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Executives

Kristin Mulvihill Southey - Former Vice President of Investor Relations

Robert A. Kotick - Chief Executive Officer, President and Director

Dennis Durkin - Chief Financial Officer

Eric Hirshberg - Chief Executive Officer of Publishing Unit

Michael Morhaime - Chief Executive Officer of Blizzard Entertainment and President Blizzard Entertainment

Analysts

Eric O. Handler - MKM Partners LLC, Research Division

Brian J. Pitz - Jefferies & Company, Inc., Research Division

Neil A. Doshi - Citigroup Inc, Research Division

Brian Karimzad - Goldman Sachs Group Inc., Research Division

Daniel Ernst - Hudson Square Research, Inc.

Andrew D. Connor - Piper Jaffray Companies, Research Division

Douglas Creutz - Cowen and Company, LLC, Research Division

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Edward S. Williams - BMO Capital Markets U.S.

Activision Blizzard (ATVI) Q4 2012 Earnings Call February 7, 2013 4:30 PM ET

Operator

Good day, and welcome to the Activision Blizzard's fourth quarter 2012 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 the Senior Vice President of Investor Relations, Kristin Southey. Please go ahead, Kristin.

Kristin Mulvihill Southey

Good afternoon, and thank you for joining us today for Activision Blizzard's fourth quarter 2012 conference call. With me today are Bobby Kotick, CEO of Activision Blizzard; Thomas Tippl, COO of Activision Blizzard; Dennis Durkin, CFO of Activision Blizzard; Eric Hirshberg, CEO of Activision Publishing; and Mike Morhaime, CEO of Blizzard Entertainment.

I would like to remind everyone that during this call, we will be making statements that are not historical facts. These are forward-looking statements that are based on current expectations and assumptions and are subject to risk and uncertainty. As indicated in the slide that is showing, a number of important factors could cause the company's actual future results and other future circumstances to differ materially from those expressed in any forward-looking statements.

Such factors include, without limitation, sales levels; current macroeconomic 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 console transition; adoption rate and availability of new hardware and related software; rapid changes in technology and industry standards; the current regulatory environment; litigation and associated costs; protection of proprietary rights; counterparty risks; economic, financial and political conditions and policies; foreign exchange and tax rates; and potential changes associated with geographic expansion.

These important factors and other factors that potentially could affect the company's financial results are described in the company's most recent Annual Report on Form 10-K for the period and on 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 in 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, 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, February 7, 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 of our online-enabled games, expenses related to stock-based compensation, expenses related to restructuring, the amortization of intangibles and impairment of intangible assets and goodwill and the associated tax benefits. Please refer to our earnings release which is posted at www.activisionblizzard.com for 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 also be posting a 12-quarter financial overview, highlighting both GAAP and non-GAAP results on a one-page summary sheet.

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

Robert A. Kotick

Thank you, Kristin, and thank you all for joining us today. 2012 was another great year for Activision Blizzard. We achieved record fourth quarter and annual results. And in 2012, on a non-GAAP basis, we generated approximately $5 billion in revenues, a 34% operating margin and EPS growth of 27% over the prior year. We increased our operating cash flow by 41%.

Our strong cash flow has given us the flexibility to invest in our portfolio and product pipeline, while also returning $3.8 billion to investors since 2009 through dividends and share repurchases. Today, we announced our Board of Directors has increased our annual cash dividend to $0.19 a share.

Our 2012 results are due to the drive, passion and creativity of our employees around the world. Their efforts, aligned with our focused long-term strategy and investment discipline, produced strong creative and financial results for our company.

In the U.S. and Europe, we were the #1 video game publisher at retail, with the #1 title overall, the #1 console title and the #1 PC title. We were also the #1 independent Western Digital game publisher and had the #1 subscription-based MMORPG.

Skylanders, our newest franchise, which is both toys and video games, has life-to-date sold in excess of $100 million toys and generated revenues of approximately $1 billion. This week, Activision Publishing revealed the third game in the Skylanders franchise for holiday 2013. And while there are new entrants in the category and challenges from slower than expected adoption of the Wii U, we remain enthusiastic about Skylanders' future prospects.

Our success in 2012 was also attributed to the significantly better performance of Blizzard's Diablo III. And while we had a strong 2012, we recognize that 2013 is a transition year, as we enter the ninth year of the current generation of console video game systems. We encounter new threats from unproven business models, and we compete against new category entrants. We aren't immune to unfavorable market dynamics, but we have navigated through the transitions many times before, and we are well prepared to do so again.

Our discipline and focus have served us well and we believe they will continue to do so for the very long term. In 2013, we'll continue to execute against the proven strategy of investment in our established franchises, selectively introducing new concepts like Skylanders, and managing our costs very carefully.

Activision Publishing will continue to invest in Call of Duty and Skylanders, along with Bungie's new universe and Call of Duty online for China, each of which is being developed with quality and innovation that has the potential to redefine their respective categories for the future, and we hope will add value for our shareholders in future years.

Blizzard plans to launch StarCraft II: Heart of the Swarm on March 12, which we expect to continue Blizzard's remarkable record of excellence. And there are also in development a new content for World of Warcraft and Diablo III players, and we'll of course continue to invest for the future in Blizzard All-Stars and our all new MMO. We believe that the investments we are making today should enable us to continue diversifying our portfolio while adding new profitable revenue streams into the future.

2013 is going to be a volatile and challenging year. Looking ahead, we believe we're well-positioned to deliver long-term growth and value to our shareholders as we have since 1991.

Now I'll turn the call over to Dennis, who will take you through our financial results.

Dennis Durkin

Thank you, Bobby. Good afternoon, everyone. Today, I will begin with a recap of our better-than-expected Q4 and full year 2012 financial results and then, I'll review our outlook for 2013 and for Q1.

Beginning with our Q4 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.

Q4 was a record quarter for the company. Our combination of incredible people, deep global franchises and the largest-ever hardware installed base were all key factors in not only executing against our plan, but exceeding it.

First, let's walk through the Q4 numbers, which were largely driven by the Call of Duty and Skylanders franchises. For the quarter, on a GAAP basis, we generated better-than-expected revenues of $1.8 billion and EPS grew to a fourth quarter record of $0.31. On a non-GAAP basis, we generated better-than-expected revenues of $2.6 billion, digital revenues increased 22%, our operating margin expanded over 750 basis points to 44%, operating income exceeded $1 billion for the first time in a quarter and EPS grew 26% to a record $0.78.

Turning to specific P&L items. Please note that all percentages are based on revenues except for the tax rate. For the quarter, GAAP product costs were 31%, GAAP operating expenses were 42%, below our outlook, due mainly to revenue overperformance. Our GAAP tax rate was 27%.

Non-GAAP product costs were 28% and non-GAAP operating expenses were 27%, again below our outlook due mainly to revenue outperformance. And our non-GAAP tax rate was 23%.

Our solid execution in Q4 anchored what was a record year for Activision Blizzard. For the full year, on a GAAP basis, we generated revenues of $4.9 billion an operating margin of 30% and EPS of $1.01. On a non-GAAP basis for the calendar year, we generated better-than-expected revenues of nearly $5 billion. We expanded our operating margin 380 basis points to 34% and grew EPS 27% to $1.18, both records. We exceeded our initial non-GAAP EPS expectations of $0.94 based on the large scale success of Diablo III and Skylanders.

In terms of cash flow in 2012, we generated over $1.3 billion in operating cash flow, an increase of more than $390 million over the prior year. Over the last 4 years, we have generated more than $4.8 billion of operating cash flow. And today, as Bobby mentioned, the Board of Directors approved, once again for the third straight year, an increase to our cash dividend, which now stands at $0.19 per share.

Now moving to 2013. We expect 2013 will be a competitive and challenging year given the macroeconomic conditions and the uncertainty that surrounds console transitions. For those of you who remember, the last transition was disruptive, volatile and financially difficult to predict. Additionally, we had some tough year-over-year comparisons given Blizzard's unprecedented success with Diablo III and our favorable tax benefits in 2012.

That said, our product lineup is expected to be anchored by 4 of our top franchises: Call of Duty, Skylanders, World of Warcraft and StarCraft. It will also be a year of significant continued investment in several new properties with long-term potential that are not factored into our 2013 financial outlook, including Activision Publishing's new Bungie universe, Call of Duty Online for China and the new Blizzard MMO.

Now on to the numbers. For calendar year 2013, on a GAAP basis, we expect net revenues of $4.085 billion, product cost of 26% and operating expenses of 48%. We expect a tax rate of 26% for the full year and a diluted share count of 1.15 billion. The share count can be used for all quarters for GAAP and non-GAAP. Finally, we expect GAAP EPS of $0.68.

For 2013, we expect non-GAAP net revenues of $4.175 billion. We expect non-GAAP product costs of 26% and operating expenses of about 43% and a tax rate of 27% resulting in non-GAAP EPS of $0.80.

So let's take a moment to walk through the non-GAAP EPS variance, versus our performance in 2012. On the product side, starting with Blizzard, we have a very tough comparison due to release slate and product launch timing. Specifically, for the full year 2012, Diablo III contributed more than $0.20 of EPS on a standalone basis. This year, our outlook for Blizzard includes the release of the StarCraft II expansion pack, Heart of the Swarm, in March and one additional title.

Combined, we have modeled these 2 titles being down significantly compared to last year's record-setting combination of Diablo III and Mists of Pandaria. For 2013 on the Activision Publishing side, there is increased volatility this year due to the ongoing console transition, which makes predicting the future more challenging than during normal years in the cycle. For Call of Duty, consistent with our past practices, we are planning for the mainline release in Q4 to be down versus 2012. And also, as I mentioned, our outlook does not include the release of the Bungie game or Call of Duty Online in China, although, we still incur costs throughout the year on these projects. In total, we expect the year-over-year impact of all these items will be more than $0.10.

Lastly, from a non-operating perspective, in 2013, our tax rate is expected to be 27%, which is 21% in 2012 due to the favorable discrete tax benefits that were realized in 2012. In addition, on the foreign exchange side, we have modeled conservatively to protect ourselves against adverse fluctuations in currency that we have seen in the past. The impact of tax and FX on our numbers, year-over-year, is more than $0.10.

Taken together, the lack of a comparable title to Diablo III, a lower forecast for the Call of Duty mainline release, continued investment in new IP like Bungie and higher taxes and FX more than make up the difference in the year-over-year non-GAAP EPS numbers.

Moving to the outlook for the March quarter. Last week, Activision Publishing released Revolution, the first DLC Map Pack for Black Ops II on Xbox. And Blizzard is expected to launch the StarCraft II expansion pack, Heart of the Swarm, in March. On a GAAP basis, we expect net revenues of $1.16 billion, product costs of 28%, operating expenses of 34% and a 24% tax rate, below our full year rate due to the recognition of R&D tax credits related to 2012, but not recognized until Congress reinstated them in early January 2013. We expect GAAP earnings per share of $0.29.

For the March quarter, on a non-GAAP basis, we expect revenues of $690 million. We expect non-GAAP product costs of 27%, operating expenses of 51% and a 21% tax rate, again, below our full year rate due to the previously mentioned R&D tax credits. For the quarter, we expect non-GAAP EPS of $0.10.

While the March quarter will be up year-over-year, the seasonality of our business will be very different in 2013 versus 2012. Considering the large success of Diablo III in the middle quarters of the year last year, our results will be much more concentrated in the holiday quarter this year.

From a balance sheet prospective, our expanded margins and low capital requirements improved our cash flow to $1.3 billion in 2012. We began 2013 with cash investments of $4.4 billion with around 60% held outside of the U.S.

This year, in addition to investing in our strong product pipeline and capabilities, we are also considering, or may consider, substantial stock repurchases, dividends, acquisitions, licensing or other non-ordinary course transactions and significant related debt financing. Although we are not going to discuss specifics initiatives today, I want to highlight that our Q1 and full year 2013 outlooks do not take into account any such transactions or financing that may or may not occur during the year. The exception being today's announced $0.19 cash dividend.

So in summary, 2012 was a great year with record financial results, strong product performance and solid digital and retail execution by our team. As we look forward, in spite of the near-term market challenges we face in 2013, we remain committed to the strategy that has successfully guided us through many difficult market transitions in the past. Notably, to focus on doing a few things exceptionally well and delivering differentiated long-term value to both our customers and shareholders. We are confident that this playbook will continue to set the bar for our industry going forward.

Now I will turn the call over to Eric, to speak about Activision Publishing.

Eric Hirshberg

Thanks, Dennis. I'm pleased to announce that in 2012, we delivered Activision Publishing's most profitable year ever, even better than the record year we had in 2011. We ended 2012 with 4 of the top 10 games in the U.S. and Europe combined, including toys and accessories. And we delivered revenues of over $3 billion and a record 32% operating margin.

Of course, none of this would be possible without the talent, passion and commitment of the best teams and employees anywhere in the entertainment industry, as well as all of our retail partners around the globe. And I want to thank each of them for helping us achieve this record milestone.

In 2012, in the U.S. and Europe combined, Call of Duty was the #1 video game franchise and Skylanders was the #3 video game franchise. 1 year ago on our earnings call, I said that we believe Skylanders is on its way to becoming our next billion-dollar franchise. And today, I'm pleased to announce that Skylanders has crossed the $1 billion threshold in revenues just 15 months after its debut.

This year, our consistent focus in deep investment has once again paid off. Black Ops II was the biggest game of the year and the fastest entertainment property ever to reach the $1 billion mark, which it did in just 15 days. Based on unique users, Black Ops II was the most played game on Xbox LIVE during 2012. And despite strong competition from new games, Call of Duty: Modern Warfare 3 and Call of Duty: Black Ops I both continued to be in the top 5 games played on the service.

More importantly, at the end of December, Black Ops II online engagement was the highest in the franchise's history, showing the continued momentum of the brand.

This year, our downloadable content will be supported by a free Call of Duty Elite service, which has a set of features unmatched in the industry, and this gives the franchise a competitive advantage and should further enhance the engagement of our community.

We are offering players 2 options to purchase Black Ops II DLC, the proven 1 Map Pack at a time model and a Season Pass, which lets fans buy our upcoming DLC Map Pack for a discounted suggested price of $50.

On January 29, we released our first DLC Map Pack, Revolution, on the Xbox. While it's still very early, we've been very pleased with the DLC results so far and, in fact, the combination of Season Pass and à la carte DLC sales are tracking well ahead of last year's combination of Elite subscriptions and à la carte DLC sets.

The Call of Duty franchise continues to set the bar for innovation and we expect the new Call of Duty game in development for 2013 to raise that bar even higher.

Also in development for the Call of -- for the franchise is Call of Duty Online for China, in partnership with Tencent. Tencent created the Free-to-Play action game model in China and is working closely with us to optimize Call of Duty for Chinese fans.

Now let's turn to Skylanders. As of the end of January, there were more than 100 million Skylanders toys in children's hands worldwide. And in 2012, we extended our reach at retail with more than 120 licensing partners and continued to gain operating efficiencies in our manufacturing and supply chain operations.

And just 2 days ago, in New York, we introduced our next innovation in the Toys to Life category, Skylanders SWAP Force. While others are just entering the category that we created, we're moving that category forward by introducing yet another innovative new play pattern, dynamic swapability. SWAP Force expands upon the success of the franchise as a signature gameplay by letting kids not only bring their toys to life, but to swap parts and create their own unique characters in the physical world, which are then recognized in the digital world. Reception at Toy Fair has been fantastic, and both the game and the toys look great.

Not only that, every character from both Spyro's Adventure and Skylanders Giants will be playable in Skylanders SWAP Force, adding tremendous value to those 100 million toys that kids have already collected.

Development also continues on our new ground-breaking project with Bungie. Bungie defined the action-shooter category with Halo, and we feel this project will once again deliver genre-defining innovation.

While we don't have a launch date to announce today, we expect to deliver incredible games with unprecedented marketing support for new IP. We look forward to sharing more information on this title in the near future.

We're also investing in new platforms and new models, including mobile Free-to-Play games. We were prudently hiring, not acquiring, the industry's best talents. In 2012, we launched 5 highly rated and top-selling mobile games, including our first Free-to-Play iOS game Skylanders Lost Islands.

While relative to the scale and profitability of our overall business, mobile is not yet a significant contributor. We have made smart, rightsized investments that should position us well for the future.

So to summarize. 2012 was a record year for Activision Publishing, driven by our continued focus on our biggest, most differentiated and most creative franchises. Black Ops II continued to set new records and Skylanders has become a fantastic success. And both Skylanders and Call of Duty had very innovative pipelines. We plan to continue innovating on our mega franchises and to introduce new high-potential franchises like our new Bungie universe and Call of Duty Online in China.

And with that, I'll turn the call over to Mike Morhaime.

Michael Morhaime

Thanks, Eric. 2012 was a busy year for Blizzard Entertainment. We had some very ambitious goals and successfully shipped 2 games, Diablo III and World of Warcraft: Mists of Pandaria. Our third game, StarCraft II: Heart of the Swarm, entered public beta testing in 2012 as well. On the year, Blizzard turned in strong financials with non-GAAP revenue of $1.6 billion and operating income of $717 million.

As of the end of the year, global subscribership for World of Warcraft added more than 9.6 million players, down slightly from the previous quarter. The majority of the decline came from China, while subscribership in the West was relatively more stable.

Looking ahead, the next major content update for World of Warcraft is already in testing and should reach players in the coming weeks. The development team continues to stick with the plan of more frequent content updates in the wake of the expansion launch, applying lessons that we've learned from past expansions.

Moving on to Diablo III. The launch of the game back in May had a tremendous impact on Blizzard and our community. Diablo III broke PC game sales records and as of the end of the year, had sold more than 12 million copies worldwide.

While this is a humbling achievement, we're not satisfied with merely breaking sales records. The development team has worked aggressively to update the games since the launch, adding new content, game systems, features and other improvements. A new update is in testing now, which will add dueling and other new content. Diablo is extremely important to Blizzard and we'll continue to invest aggressively to support the franchise and its community.

On the StarCraft side, we've had a flurry of activity surrounding the game in the past few months. The Battle.net World Championship in Shanghai this past November was a great success. A big congratulations go out again to PartinG from South Korea who was crowned our global champion.

The Heart of the Swarm beta has also been ongoing since last year and the team continues to improve the game with player feedback. Over the past couple of months, we've announced numerous new online features for the game, unveiling the opening cinematic, and conducted a global press showcase.

The feedback from the community about the campaign and new online features has been very positive and excitement continues to grow as we head into launch on March 12. Lastly, I want to remind everyone that BlizzCon will make its return later this year. We'll have more details announcements soon and we're looking forward to reconnecting with our players this year to hear their thoughts, share the latest Blizzard news and share along with them at the Blizzard eSports Global Finals. We hope you'll be able to join us at the show.

As we head into 2013, we'll continue to work hard on our pipeline of games and deliver on a great experience to our players. Thanks, and I'll turn the call back to Kristin.

Kristin Mulvihill Southey

Thank you. Operator, we'll be ready to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Eric Handler with MKM Partners.

Eric O. Handler - MKM Partners LLC, Research Division

My question deals with Skylanders, and how you think about the franchise going forward if, in fact, we do have a new console cycle. What percentage of people are playing Skylanders on the Wii, and if people start transitioning more, Nintendo's starts losing some share to new consoles for Sony and Microsoft, how the game might be impacted that way?

Robert A. Kotick

Look, I think that's a very good question, Eric. And as you know, we were somewhat disappointed with the launch of the Wii U, and I think it's a challenging environment this year. And one of the things we are concerned about is what the installed base of hardware will be like for 6- to 11-year-olds. But we have a lot of confidence in the franchise for the long-term. I think we're delivering another great product this year. And Eric, you may want to say a little bit more -- but it's something we are concerned about.

Eric Hirshberg

Yes, you pretty much covered that. We've done well on all platforms, is all I wanted to day. The franchise has done well on all platforms and historically, the strongest franchises going into a console transition are the ones that fare the best. So I think that positions us well for Skylanders future.

Robert A. Kotick

Well, we haven't had any competition in the category. We have a new competitor and we are likely to have more. But we've invested a lot against it, we achieved a lot of good success so far and we have high expectations for the franchise going forward.

Operator

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

Brian J. Pitz - Jefferies & Company, Inc., Research Division

What do you think about the World of Warcraft and MMO community? Do you think the audience essentially remains strong and willing to play? Or do you think they're essentially in need of a new game? Can you talk about, really, the fatigue factor both in the MMO, as well as with specifically for the game, and then, I just have a follow-up question.

Eric Hirshberg

Well, we have seen an evolution in player behavior since the launch of Cataclysm. Players consume content quickly. There are more apps that come and go from the community, which is why we are targeting more frequent content updates. We are currently testing our second major update since Mists of Pandaria. I think that another thing to note is, if you compare the months following Cataclysm and the months following Mists of Pandaria, the trailing months have been stronger with Mists. And we have seen an increase in engagement in all regions with the launch of Mists of Pandaria.

Brian J. Pitz - Jefferies & Company, Inc., Research Division

Bobby, a quick one. You've been a vocal supporter of games direct to the TV. With more Smart TVs out there and also, the pending launch of consoles, how should we be thinking about this kind of direct-to-TV phenomenon with respect to games?

Robert A. Kotick

I'm not exactly sure I understand the question or what I supported historically. But I would say, another thing that we are concerned about is, as you start to see Internet-enabled televisions and the App Store reach the television with more -- with a much larger base, it's very hard for us to compete against free. I think there are challenges even at the $0.99. And so to the extent that you see a lot more Internet-enabled televisions, we're going to have the start thinking differently about the content that we would deliver to those Internet-enabled televisions.

Operator

We'll go next to Neil Doshi with Citi.

Neil A. Doshi - Citigroup Inc, Research Division

Dennis, it looks like we saw record high operating margins in Q4, both on the total company side, as well as on the Activision side. What drove this, and do you feel like this is kind of a long-term potential for the overall business? And then, Mike, if you can give a little more color on the China market, it seems like there's continuously intense competition there and most of the declines seem to come from the East. Is there anything you could do to be more competitive in that competitive market? And then any learnings you could share with the Activision side as they go in and launch Call of Duty China.

Dennis Durkin

Sure. Neil, let me give you a couple of points on margins. Obviously, it was a very strong quarter margin-wise, and I think it speaks to our long-term strategy about being very focused and trying to build enormous franchises. And we saw that in Q4, and you can really see the scale benefits of that happening on our margin structure across the business. And yes, these are record margins for our business that we've ever had. So going forward, though, I think one of the things to think about -- and you'll see this in our guidance is relative to how margins play out over the next 12 to 24 months. Last year we had the benefit of being late in the console cycle, which gives you a lot of benefits from a development perspective and from a monetization perspective. And margins, traditionally, in past console cycles which you see our guidance compressed a little bit as you kind of work your way through the transition of that. So you'll see that reflected in our guidance from an OpEx perspective as revenue comes down relative to some of those new platforms and then, in out years it starts to grow again and margins expand. So that's kind of the, at least, the high level in terms of how we see margins playing out over time, but last year was really the benefit of being late in the cycle and having the largest franchises. Mike, I don't know if you want to...

Michael Morhaime

Yes, so with respect to competition, we've always had competition for World of Warcraft in all markets. I think it's fair to say that competition has increased, but I think it's also important to point out that World of Warcraft is competing against, really, all forms of entertainment for leisure time. And so that just underscores the need for us to continue creating new content, to keep up engagements. With respect to China, in spite of the decline in subscribership, it is important to note that the engagement levels of the core audience did increase with the launch of the expansions and I think that, that suggests increased engagement by our core players.

Operator

We'll go next to Brian Karimzad with Goldman Sachs.

Brian Karimzad - Goldman Sachs Group Inc., Research Division

I guess, quickly first, what's changed such as you're willing to publicly consider putting dead-on for strategic options? And then, Dennis, I have a housekeeping question on the add-up for guidance.

Robert A. Kotick

Well, I can't say that there's anything we can answer with respect to that disclosure. But we always are -- contemplating, always, to return capital to the shareholders.

Brian Karimzad - Goldman Sachs Group Inc., Research Division

Fair enough. Dennis, I think I -- maybe I have a number transposed or something, but when I take the non-GAAP guide here, so $4.175 billion on the revenue side and then, it sounds like you're adding up to a 31% margin. And then, put the tax rate on that because it really, generally, isn't much in between, I'm getting to -- closer to $0.85 in EPS, so can you help me understand what I'm missing here?

Dennis Durkin

Sure. Let me take you through our full year numbers on the GAAP side. I'm not sure where your math is breaking down, but I think we were pretty specific in terms of our announcement on that. So I can walk you through, I mean, I'd say it's probably best that we walk you through the numbers right after the call in terms of all the specifics, because it's -- if $0.80 is relative to what we have in there on our margin structure, COGS structure, revenue and totals.

Operator

We'll go next to the Daniel Ernst with Hudson Square Research.

Daniel Ernst - Hudson Square Research, Inc.

Bobby, relative to your comments about connected TVs and the efforts that you've had to date in console gaming with, first, you tried it with Call of Duty, tried the service for Wii and then it's transferred more to the Season Pass. In digital, on iOS, we have seen some interesting success with episodic content, specifically, the Walking Dead, and I wonder if that's a way that -- an issue you might be addressing, creating some more of a consistent revenue stream from consumers without the big ticket $60, $70 price tags for games. And then that brings me to related questions. When we look at next gen, in the last gen, we saw prices rise, because development costs were rising. Do you see the same upward pressure in development costs for this coming generation? Will it be the need for an upward trend in pricing, or is it not to be that traumatic this time around?

Robert A. Kotick

Okay, so that's a lot of questions. I would say, the first the thing is that what we've seen today on our iOS-related content, relative to the business that we're in, we're not really moved to dial that significantly. Having said that, we're investing in a variety of initiatives. We're looking at those things carefully. There's nothing that we see on the near-term pipe pricing that's going to have a meaningful impact on our financial results. But we're an opportunistic company and we're always exploring new areas that could be reasonable returns for our shareholders. You know what? I don't really know how to answer your second question, to tell you the truth. Maybe you could be a little more specific.

Daniel Ernst - Hudson Square Research, Inc.

Do you expect development costs to rise on a like-for-like basis for this coming next gen?

Robert A. Kotick

So this is my 22nd year doing this, and in every single console transition, we've seen an increase in development costs. Over long periods of time, it gets smoothed out, but I would say this is not a transition where that's going to be an exception. We're going to have to figure out how to take advantage of the unique capabilities of new hardware, and that requires new skills and investment in tools and technology and engines and so yes, that's likely.

Operator

We'll go next to Michael Olson with Piper Jaffray.

Andrew D. Connor - Piper Jaffray Companies, Research Division

This is Andrew Connor in for Mike. I promise I will not ask you any questions about the consoles. But my question is really about Call of Duty and the reacceleration that we saw in the month of December. I'm curious if that has anything to do with the focus on the multiplayer component of Call of Duty versus the single player campaign and whether that's a strategic focus for the franchise going forward?

Eric Hirshberg

Well, I wouldn't say we're any more or less focused on multiplayer this year than we have been in years past. We delivered an extensive campaign, as well as a very deep multiplayer experience. I think that Treyarch did deliver an exceptional multiplayer game and it followed up with exceptional DLCs so far. And I think, as always, the quality of the content is the thing that drives our results the most.

Operator

We'll go next to Doug Creutz with Cowen.

Douglas Creutz - Cowen and Company, LLC, Research Division

I wonder if you could talk a little bit about where you are in Call of Duty China? I think last year, you had said that you expect to launch in 2013, and maybe even in the first half of 2013. And just, are you sort of on your launch plan? Do you still expect to get it out this year? You mentioned in your guidance, you don't have anything in for, but is that just a measure of conservatism around the revenue, or are you actually contemplating the idea that you might not ship it this year?

Eric Hirshberg

Well, as I've said, we don't have any dates to announce or specifics to announce, and also I would note, that there a lot of things beyond our control with this project, a, that we're working with a partner; and b, that we have government approvals to contend with. So there are a lot of variables at play here. And our guidance is our guidance for a reason and that's all we really have on the topic today.

Operator

And we'll go next to Drew Crum from Stifel, Nicolaus.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

I wonder if you could talk about the discussions you're having with retailers, planned shelf space for Skylanders, given the increased competition you referenced in your preamble. And then also, can you talk about your plans for your shooter business given the impending launch -- or the eventual launch of the Bungie game against your Call of Duty franchise? In terms of cadence, would you launch 2 games in the same time period, same quarter? Just give your comments on that.

Eric Hirshberg

In terms of Skylanders, if the response we're seeing from our retail partners at Toy Fairs' is any indication, we expect to increase our retail presence and strength, not decrease. And I do think that our retail execution has been one of the shining stars and reasons for our success on this franchise. So I don't see any reason why we would think that would change.

Robert A. Kotick

I already said that we don't run out of competitors...

Eric Hirshberg

Yes, I was just going to say, we take every competitor seriously. And we've had -- sort been a competitor to ourselves thus far, but Skylanders is a proven force and we feel very confident about our partner's continued support for the franchise. Could you repeat your second question?

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Yes, as far as the Bungie game, would you consider releasing it in close proximity to one of your Call of Duty releases, or do you need to create separation between the 2 in order to avoid cannibalization?

Eric Hirshberg

Yes, we don't just have any announcements at this time, on our timing on Bungie. We really look forward to sharing it with you, just as soon as we are ready.

Operator

And we'll take our last question from Edward Williams with BMO Capital Markets.

Edward S. Williams - BMO Capital Markets U.S.

A couple of things. First of all, just a follow-up on Doug's question with regards to Call of Duty in China. Can you just let us know what steps need to be taken at this point before the game does release commercially? And since I'm last, I'll take advantage of that. A couple of other questions. First of all, looking at Skylanders, can you give us a sense as to what the attach rate is like from toys to games or a revenue split between toys and games? And then, thirdly, Bob if you can just -- going back to the comments with regards to potentially using debt or using cash and doing an acquisition, can you give some -- can you reiterate your philosophy around the acquisition strategy?

Eric Hirshberg

So I'll start with the China and Skylanders questions. On Call of Duty Online, we really -- this is where our partnership with Tencent is going to come to the fore. They are really the pioneers in that category and in this market, obviously, so we're following their lead. There are a number of steps from alpha testing and beta testing and refining, and of course, there's the government approval process. And we hope that -- we expect all those to go as planned, with Tencent really driving the ship through those things. In terms of Skylanders, the question was?

Robert A. Kotick

Skylanders attach rate.

Eric Hirshberg

Attach rate, which we don't break out on the toys that we can -- we've shared a lot of data today on the strength and the number of toys that we've sold and obviously, it's a great business. If you just look at it as a toy business, it would be the best-selling action figure line and better-selling than Star Wars and Transformers combined. And the software sales have been strong as well. And our ability to continue to drive that attach ratings has been one of the secrets to our success.

Dennis Durkin

I would just, just to add on that -- to build on than that comment. The Skylanders, one of the benefits of it is the forward-compatibility of the toys. So it is -- you get the added benefit of your installed base essentially so -- or when you buy the next games. So that's been a huge factor for us but -- so calculating the exact attach rate becomes tough when you have multiple SKUs in the market for at the same time.

Robert A. Kotick

Ed, I really can't comment on any acquisitions.

Kristin Mulvihill Southey

Okay. On behalf of everyone at Activision Blizzard, we want to thank you for your time and consideration today, and we look forward to talking with you soon. Good night.

Robert A. Kotick

Thank you.

Operator

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

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