Ultimate Evil Edition launched in August on next- and current-gen consoles, with better than expected sales. The reviews have been stellar, and the game remains one of the top-rated titles to date on next-gen platforms.

We also released a large update that offered new game content for players to explore and collect, as well as new features to enhance replayability. That update was well received and helps to bolster ongoing engagement with the game.

Hearthstone also had a big quarter with the release of the Curse of Naxxramas adventure. The community responded with great enthusiasm to the single-player encounters as well as the new cards.

More than 20 million players have now played Hearthstone. While e-sports tournaments around the game are also growing more popular than ever, recent Hearthstone competitions have surpassed 150,000 concurrent viewers on online streams.

Similar to our other franchises, the key to ongoing engagement in Hearthstone is new content, and our developers are already working on a full expansion that will include over 100 new cards. We've also announced that the game will be coming to Android tablets before the end of the year, with Android phones and iPhone versions to follow.

Heroes of the Storm, our upcoming hero brawler, continues to evolve and improve in testing. We believe the inclusion of Blizzard's recognizable characters, as well as design innovations that make heroes easy to learn, will attract players to our game.

We've now entered the final phase of technical alpha testing where we've made significant progress building out our back-end infrastructure. This means that we're ready to greatly expand our worldwide base of testers and drive towards closed beta. So solid progress on that front.

Finally I want to remind everyone that BlizzCon, our massive gaming festival, takes place in just three days at the Anaheim Convention Center. I hope you will be able to join us at the show or follow along online. We expect this to be our biggest and best BlizzCon ever, and we'll be sharing tons of exciting news as well as holding huge e-sports competitions across many of our games, including World of Warcraft, Hearthstone, Starcraft II, and a special exhibition for Heroes of the Storm.

We're proud of the results we've posted this quarter and believe they are indicative of the success we've had in expanding our portfolio of games. With Hearthstone, Diablo, and World of Warcraft launches this year, Blizzard now supports vibrant and active communities across a wider range of genres and platforms than ever before.

Additional exciting opportunities are in the pipeline as well, including Heroes of the Storm, and Android and iPhone for Hearthstone. It's an exciting time to be a Blizzard gamer, and we look forward to celebrating with our players this Friday at BlizzCon.

Thanks and I will turn the call over to Thomas.

Thanks, Mike. Before we open the call for Q&A, I will take a moment to summarize the three key takeaways from today's call.

First, Destiny's unprecedented success and the resurgence of World of Warcraft player engagement drove record third quarter results and led us to again raise our outlook for the year. We are on track for double-digit revenue growth and record EPS in 2014. Second, this year we successfully expanded the portfolio of blockbuster franchises that we own or control, with both Hearthstone and Destiny far exceeding expectations, and we are launching some of the best content we have ever created for our established franchises.

And third, we have never had a larger, more diversified or more promising global product pipeline which includes several new games targeted at some of the fastest-growing market segments, beginning with Call of Duty Online for China in Q1 of 2015, Blizzard's Heroes of the Storm, and a number of other unannounced games in development. Digital growth trends and our plans to expand into new geographies, new platforms, and new business models position us well for long-term growth and increasing profitability, which we expect will allow us to continue to deliver superior shareholder returns as we have for over 20 years.

And now, we will take a few questions.

Thank you.

(Operator Instructions)

We will take our first question from Chris Merwin at Barclays.

Great, thanks. It was great to see that Warcraft subscribers grew again in the 3Q, and that's even before the release of Warlords of Draenor. Is most of the subscriber growth there to date attributable to new users signing up, or is that mostly older users returning to the franchise because of the character boost that you introduced?

And Mike, I think you mentioned that the net adds in 3Q are pretty evenly split between East and West. Do you expect to see any mix shift change in the upcoming quarter? Thanks.

Thanks for the question. So much of the resurgence comes from returning players, many of whom already have strong connections to the game.

We've been focused on making it easier for players to return, and I think the character boost really plays a big role in that, helping people quickly get up to speed with their friends, and also catching up with all of the changes we've made to the game over the years. The growth that we've seen has been proportional to historic ratios between the East and the West, and we don't make predictions about subscriber growth in the future, but we're feeling very good about the expansion launch next week.

Thank you.

We will take our next question from Drew Crum at Stifel.

Okay thanks, good afternoon everyone. So as it relates to Destiny, could you comment on the remaining capitalized software associated with the game and what the implications are for profit? And I guess on a related note, you've mentioned in the Press Release 9.5 million registered users. Is there a way to tie that back to the sell-through on the game to date? Thanks.

Do you want to take the second question, and then I will come back to the software?

Sure. Well first of all, I think by any measure, Destiny is off to a great start. As I mentioned, we were the largest new franchise launch of all time. And despite the large investment, which Dennis will talk about, or maybe because of that large investment, we were able to be profitable from day one. And we think it's only a matter of time now before it becomes our next billion dollar franchise.

I also mentioned some pretty incredible engagement numbers. The average player is investing over three hours of game play per day, and to date we have 9.5 million registered users.

Of course, there's a relationship to sell-through. It's not exact, because some people have more than one identity, but obviously that's directional. So it's a highly engaged audience that is hungry for more content and we've had that.

We think we've been good at providing them with more content to satisfy that demand which we're planning on doing on September 9 with our first expansion pack. And I also mentioned that we are also already underway on our next full game releases. So we've got a great pipeline of content, a great plan, a great development partner with Bungie, and we're very bullish on Destiny.

Just to the first part of your question, relative to software amortization and profitability, Derek mentioned even with the significant launch, marketing, and product amortization cost which we took in the quarter, Destiny was profitable from day one on a non-GAAP basis, which is just tremendous collaboration I'd say between the Bungie team and the Activision Publishing team. Regarding product development cost and amortization specifically for non-GAAP, the vast majority of the capitalized development cost for -- up to the launch, were amortized in Q3.

So there's only about 15% of the final development cost left to be amortized over the next few quarters. So we think it provides a great opportunity for profit growth in the coming years.

Thanks, guys.

We will take our next question from Colin Sebastian at Robert W. Baird.

Great. Question on Hearthstone and the success you've had to date with the title and the pricing model. I wonder if you could elaborate a bit on the strategy to continue driving the user base higher as well as monetization, for example, through content enhancements or expanding on to other platforms, what's in store for that franchise, thanks.

Yeah, I think there are two main points. The first is with respect to platform expansion, so we already announced that the Android tablet version of the game will be coming in December. And we are working on Android phone and iPhone versions that will come at some time after that.

We're particularly excited about Android, especially as it relates to China and Korea, where Android is the dominant mobile platform. Our developers are really busy right now working on our new expansion. And we're very encouraged from what we've seen when we launched the Naxxramas adventure, how important new content can be to engagement in the game. So those are the big areas where we are focusing right now, and will continue to add content and features to the game as time goes by.

Okay, thanks.

And we will take our next question from Arvind Bhatia at Sterne, Agee. Your line is open.

Please check your mute function. Once again, Mr. Bhatia, check your mute function. Your line is open.

Okay. We will go to the next one.

Yes. Can we please go to the next one?

Hearing no response, we will go to Stephen Ju at Credit Suisse.

Thanks. So Eric, or Dennis, can you give us some additional color on the mix of digital versus retail for next-gen versus prior-gen hardware? What are you seeing the consumer opting to do? It seems like, given that Microsoft and Sony have made this relatively easier, the trend for presumably an increasing mix from digital should continue over time. Thanks.

Thanks, Stephen. At a macro level, obviously the consumer trend towards digital downloads on full games we think will be a nice margin tailwind for us over the next few years.

Recently the experience that we've seen in terms of digital mix, as I said in my prepared remarks, on consoles for new games like Destiny and Diablo has been in the high teens. And that's really a capability that only really launched last year for new release titles, so it's a pretty rapid rate of adoption. And we've seen initial positive trends on Advanced Warfare, but due to the size and mass audience of that game, we would expect lower digital mix on a title of that size and scale.

Next-gen systems, as you point out, due to their high connection rates, improved transaction capabilities, early adopter profiles, have a higher propensity for digital purchases than previous-generation systems. So overall we expect this part of the business to grow rapidly as the next-gen installed base continues to grow, and consumer buying patterns continue to embrace the convenience of this distribution model.

In the long term, though, like we've seen on the Blizzard side of our business, we expect this to be the majority of our sales mix over time, but at the end of the day, it will be consumers who decide how fast that transition ultimately takes place. Thanks, Stephen.

We will take our next question from Brian Pitz at Jefferies.

Great, thanks. Question for Dennis follow on to the download question. Can you quantify the impact of gross margin if a user is essentially downloading a game instead of buying it at a retail store?

And maybe just a second one for Dennis as well, on console sales, obviously doing a little bit better this year than maybe people would have thought, plus you've got Microsoft's $50 cut. How has that impacted your thoughts going forward in terms of units for hardware?

Sure. Yeah, I think obviously, I will answer your second one first, relative to console sales. Clearly both -- we have two very, very strong platforms that have gotten out of the blocks significantly faster than last generation. Both are very committed to winning.

And obviously I think the last price cut that Microsoft just announced last week, in terms of the $50 heading into the holidays, is only going to be a nice tailwind to further make that transition happen faster. So we're very excited about that, and the attach rates we've seen have been solid.

The flip side of that is the current-gen systems and the tail on the current-gen system I think has been equally aggressive in terms of decline. So that is a little bit of a headwind that we face relative to that transition when you have games as significant in size as ours.

On the digital point, relative to digital margins, obviously the price point is relatively equivalent relative to consumer price points, whether it's physical or digital. And we end up sharing with whoever the platform provider is, the percentage of sales to compensate them for effectively the transaction, and that's usually about a 30% cut that the first parties end up taking.

On the PC, obviously in the Blizzard side of our business, that's just direct. There is no sort of intermediary in between that, so it's obviously very accretive to margins over time.

Operator?

We will take our next question from Daniel Ernst at Hudson Square.

Yes, good afternoon, thanks for taking my question. I'd like to follow-up on your commentary on Call of Duty Online in China, and what you might expect from that: how long it will take to go from the beta in Q1 to full commercial launch; how long until it hits its commercial revenue stride. And are you still expecting this to be on the scale of something like a CrossFire in terms of revenue potential? Thanks.

Sure. So, as I mentioned, we've now successfully passed all of the required development milestones and we've seen very strong engagement statistics from Chinese consumers. And we plan to launch unlimited access beta testing in Q1 2015, which means we will start monetizing throughout China early next year.

So of course, free-to-play games like the one we're making take time to build revenue and expand their audiences. Fortunately, our partner Tencent has one of the strongest track records out there.

As for your specific question on ramp up time, you can look at games like CrossFire and League of Legends to see how large, successful microtransaction games in China ramp up. It takes some time, but ultimately it's worth it if you have a great game, which we think we do. So we think Call of Duty Online is a major opportunity to expand our reach in a new region over time, maybe become our biggest player community with consistent year-round revenues.

Thank you.

We will take our next question from Justin Post at Merrill Lynch.

Thanks. So far, we've heard a lot about digital really helping performance in the industry.

I'm wondering if you could talk about the opportunity for Heroes of the Storm and Hearthstone, to really help the revenue mix towards digital and towards Blizzard, and how meaningful are these products to EPS like this year or next year? Can they help move the needle? Thank you.

Sure. Justin, it's Dennis. Thanks for the question.

Both Hearthstone and Heroes share the attributes, as you point out, of being highly digital; and, if they scale, high-margin recurring revenue business models. So we're very optimistic about the opportunity for both of them. But let me parse them individually because they are at slightly different phases of development.

Hearthstone, as Mike spoke to in his comments, has obviously been a commercial hit this year with more than 20 million players, strong engagement, monetization, et cetera. So it's a strong contributor this year. And the two key drivers for that success on an ongoing basis are really going to be about the platform expansion that Mike spoke to and the content release. So we think we can grow on that next year and continue to expand the opportunity as it relates to that franchise.

Heroes is obviously a more nascent part of the development curve, currently just approaching beta, so we don't have an outlook yet for Heroes to share. But given the popularity of the genre and the digital business model, we're optimistic that it can become a significant contributor over time. So we think that they both present a great opportunity for us in 2015 and beyond. So thanks, Justin.

Thank you.

We will go back to Arvind Bhatia at Sterne, Agee.

Sorry about that. Just wondering if you can maybe talk about Call of Duty: Advanced Warfare day-one performance a little bit more, maybe directionally if you are not prepared to talk about numbers yet, and maybe what the learnings are so far from this one in slightly more detail? Thank you.

Well, I think the first directional comment we will make is we think we have a great game, and that's probably the most important thing. As you know, this is our first three-year development cycle, which is an important strategic shift we made in terms of the approach; our first new lead developer in a decade; new innovations that we embrace and champion across every mode of play. And we think those decisions have paid off.

As far as performance, as I said before, day one started at midnight this morning, so unfortunately it's obviously too early for us to tell. But here is what I can tell you: we were pleased with the results of our Day Zero Edition.

Purchase intent is meaningfully up versus last year. There's great positive sentiment from reviewers. Positive sentiment from consumers on social media is also up. We think we've got great buzz overall on the game, and Advanced Warfare was the most preordered game of the year and leads Nielsen's unaided first choice across the industry. We also have some trends in the console transition working in our favor with a lot of next-gen consoles that we open during the holidays.

Call of Duty has historically high attach rates to the next-gen, so we think that we will have strong sell-through as the next-gen installed base ramps up towards the holidays. So, all in all, we expect that Advanced Warfare will go on to become the biggest game of the year based on a lot of positive momentum and a lot of positive indicators, the most important one being that it's a great game.

Thank you very much, and good luck for the holiday season.

Thanks.

We will take our next question from Todd Mitchell of Brean Capital.

Thank you. Not to belabor the point, but everybody has been asking about digital. I was wondering if you could just get more specific in terms of the breakdown by type or by platform, or even by property. And can you kind of size some of these initiatives, the free-to-play initiatives, and talk about their relative contribution margins?

Sure, thanks, Todd. Yes, a very popular topic, and one that we're very excited about just based on the obviously consumer trends that we're seeing, and obviously the margin trends that it has inside of our business.

As I mentioned, our digital business is growing rapidly across the portfolio, with both secular and consumer trends fueling that growth. For the first nine months of the year, our overall digital revenues grew by 25% year-over-year and represented nearly 60% of our business. So obviously a very solid, high-margin recurring tailwind there.

There's three buckets of digital activity that I really call out. The first is full game downloads for front line software. And actually this is the smallest bucket, percentage-wise, of our digital business; but one of the fastest growing, as the basis is small, particularly on console and that transition takes place.

And the second bucket relates to new business models that we've used to drive engagement and monetization inside of our large online communities. And this is actually the largest bucket. And so this is things like downloadable content for Call of Duty, value-added services for World of Warcraft, microtransactions for Hearthstone and Call of Duty.

Though these add-on sales are obviously very high margin, and very good drivers of engagement inside our very, very large communities. And so that's obviously growing incredibly fast.

And then the last bucket that I'd call out is really relating to subscription revenue, and that largely relates to World of Warcraft. And it's a large, recurring revenue stream on PC really directly correlated to the overall subscriber base. And recent subscriber trends, particularly in the West, will be helpful as that stream stabilizes with the new launch of Warlords of Draenor.

So when you go back to the original point that we're growing at 25% and that third bucket being subscriptions, which has been sort of flat to slightly down over the past year or so, those first two buckets are really growing at rates higher than that, which gives you the blended rate of 25%. But across the portfolio, a very strong tailwind for us, both into this holiday and through next year and beyond.

We will take our next question from Neil Doshi of CRT Capital.

Thanks for taking the questions. Mike, can you talk a little bit about how we should think about World of Warcraft subscribers, post the launch of the game? And given that you've been testing the free-to-play with Hearthstone, have you talked about down the road if we could potentially see free-to-play come to World of Warcraft? Thank you.

Okay, let me take the second part of that question first. So I don't foresee any dramatic changes to our business model in World of Warcraft. We do currently provide the first 20 levels of World of Warcraft completely free, so anybody is able to try those out. But after that, it is $15 a month in the West.

With respect to how to think about subscribership after launch, we don't provide specific numbers or forecasts, as you know. But what I can tell you is that typically, with expansions, we do get a boost in players and engagement when we launch a new expansion. This time around, we have taken steps to make it easier for players to return to the game and quickly get up to speed with changes that we've made to the game since they may have left. And I think that that will help us with winbacks.

We're already seeing positive signs that it's working. We have updated the player models in Warlords of Draenor and have really freshened the game's look and feel.

We've added the new garrisons feature that allows players to create a home base in the world. And we're hoping that these improvements will help players feel more ownership and attachment to the game and will make it more fun for them to stick around following the expansion.

Thank you.

We will take our final question today from Eric Handler at MKM Partners.

Yes, thanks for taking my question. Battle-dot-net questions for you: with the expanding volume of Blizzard content over the last year, I'm just curious how beneficial the Battle.net platform has been in cross-promoting the studio's games and driving greater utilization, or maybe even time spent playing those games. And is there any way to put a dollar value on that?

I think that it's very hard to put a dollar value on it. But what I can say is the Battle.net platform has always been a very important communication tool for us in keeping our players informed about new updates to our games, as well as new games, new expansions that we're coming out with. I think that it's not only important for Blizzard's ability to communicate with our players, but also has been really important allowing our players to communicate and keep in touch with each other across our portfolio of games. And so I think that that is a very powerful cross-promotional tool, and it does lead to very tangible results when we launch major new releases.

Thank you all for joining the call. We appreciate the questions and the support. And we're looking forward to a terrific rest of the year, and to being in touch with you again at our next Conference Call. If you have an opportunity to participate in BlizzCon, either through the live stream or in person this weekend, we think you are going to find it very interesting and exciting.

Thanks, everybody. Thank you, Operator.

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