Kristin Southey – VP, IR and Treasurer
Bobby Kotick – President and CEO
Thomas Tippl – CFO
Mike Griffith – President and CEO of Activision Publishing
Paul Sams – COO
Ralph Schackart – William Blair
Jeetil Patel – Deutsche Bank Securities
Ben Schachter – UBS
Tony Gikas – Piper Jaffray
Heath Terry – FBR Capital Markets
Colin Sebastian – Lazard Capital Markets
John Taylor – Arcadia
Doug Creutz – Cowen & Company
Brent Thill – Citigroup
Activision Blizzard, Inc. (ATVI) Q4 2008 Earnings Call Transcript February 11, 2009 4:30 PM ET
Good day ladies and gentlemen, and welcome to this Activision Blizzard’s fourth quarter and calendar year-end earnings 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 Vice President of Investor Relations, Ms. Kristin Southey. Please go ahead, Kristin.
Good afternoon and thank you for joining us today for Activision Blizzard's December quarter and calendar year end conference call. I want to let everyone know that our release has not crossed the wire yet, it should be momentarily as we have a number of tables that are associated with the release and they are taking awhile to be loaded. So we apologize for any delay.
With that, we are still going to get started. So as always, I am going to start with a review of our Safe Harbor disclosure, followed by comments from Bobby Kotick, CEO; Thomas Tippl, CFO; Mike Griffith, President and CEO of Activision Publishing; and today, Paul Sams, Chief Operating Officer of Blizzard Entertainment will join us as Mike Morhaime is traveling.
I would like to remind everyone that statements will be made during this call that are not historical facts and are forward-looking statements. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties. The company cautions that a number of important factors could cause Activision Blizzard's actual future results and other future circumstances to differ materially from those expressed in any such forward-looking statements.
Such factors include without limitation the impact of the current macroeconomic environment, sales levels of the company’s titles, shifts in consumer spending trends, the seasonal and cyclical nature of the interactive game market, the company’s ability to predict consumer preferences among competing hardware platforms, declines in software pricing, product returns and price protection, product delays, retail acceptance of our products, adoption rate and availability of new hardware and related software, industry competition, rapid changes in technology and industry standards, protection of proprietary rights, litigation, maintenance of relationships with key personnel, customers, vendors, licensees, licensors and third-party developers, counterparty risks, domestic and international economic, financial, and political conditions and policies, foreign exchange rates, integration of recent acquisitions and identification of suitable future acquisition opportunities, our success in integrating the operations of Activision and Vivendi Games in a timely manner, or at all, and our ability to realize the anticipated benefits and synergies of this transaction to the extent or in the timeframe anticipated.
These important factors and other factors that potentially could affect the company’s financial results are described in the company’s quarterly report on Form 10-Q for the period ended June 30, 2008 and September 30, 2008. The company may change its intentions, belief, or expectation at any time and without notice based upon any changes in such factors in the company’s assumptions or otherwise. The company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after today, February 11, 2009 or to reflect the occurrence of unanticipated events. I would also like to note that certain numbers we will be presenting today, including net revenues, operating income, earnings per share, manufacturing and distribution costs, product creation costs, sales and marketing expense, and G&A spending, inventory, capitalized software, and intellectual property will be made on a non-GAAP basis, excluding the impact of the change in deferred net revenues and related cost of sales expenses related to equity-based compensation costs, the operating results of products and operations from the historical Vivendi Games businesses that the company has exited or is winding down, one-time costs related to the business combination between Activision and Vivendi Games, the amortization of intangibles and the changes in cost of sales resulting from purchase price accounting adjustments and the associated tax benefits.
Please refer to our earnings release for a full GAAP to non-GAAP reconciliation. In addition, due to the fact that our business combination was accounted for as a reverse acquisition, we’ll be presenting additional non-GAAP explanations that includes Activision's stand-alone results for the periods prior to July 9, which is referred to as non-GAAP comparable basis.
Please refer to our earnings release which is posted on our Web site, and will be posted on our Web site at activisionblizzard.com for reconciliations and further explanations.
And now, I would like to introduce, Bobby Kotick, our CEO. Bobby?
Thank you, Kristin, and good afternoon. In previous calls, I’ve shared with you our strategic approach to our business. We focused on a select number of proven franchises genres where we have a development expertise. We try to ensure that titles are high-quality with broad appeal that can be delivered across multiple platforms and geographies. We support strong retail oriented marketing and sales programs to achieve our commercial success. And we look for ways to broaden the footprints of our franchises, and where appropriate we develop innovative business models like subscription-based online gaming. And we consistently execute with our lean, efficient, and focused operational strengths, which we believe to be the best in our industry.
We believe this approach was vital to capturing market growth and profitability, and it would be embraced by both retailers and consumers. Our results this year were a confirmation of that approach. In calendar year 2008, Activision Blizzard grew revenues and operation income in excess of 20% on a non-GAAP comparable basis. We also achieved on a non-GAAP comparable basis net revenues of $5 billion and operating income of $1.2 billion, both company records. While our non-GAAP operating margin of 24% set the standard in operating margin for third-party publishers. We were the number one third-party console and handheld software publisher for North America in dollars, we had a number one selling title or franchise on every major platform, console, handheld, PC, and online subscription, in our view a very important accomplishment.
We had in the December quarter both the number one and number two best-selling console titles, Guitar Hero World Tour and Call of Duty World at War in North America and Europe; and we became the first publisher to surpass $1 billion in sales from a single title, Guitar Hero III
Legends of Rock. On the PC, we saw the number one selling game in the December quarter World of Warcraft
Wrath of the Lich King, and that helped us to reach 11.5 million World of Warcraft subscribers, an increase of 1.8 million subscribers from a year ago. And on handhelds, we have the number one best-selling title in North America on the Nintendo DS, Guitar Hero On Tour. These terrific results build on 17 consecutive years of revenue growth and establish another year of 20% plus operating margins. They are the direct result of the hard work, talent and passion of our employees who are responsible for the success of our brands, the quality of the products, and the continued success in the execution of our strategies.
I'm incredibly proud to be associated with our fantastic team, and I'm very grateful to their continued commitment to excellence in every aspect of our business. The dedication of our employees is especially remarkable in light of the difficult macroeconomic environment. Success that we accomplished in two areas is worth highlighting; first, in executing the seamless integration of Blizzard Entertainment and right-sizing our organization. We are now paying nearly $150 million in merger integration and cost savings, exceeding our original goal and our original timeline. This merger related work has also allowed us to realize the tremendous benefits from a predictable and growing subscription-based model, which makes us more resilient to market volatility and console transitions.
Second, in delivering our entire holiday slate on schedule with strong quality ratings on all our key titles. Our consistent track record of on-time delivery gives us a significant advantage with our global retailers, who value planning and predictability to an even greater degree as they focus on tighter inventory management.
As we now turn our attention to 2009, I want to highlight three key competitive advantages that will allow us to build on our success and continue as the world’s number one third-party video game publisher. First, our proven strategy of focusing on high-quality franchises, which is evident in our 2009 product line up, the best in our company’s history. Second, our industry-leading operational capability, which has allowed us to avoid the distraction of right-sizing and restructuring. And third, our strong financial position, which gives us the ability to use capital as a competitive advantage. The consumer outlook remains uncertain for 2009. As always we recognized that our titles will need to perform well. We remain mindful of the many variables that can affect industry fundamentals and our own near-term market performance as there is still significant macroeconomic risk, consumer acceptance risks, and pricing risk.
We do believe that our proven ability to focus on select franchises gives us an unparalleled competitive advantage this year. Our strategic planning process provides the consistent ability to understand which titles to pursue, those which offer the greatest near-term reward with the greatest long-term value to our audiences, as well as which titles and genres to avoid. We are therefore confident in launching in calendar 2009 more products than ever before, what we believe to be the strongest slate in the industry. The great majority of these are based on proven franchises, including three of the most successful franchises in the history of video games. A smaller minority will consist of a select few wholly owned and internally developed new intellectual properties for which we have planned conservatively, but if successful, will provide a high return on investment for the near and long term. We’ve taken even more thoughtfully, rigorous and measured approach to launching new intellectual properties than we do to long-standing franchises as the introduction of new IP is one of our industry's most difficult challenges. We conservatively manage our portfolio risk profile by generating the majority of our revenue and operating earnings from the more predictable and stable franchises that have served us well over long periods of time. We believe this strategy is in the best interest of our long-term shareholders, and has been validated by our consistent performance.
Our proven operational capability complements our strategic focus and gives us another competitive advantage in the industry. This capability includes, as a core value, a culture (inaudible), and it lies at the heart of our operating philosophy. Scrutinizing spending to ensure that every operating expense, from the purchase of office supplies to the investment of hundreds of millions of dollars in massively multiplayer online games is part of the genetic cultural code embedded in our company. We conservatively model costs and we aggressively manage spending. This approach allowed us to deliver industry-leading operating margins in 2008, and it should enable us to achieve a record non-GAAP operating margin in 2009. In fact, we are forecasting a 26% operating margin, the highest operating margin attained by a major third-party publisher.
Our strategy and capabilities are supported by our very strong financial position. We ended the year with more than $3 billion in cash and investments, and no debt. The $1 billion share repurchase program we announced in November reflects our confidence in the company as an investment. To date, we have repurchased approximately 13 million shares. Even after the repurchase program is completed our remaining cash on hand liquidity and predictable cash flow provide us with the ability to continue investing for the future. Our solid balance sheet distinguishes us from our competition and provides us with another key advantage during this time of uncertainty.
Finally, as we enter the year we are well positioned to capitalize on the markets’ opportunities. As you will hear from Thomas, Mike and Paul later on, the video game market fundamentals are positive and we expect another year of growth in 2009, something very few industry sectors are expecting this year. Our competitive advantages, combined with the significant cost per hour entertainment value that games deliver over other forms of media, and our growing subscription-based business model should enable us to continue to capitalize on this industry growth.
We believe that the most dynamic parts of the digital economy are represented by the products we create, and that we should be able to increase a relatively small share of the global entertainment business, which is expected to reach $2 trillion within the next few years. Interactive entertainment continues to transform the media landscape and global consumer demand for virtual and digital content has increased significantly. The demand for video games is growing and they continued to capture a larger share of all media and leisure time. We are the leader in the highly profitable online subscription market, where others continue to try without success. Our market position, our large global footprint, our world-class proven brands, our strong development capabilities, and our focused commitment to our long-range financial plan, should enable us to deliver sustainable long-term growth and profitability to our shareholders, as we have for 17 years.
Now I would like to turn the call over to Thomas Tippl, who will provide a review of Activision Blizzard's financial results for the quarter, and review of our outlook for 2009. Tom?
Thank you, Bobby. Today I will begin with a review of Activision Blizzard's December quarter and calendar year end results, and then I will review our initial outlook for the first quarter and calendar 2009.
Before I get into the numbers, I would like to remind everyone that due to reverse merger accounting, our historical GAAP financials are those of Vivendi Games only. Activision’s results are only included as of the date of the merger July 9, 2008. As we did last quarter to provide a more transparent view of our comparable year-over-year operating results we have included in our press release a set of schedule labeled GAAP to non-GAAP reconciliation segment information for the three and 12 month periods for our core business. We refer to these numbers as non-GAAP comparables and they represent an apples-to-apples comparisons for the combined company on a year-over-year basis. These will be the numbers that I will refer to unless otherwise noted in my commentary. Also, please refer to our earnings release for a GAAP to non-GAAP reconciliation of the discussed items.
Focusing on our core business results for the calendar year, on a non-GAAP comparable basis we had a very strong year, with revenue growth of 26% and operating income growth of 21%. For the calendar year, we had GAAP net revenues of $3 million, and on a non-GAAP comparable basis net revenues exceeded $5 billion, the most revenues ever generated by a third-party publisher. For the calendar year, we had a GAAP operating loss of $233 million and a loss per share of $0.11.
Non-GAAP operating income for the calendar year on a comparable basis was $1.2 billion, a 21% increase year-over-year, translating into a 24% non-GAAP operating margin, making us by far the most profitable third-party publisher.
With respect to the December quarter results, Activision Blizzard not only exceeded our non-GAAP outlook, we grew non-GAAP revenues and earnings over the prior year, something very few companies accomplished this holiday season. For the quarter we had GAAP net revenues $1.6 billion and on a non-GAAP comparable basis net revenues exceeded $2.3 billion, a 24% increase over the prior-year comparable. Both Activision Publishing and Blizzard Entertainment performed better than expected in an extremely challenging environment. For the quarter, our strong performance was driven by high quality releases from our three wholly owned franchises, World of Warcraft
Guitar Hero, and Call of Duty.
This holiday we benefited as consumers and retailers focused their time and dollars on the products with the highest expected return on investment. For the quarter, we had a GAAP operating loss of $148 million and a loss per share of $0.05 as product mix towards online-enabled games increased deferred revenues, which will be recognized in future quarters. In addition, we were able to accelerate restructuring activities and associated costs that were planned for early 2009. Both of these are desirable events, as earlier restructuring accelerates synergy capture and an increase in online-enabled games provides additional ancillary revenue opportunities.
Non-GAAP operating income for the December quarter was $644 million and non-GAAP earnings per diluted share were $0.31, $0.02 ahead of our outlook.
With respect to specific line items for the core business, I will refer only to non-GAAP numbers. In the December quarter, non-GAAP product costs, including cost of sales for MMOGs was 42% of net revenues, higher than our prior year for the reasons; first, we incurred higher costs associated with the launch of Guitar Hero World Tour, which drove margin compression on the Activision Publishing segment. Specifically, the component and freight costs for the drums came in higher than expected as oil-driven input prices skyrocketed ahead of production and additional investments in drum tuning kits were required to ensure we deliver a best in class entertainment experience for our consumers. The fact that we outsold our competition margin of two to one in the December quarter validated our investment. And the upside is that these unexpected costs provide us with significant cost reduction opportunities in 2009. Second, we took higher obsolescence reserves to write down our remaining inventory of Gibson Guitar as our agreement has expired. And lastly, as we saw in the September quarter price protection and returns reserves were higher amidst unprecedented economic uncertainty and retailer caution with regard to inventories.
Non-GAAP product creation costs for the core business were 18% of net revenues. Non-GAAP sales and marketing expense was 10% and non-GAAP G&A was 3% of net revenues. In total for the quarter, non-GAAP operating expenses came in at 31%, lower than expected. The favorability was due to higher business mix from our distribution and affiliate business, acceleration of synergies and tight cost management. During the quarter we generated $18 million in investment income, $6 million less than last quarter despite higher cash balances as yields continue to decline because our investments are held in government-backed shorter-term securities to limit credit exposure and provide flexibility to deploy capital. Our effective non-GAAP tax rate was 35%.
In summary, our operating performance for the first two quarters as a combined company has been exceptional, especially in light of the economic conditions and the need for the organization to deliver the business as well as the integration and cost synergy initiatives. As a combined company, we finished the year well ahead of the prior year and have extended our industry-leading non-GAAP operating margin advantage over key competitors, many of whom produced non-GAAP operating losses for calendar 2008. The strategic and financial benefits that we expected from the merger with Blizzard have materialized for our shareholders and position us well for continued strong performance.
Now turning to the balance sheet. On December 31, we had no debt and approximately $3.1 billion in cash and investments, a slight increase over the prior quarter. In today's capital market environment, we continue to view the strength of our balance sheet as a major competitive advantage and we are putting the cash to work. On our last call, we announced that our Board had authorized up to $1 billion of share purchases and to date we have purchased approximately 13 million shares for approximately $126 million at an average price of $9.68 a share. In addition, we believe a prolonged and challenging macroeconomic environment might provide acquisition opportunities for which we are well positioned with our balance sheet, our more predictable cash flow outlook resulting from Blizzard’s subscription business model, and the backing of Vivendi as a shareholder.
Now let me turn to our other key balance sheet positions. The accounts receivable balance was $1.2 billion. This is $894 million higher than last quarter’s balance and up $394 million from the prior year on a comparable basis, reflecting the strong holiday sales performance. We also successfully navigated the bankruptcies of Circuit City and Entertainment UK without incurring bad debt. Inventories were $262 million, down $115 million from the prior quarter and up $88 million from the prior year on a comparable basis. The increase was due mainly to our larger slate and expected late quarter replenishment of Guitar Hero, which shipped more SKUs in more territories and has higher price points than in the prior year. We see opportunity to reduce inventories going forward driven by the strong sales for all Guitar Hero products we saw in January and the retail and trade programming we have planned for the remainder of the quarter.
Capitalized software development costs were $236 million, a decrease of $10 million versus the prior quarter; but excluding deferrals for online enabled games and purchase price accounting adjustments, capitalized software development costs were $165 million, in line with the comparable prior year and down $80 million versus the prior quarter, due to the amortization of our Q4 launch (inaudible). Capitalized intellectual property costs were $40 million, an increase of $30 million versus the prior quarter; but excluding deferrals and purchase price accounting adjustments, capitalized intellectual property costs were about flat versus the prior quarter.
In summary, our combined company December quarter results were strong and our financial position has never been stronger. We are well positioned as we enter a very challenging market environment in calendar 2009.
Before turning to our financial outlook, I would like to highlight a few items. Our non-GAAP results will continue to exclude the items detailed in today's press release. All these changes are intended to provide our investors as much visibility into our underlying operating performance as they had in the past. Finally, due to current macroeconomic conditions, our outlook is subject to significant risks and uncertainties, including declines in demand for the company's products, fluctuations in foreign exchange rates, and counterparty risks relating to customers, licensees, licensors, and manufacturers.
Our outlook is also based on assumptions about sell-through rates for the company's products, the new slate of products and progress in integrating operations following the company's recent business combination. As a result of these and other factors, actual results may deviate materially from the outlook presented today.
So now on to the combined company’s outlook. We enter 2009 with a reasonably prudent approach as we always do, especially in this uncertain and difficult macroeconomic environment. We are monitoring the retail and consumer environment carefully and remain cautious, despite the strength of our franchises, the quality of our slate, and the best in class execution we are bringing to the distribution of our titles, both online and offline.
Having said that, we are still positioned to exceed the industry-leading calendar 2009 financial goals which we set for the combined company at the time of our merger announcement on December 2, 2007, which as a reminder, were $4.3 billion in revenues and $1.1 billion in operating income. This is in spite of the fact that we have entered a global recession and have to offset the negative impact of a significantly stronger dollar since our merger was announced. In addition, our long-term companywide focus on profitability is expected to yield another year of operating margin expansion.
For calendar 2009, we expect GAAP net revenues of $4.2 billion and non-GAAP net revenues of $4.7 billion, which includes a negative impact of more than $400 million from the stronger dollar year over year, a reduction of more than $200 million in revenue from our lower margin distribution and co-publishing businesses, and the movement of the James Bond title into calendar 2010 to avoid head-to-head competition with Call of Duty. On a constant currency basis, however, non-GAAP net revenues will be up year over year.
For calendar 2009, we expect GAAP EPS of $0.22, we expect non-GAAP EPS of $0.61, which also includes about a $0.06 negative impact from (inaudible), and a reduction of about a penny related to the distribution and affiliate revenue declines. In addition to our launcher slates, our relentless focus on cost optimization, especially with regard to the Guitar Hero franchise and merger synergies will drive a non-GAAP operating margin of approximately 26%. This is another step closer to our 27% to 28% near-term operating margin objective.
For the calendar year, we expect GAAP product costs, including cost of sales for MMOGs of approximately 33% of net revenues and operating expenses including royalties of about 57% of net revenues. We project a GAAP effective tax rate of 32% and a diluted share count of about $1.33 billion.
On a non-GAAP basis, we expect product cost, including cost of sales for MMOGs of 34.5%, which is an approximately 650 basis point improvement over the prior year, driven by cost reductions for Guitar Hero hardware and mix shift to software for the franchise.
Gross manufacturing margins will also expand due to revenue declines in the distribution and co-publishing businesses, both of which carry much higher cost of goods. The flipside of a smaller distribution co-publishing business is an increase of operating expenses, including royalties, to almost 40% of net revenue. In addition to the mix shift, our launcher slate which includes three new intellectual properties, which carry higher product creation costs and higher sales and marketing expenses year-over-year. Also, Blizzard is expected to increase their investment in customer service to further enhance the WoW entertainment experience and expand its competitive advantage.
Finally, Blizzard’s product development expenses are projected to increase as they get further into development of future titles, including Diablo III. The return on these investments is reflected in our operating margin expansion plan for this year and beyond.
For the calendar year, we expect an effective non-GAAP tax rate of 34% and a diluted share count of 1.33 billion. Please note that our share count could be different depending on the amount of repurchase activities executed in the year.
Now moving on to the March quarter. We have two important releases, both of which are launching in the last week of the quarter. Guitar Hero
Metallica on the 360, PS3, and Wii in the US; and DreamWorks Monsters Vs. Aliens, which in addition to catalog sales and significant revenue deferrals are expected to generate GAAP net revenues of approximately $850 million. We expect GAAP product costs, including cost of sales for MMOGs of approximately 34% and operating expenses including royalties of about 47% of net revenues. We project a GAAP effective tax rate of 32%, diluted share count of about 1.35 billion and GAAP earnings per share of $0.08.
We expect non-GAAP net revenues of $550 million. This is lower than a year ago, as we are cautious about the near-term retail environment, plan for further channel inventory reductions and have to observe a significant negative impact from (inaudible). We expect non-GAAP product costs, including cost of sales for MMOGs of 34%, non-GAAP operating expenses including royalties of 54% of net revenues, and a non-GAAP effective tax rate of 34%. We also project a diluted share count of 1.35 billion and non-GAAP earnings per share of $0.03.
Before I close, I want to provide a recap of the progress we have made with the merger integration synergy capture. Since the merger, we increased our synergy targets by $50 million to a range of $100 million to $150 million and we are now tracking towards the top end of this range. We right sized our organization, having already eliminated approximately 1,500 positions, avoiding a major distraction for our employees in 2009. And our (inaudible) cash restructuring costs are expected to come in well below the $100 million threshold due to our successful disposal activities. As we enter 2009, our integration efforts and synergy capture will focus on the European territories.
So in closing, our merger has been an all round success. In 2009, we have the strongest lineup of proven properties in the industry and today, we expect to generate record operating margins. And finally, we have a strong balance sheet, which gives us the ability to take advantage of market opportunities that arise from these challenging times.
So I will now turn things over to Mike Griffith, President and CEO of Activision Publishing to provide his thoughts on the holiday.
Thanks, Thomas. Today, I will focus my comments on our projections for the hardware and software market, the key strategies that drove Activision’s solid performance and our initial thoughts and key drivers for calendar 2009.
First, starting with a review of the market. Despite the global economic turmoil in 2008, industry fundamentals remained strong. On December 31, the installed base of hardware in North America and Europe for current-gen systems including handheld was 159 million units, an increase of 69% year over year. For calendar year 2009, we expect the installed base of hardware in North America and Europe will be up 8 million units for the PS3 and up 8 million units for the Xbox 360; and we expect the Wii to add more than 16 million units. Finally, we expect handhelds will grow in excess of 21 million units.
Moving to software, we define our market to include all major platforms in North America and Europe. In 2008, the software market grew 20%. It is important to note that during the holiday quarter, the industry grew 6% year over year showing strength even during a challenging economic environment. The videogame market has shown resilience compared to other sectors.
For 2009, we expect the combined North America and European retail software markets to show mid single-digit growth, something very few sectors are expecting this year. Overall, we anticipate that the software market will continue to hold launch pricing and reward the titles with the best quality broadly across platforms and geographies.
In the US, the average price point of retail trended up during the year and the average price point for the December quarter was the highest ever, buoyed by premium priced SKUs. Consumers have proven receptive to special editions at higher prices and bundles with added value on top titles. Our band bundles at $189 sold extremely well and if we had had more in stock during the critical shopping period of the holidays, we would have sold even more. In addition, we continue to hold launch pricing of Call of Duty
Modern Warfare more than a year after launch. We expect that we will continue to hold premium pricing for our AAA titles, as we were able to do this holiday season with our core franchises and we continue to examine opportunities for further pricing. Of course, pricing decisions for our titles will be made on a title-by-title basis based on quality and other factors.
Turning now specifically to Activision. For calendar 2008, Activision publishing was the number one third party console and handheld publisher in North America and the number one third party publisher for the Nintendo Wii platform worldwide. And we also had the number one Nintendo DS title in North America, a first for any third-party publisher. For the December quarter, we were the number one console, handheld, and PC publisher for the quarter and we had the number one and number two best-selling console franchises in North America and Europe in dollars with Guitar Hero and Call of Duty.
Overall, we believe that our continued focus on three core strategies drove our success in 2008 and have fostered strength and capabilities which will drive our long-term competitive advantage. These strategies are first, smartly expanding our balanced franchise portfolio; second, strengthening our development capabilities; and third, focusing our resources disproportionately on the top customers in the top markets and against our top properties.
First, we are committed to expanding our balanced franchise portfolio by offering new entertainment experiences that resonate with consumers. We believe that our ability to extend the life of our franchises, coupled with the introduction of a select number of new IPs will allow us to maintain our industry-leading track record of success. As you know, we have been cautious with new intellectual property development, carefully vetting concept and product and that has led to an excellent track record of success with a focus on creating big new franchises not just one of opportunities. And as a result, we had strong success broadening our wholly-owned franchises.
For the calendar year worldwide, two of our franchises had more than one title in the top ten. The Call of Duty franchise had two top ten titles, World at War and Modern Warfare. And the Guitar Hero franchise also had two titles in the top ten, World Tour and Guitar Hero III. We will also look to expand our proven franchises by offering consumers new entertainment experiences, which extend the reach of our franchises and broaden our consumer base. We successfully executed this approach in calendar 2008 by extending the Guitar Hero franchise to the Nintendo DS, capturing the number one spot in the US. And in calendar 2009, we plan to launch yet another completely new entertainment extension in the music genre with DJ Hero.
With respect to new intellectual property, we recognize how challenging it is to create and launch new franchises, which is why we limit our exposure to only a select few properties in a single year. This year, we will launch two new well vetted qualified Activision intellectual properties, one in the racing genre and one in the first-person shooter genre. These genres are large, profitable synergies abilities and represent scalable opportunities for new interest who offer consumers fresh and innovative development. In addition, we will launch prototypes of new intellectual property we picked up in the merger that was largely already developed and which is getting very strong media buzz.
Lastly, we will continue to extend the shelf life of our franchises through new downloadable content offerings. To date, more than 37 million Guitar Hero songs have been downloaded and in the coming months, we expect to release all new map packs for Call of Duty
World at War, which currently is the number one game on Xbox Live. It is still very early days for downloadable content. However, we expect this revenue stream to continue to grow in the years to come.
Our second key focus is to continue strengthening our independent studio model, which we believe has a long-term competitive advantage. This model fosters creativity and innovation and enables us to more easily attract and retain studio talent, particularly in this economy. During the past year, we added four developers to our studio roster
Radical Entertainment and High Moon Studios, which we acquired as part of the merger and chose to retain after extensive due diligence; Budcat Creations, an award-winning studio with expertise on the Nintendo platforms; and FreeStyleGames, a leading UK developer of music-based games. All of these developers have been fully integrated into our company and are working on upcoming games.
Finally, our third strategy is to focus our global resources on the top markets and on our top customers and against our top titles. In 2009, we will continue to allocate our resources against North America and European consumer marketing activities focused to make the big bigger in our biggest markets; also, on our worldwide in-store execution activities to win the consumer at the point of sale, where we have built consistent capability over time; and third, integrated marketing plans with each of our top five customers in all key geographies.
In summary, our business is well positioned in the market, our global team is focused on the right priorities, and we have the financial flexibility to execute on our strategic initiatives to deliver long-term revenue goals and record operating margins. The progress we have made in 2008 provides us with a solid foundation as we enter 2009. Our strong product slate, coupled with the less crowded landscape provides us with a unique opportunity. The combination of our games based on some of the best-selling franchises of all time, the historic increased appeal of video games during difficult economic times, and the growing worldwide installed base of hardware should allow us to reach new consumers with our titles. There is no other company better positioned to capitalize on the market opportunities that should present themselves during the calendar year ahead.
In 2009, we will launch games based on proven franchises Call of Duty, Guitar Hero, Transformers, Wolverine, Marvel, Tony Hawk, Wolfenstein, and Ice Age. Additionally, we will launch new intellectual property, our racing game, Singularity as our new first-person shooter, and Prototype, as well as DreamWorks Monsters Vs. Aliens. We made a strategic decision to move our next James Bond release from late 2009 to 2010 to benefit from a better launch window and avoiding having to compete with the large holiday lineup and going head-to-head with Call of Duty, both of which negatively impacted the performance of this title this holiday.
The movement will have an added benefit in staggering the completions of our racing title and the next Bond, both in development at Bizarre Creations. This will allow the studio to give each title the time and attention it deserves for finish and polish, again learning from last year’s experience as (inaudible) had to simultaneously finish Call of Duty
World at War and James Bond, which we believe plummeted the opportunity for Bond this past holiday.
In 2009, we are also committed to maintaining a leadership position on the Nintendo platforms by continuing to innovate on our intellectual properties best suited for this consumer like Guitar Hero and Tony Hawk plus DJ Hero in addition to a variety of content and innovation that our Minneapolis Value Group is working on in a number of genres, including sports and family-oriented games. Our breakthrough performance on the Nintendo platforms last year underscores our commitment to this goal and the strategic advantage we enjoy as the Wii continues to grow, by having titles well matched to Wii’s demographic and playing dynamics.
In addition to our mainline titles we expect that our catalog will provide a solid base of revenues driven by the number one and number two top-selling titles in the December quarter.
Before moving to the release schedule, I would like to spend some time discussing the overall music category and Guitar Hero's strategic plan for next year. Today, the music genre represents almost 11% of the worldwide software market and an even higher percentage of top ten revenues. In 2008, the music category grew for the year, for the holiday quarter, and for the month of December.
For the year, the music genre grew 68% worldwide. For the holiday quarter, the category grew 17% worldwide. And for the month of December, the category was up 27% year over year. In 2009, we expect that the category will be flat to up slightly with continued long-term growth prospects, since the music genre in total is still smaller than several other genres and lend themselves [ph] very well to this consoles generation’s demand for interactivity. This year, the category will be driven in part by a larger installed base of hardware, our larger lineup year over year, and the late fourth quarter 2008 supply of the premium-priced Guitar Hero
World Tour band kit.
Guitar Hero created the music genre and for the record, Guitar Hero was the largest videogame franchise worldwide in 2008. And Guitar Hero
World Tour was the largest videogame that titled worldwide in the holiday quarter. And Guitar Hero’s sell-through for the month of January, including all measured and unmeasured outlets is up versus year ago. In 2009, we will continue to lead the category with product innovation, a robust and growing music library, and the introduction of compelling new games and features that will excite existing fans and bring in all new users.
Today, there are essentially two significant players in the large music genre and Guitar Hero is the clear leader with an installed base of more than 32 million worldwide, almost 4x that of our nearest competitor, who we continued to outsell strongly through the most recent holiday quarter. Despite supply constraints for the band product in the key holiday quarter, Guitar Hero was the number one selling console franchise in the US and Europe. In Europe, the franchise’s sales increased 122% during the holiday period and although sales were up significantly, international revenues for the brand are still tracking below our publishing average of approximately 40% of North America. Therefore, despite significant growth, we believe there is still an opportunity for us to grow this franchise faster internationally.
The music genre is clearly robust and our internal research shows that there are many genres of music that we have not tapped, but which consumers are very interested in. This year, we will introduce new products to meet consumer demand and attract more people to the Guitar Hero franchise.
In calendar 2009, we expect that the installed base of consoles and handheld hardware will grow by another 53 million units, giving us a large new base of potential consumers. Our experience continues to show that new users to the franchise broaden our demographics and as these new users as well as established users still hunger for additional music variety. While we have made significant achievements over the past few years, there is still a lot more that we have to accomplish. In Europe, we continue to be underdeveloped, and this year we expect to include more songs from European bands in order to leverage the growing installed base of consoles.
In February, we will launch StandAlone Drums worldwide to consumers who purchase the guitar bundle can add a drum set and build their own band. We expect that our focused approach in delivering products that appeal to a variety of musical taste should enable us to bring new consumers to the franchise and with products like DJ Hero, which build on the core idea to take the opportunity in an innovative and completely new direction. And attacking these opportunities with nearly twice as many SKUs as last year will continue to build our leadership.
So in summary, the music category is very large, has continued long-term growth prospects, and we have a robust strategy in place to leverage our leadership position.
Now I would like to discuss our March quarter game releases. We will release two new titles in the last week of the quarter, Guitar Hero
Metallica for the Xbox 360, PS3 and Wii in North America, and Monsters Vs. Aliens worldwide on multiple platforms.
Metallica lets players experience one of the greatest heavy metal bands of all time as well as 20 other bands handpicked to build out the experience. Metallica is one of the most popular artists in music history, having sold an estimated 100 million records worldwide and having won nine Grammy awards, including two earlier this month. Their 2008 album debuted at number one, marking the first time a band has had five consecutive albums debut at the top of the charts. Next month, Metallica will be inducted into the Rock 'n Roll Hall of Fame. All of our market research for the group supports top-tier appeal in both North America and Europe.
In late March, we will also release Monsters Vs. Aliens ahead of the March 27 theatrical release. The game is based on the first ever DreamWorks 3-D movie. Additionally, we will continue to support sales of our top two franchises with new downloadable content for Guitar Hero and Call of Duty. In the first quarter, we will release about 50 downloadable songs for Guitar Hero and the first map pack for Call of Duty
World at War that features all-new multiplayer maps.
Looking out at the second quarter. First up is the much-anticipated X-Men Origins
Wolverine. Wolverine is one of the most popular Marvel characters of all time and the game's multi-platform May launch coincides with the global release of 20th Century Fox's feature film. The love by our own Raven Software, which also developed the highly-rated Marvel Ultimate Alliance, this is the first game that lets players experience Wolverine’s regenerative abilities and indestructible claws. It is Wolverine uncaged and we expect that this title will be one of the best action games this year based on all the early buzz and feedback.
The second title is Transformers
Revenge of the Fallen on multiple platforms, which will be released with the movie in June. The first movie was one of the top 20 grossing domestic movies of all time and the game has sold nearly 5 million units to date.
The next title will be Prototype, the all-new third person open world action game from Radical. The press on this title has been very positive and we are excited about its entry into the market. The game puts the players in the shoes of Alex Mercer, who can change form by consuming others to become the ultimate shape shifting weapon.
We will also launch Ice Age 3 timed to the movie's release at the end of June. The Ice Age feature films have grossed in excess of $1 billion in theatrical revenue worldwide and Ice Age 2 sold nearly 2 million units as a game.
Lastly, we have a robust lineup of new Guitar Hero SKUs. In addition to Guitar Hero
Metallica, we expect a launch a new Guitar Hero game for the Nintendo DS and a separate razortips compilation Guitar Hero game that includes full band versions of the most popular songs from previous Guitar Hero games and will be made available for the 360, PS3, and Wii.
As we look at the back half of the year, we expect to release the majority of our games. Starting with the Guitar Hero franchise, we will launch a major restage of the business with all new differentiated Guitar Hero products, plus the launch of DJ Hero, a line extension that enhances and extends the franchise. We will be sharing more details with you about our new Guitar Hero lineup and DJ Hero games in the future.
We will also release Call of Duty
Modern Warfare 2 from Infinity Ward. The Call of Duty franchise is in its seventh year and it has never been stronger. Our recent performance was driven by Call of Duty
World at War, which was a huge success for us this year, ranking as the number two selling franchise in the holiday quarter and the strength of Call of Duty 4
Modern Warfare catalog sales, which was the number one first-person action game of all time with light to date of more than 12 million units. 2009 going to be a very exciting year for the franchise as we expect this year's launch is likely going to be the most anticipated title of all of 2009.
In addition, we will be entering the large racing genre with a new IP from Bizarre Creations, which we are very excited about. In 2008, the racing genre grew an incredible 34% and is the fifth largest genre. While we haven't disclosed any details yet for competitive reasons, Bizarre Creations has a proven track record of developing hit racing games for the past 10 years and was the principal reason we acquired them. They have developed an incredibly innovative game that looks great and which we expect will appeal to a global mass market audience. And we think the launch timing vis-à-vis the competitive environment couldn't be better.
In addition to the above, we also have a new game based on the Tony Hawk franchise. We said we would reinvent this franchise from the ground up and we have developed a very innovative and interactive approach for Tony. This should allow us to broaden the appeal of skateboarding beyond the core to mass market audiences and take advantage of this cycle’s dynamics. More details later for competitive reasons.
Additionally, this summer we expect to release an all new Wolfenstein built on id Software’s well-established videogame franchise.
And lastly, we will be launching our new wholly-owned first-person action game, Singularity, which is being developed by our own Raven Software. The game propels players into a sci-fi experience, where they must navigate through two intertwining eras to prevent a catastrophic accident called the Singularity. This game is already receiving strong interest from the media and again through the combination of a well vetted and research concept in a large genre with a top-tier developer. If you haven't seen it, you should check out the cover story on Game Informant.
This provides you with a snapshot of what we have planned for 2009. It is our strongest slate ever and we believe it has the right balance between proven properties and new introductions to capitalize on our solid performance this past year. As we look ahead, there are few companies better positioned than Activision Blizzard to leverage the long term opportunities that the interactive entertainment industry has to offer. As a company, our strategy has been focused on those activities that will drive long-term growth and operating margin expansion. We will continue to innovate our franchises and aggressively pursue those long-term opportunities that enable us to increase our global market share. And lastly, as Thomas discussed earlier, we will continue to drive efficiency as a major focus area. This focus has never been more of a competitive advantage than during these uncertain times.
And now, I would like to introduce and welcome Paul Sams, the Chief Operating Officer of Blizzard Entertainment.
Thanks, Mike, and hello everyone. Today, I will spend most of my time discussing the December quarter and then I will talk about some of our initiatives for 2009. We had three very strong quarters from January through September, but our December quarter was our best of the year. This was due to the November launch of our second World of Warcraft expansion, Wrath of the Lich King. More than 16,000 stores were open at midnight to celebrate the launch and that is three times the number of stores that held midnight launches for the first expansion. And within 24 hours of availability, the new expansion sold more than 2.8 million copies. Not only did this break the record for the fastest selling PC game of all time, previously held by the first World of Warcraft expansion, but in a single day, Wrath of the Lich King had already sold enough copies to become the best-selling PC game of 2008. It went on to sell more than 4 million copies in its first month, which also set a new record for PC games.
In addition to record sales, the new expansion received critical acclaim with an average Metacritic rating of nearly 92%. It also won several Editor Choice awards and was named Best Expansion of 2008 by multiple news outlets. The success of Wrath of the Lich King led to a new subscriber milestone also. In October, we announced that the game had reached more than 11 million subscribers. By the second week of December, we were at more than 11.5 million subscribers. For the year, the game grew by over 1.8 million subscribers, which is approximately 18% beyond where it was in December of 2007. This growth was proportional across all regions, keeping us at a 55-45 split between east and west.
This past quarter, we also rolled out our paid character re-customization service, which let players change their character’s appearance and gender for a fee. The community had been asking for this feature for a long time and we are pleased to finally be able to offer it to them. Similar to our paid realm transfer and character name change services, the re-customization feature has been very popular with players.
As a result of all these factors, our non-GAAP net revenue was up 61% and our non-GAAP operating income was up 76% compared to the previous quarter. Overall, 2008 was our best year-to-date. On a non-GAAP comparable basis, net revenues for the year exceeded those of 2007 by 21% and our operating income was up 24% year over year. This was fueled by the sustained performance of the first World of Warcraft expansion as well as the Wrath of the Lich King launch. Including Wrath of the Lich King's number one finish, three of the top five selling PC games in North America and Europe were in the World of Warcraft series in terms of units sold. The World of Warcraft based game, Battle Chest, which combined World of Warcraft and the first expansion, stayed in the top-ten list nearly all year. In addition, Warcraft III and Diablo II Battle Chest made several appearances in the weekly top ten lists, despite having been on store shelves for five and seven years respectively.
While no industry is immune to the current economic situation, World of Warcraft is well-positioned to remain the entertainment experience of choice for our players. This is because it offers what we feel is the best entertainment value for the dollar. For less than the cost of a single movie ticket and popcorn, our players receive one month’s worth of entertainment versus the two hours they would get at the theater. The comparison is equally strong when you look at the hourly cost of cable television, sporting events, theme parks and so on.
Part of what makes World of Warcraft appealing is the constantly changing in-game experience. This comes from players’ interactions with each other as well as from the new content that we add throughout the year. Keeping the focus on quality with this new content will help position us for continued growth in 2009 and beyond.
Historically, Blizzard games have remained top sellers year after year. This emphasizes the value we seen taking the time we need with each game to make sure we get it right. We believe that the performance of our previous games in each series is a good indicator that StarCraft II and Diablo III will be well received once they are ready for release.
Turning now to the year ahead, we are optimistic about the continued performance of our games in 2009. We are preparing to release Wrath of the Lich King in China and we anticipate that that launch will attract new and returning players there just as we saw in other regions. Also coming up in the months ahead will be the StarCraft II beta test. The beta will be played on a basic version of our new Battle.net architecture, which will give us the opportunity to test the game and the service in a live environment. Over time, we will be adding features to deliver a second generation Battle.net experience. We know that the demand for StarCraft II is very high. The original StarCraft has sold more than 11 million copies worldwide and the sequel has been named on several most-anticipated lists. We are aiming to release StarCraft II as soon as possible, but as with all previous Blizzard games; we won’t ship it until we feel it is ready.
For World of Warcraft, we will be delivering substantial content updates this year. These updates play a large part in retention, because they offer new challenges and awards for players, while continuing the rich and immersive story. The first of these will be going to our public test rounds soon. The test rounds are a good way for us to give players a chance to be part of the development process, by helping us to test upcoming content before it gets added to the live game.
So we are off to a good start with the first quarter. World of Warcraft subscriber base has continued to grow, despite the ongoing economic concerns and we just announced that we will be starting our e-based player versus player tournament for the game soon. This tournament proved to be exceptionally popular last year, and we are hoping for a similar response this year given the $200,000 in cash prizes we are offering. As I mentioned, our focus remains first and foremost on quality. This applies to every aspect of our organization. One of the ways we will be demonstrating this over the upcoming quarters is through some major customer service initiatives. We recognize that customer service is the retention factor for many players, and we are committed to ensuring the quality of our service matches the quality of our games. Ultimately our goal is to be among the best in class for customer service regardless of industry.
In addition, we will continue to put every effort into delivering the types of entertainment experiences our players expect and enjoy. This goes not only for our upcoming World of Warcraft content, but also for StarCraft II and Diablo III, as well as our unannounced massively multiplayer game. While the amount of development activity we currently have underway is as high as it’s ever been, we are fully committed to maintaining our quality standards with each and every product that we deliver.
Mike Morhaime and I look forward to sharing more information with you about our 2009 initiatives on future calls. For now, I thank you for your time and I would like to turn the call back over to Kristin.
Thanks, Paul. Operator, we would now like to open up the call for questions. But I wanted to highlight, given the large number of people and the time that we only ask you to limit your questions to one per caller. So, operator?
(Operator instructions) And your first question will come from Ralph Schackart with William Blair.
Ralph Schackart – William Blair
Hi, good afternoon. I'll keep to one given the length of the call. Just curious how the sales have trended post-holiday Q4 results? Any big changes in terms of units, pricing for top games versus catalog, any color you could provide there would be great. Thanks.
Sure, Ralph. I think in terms of our pricing there’s really been no change. It's been normal promotional activities right from the holiday quarter and into January. As you know, many retailers end their fiscal year at the end of January. So, we did see stronger sell through performance in early January, a little bit of that backing off later into the month, but then it has rebounded at the end of the month and on into February. So, we are encouraged that our own sell through results were up year-over-year in January. The open to buy dollars in retailers seem to be loosening up a little bit now that their fiscal years are behind them. And pricing and promotional activity is kind of what we would expect.
And from Deutsche Bank Securities, we will hear from Jeetil Patel.
Jeetil Patel – Deutsche Bank Securities
Hi guys. A question around just if you look at your three top franchises for this year, I assume are Guitar Hero, Call of Duty, and Hawk I guess – if you combine those versus Guitar Hero and Call of Duty for ‘08 do you think you comp positive as you look at three franchises versus the two in ’09, or do think that it will be made up of some of the newer titles coming up for this year? And then just a quick question around cash flow, the $0.61 that you guided to for the year, do you think cash flow pretty much tracks around that earnings number?
Just to start, Jeetil since we're only going to answer one question –
Jeetil Patel – Deutsche Bank Securities
Pick the first one then.
I think when you look at operating margin contributors, the Call of Duty franchise and as far as new releases on other existing franchises it's a long list of other products. And so we are not going to give the level of granularity on a title by title basis, but strategy has been pretty consistent. Put out only products that we think can achieve that broad penetration can do many millions of units, have clear sequel potential or annualizable and will get us to our operating margin objectives. And I would say that's pretty much the case across the board on every product.
Jeetil Patel – Deutsche Bank Securities
And on cash flow?
And on your second question on cash flow, our cash flow going forward is going to track closer to EPS as we have burned through our net operating losses we are a cash taxpayer now. Now, obviously it is not going to track perfectly to net income. It depends on IP investments we would be making, etc. But it is going to track closer to that number than it has in the past.
And from UBS, we will hear from Ben Schachter.
Ben Schachter – UBS
You mention that StarCraft won't ship until it is ready, but does the guidance into any non-Warcraft revenue from Blizzard this year? And just as quick follow up, could you give us the, what you think the blended ASP for the music titles will be this holiday. Thanks.
This is Paul; I will take the StarCraft one. As we mentioned at the analyst day last year, Blizzard intends on delivering one front line release per year. And I think that you can see in our numbers that that is contemplated. As it relates to which title we will be releasing at this year, we are not prepared to say.
On the Guitar Hero pricing, I think you can expect very similar price points. As we saw in 2008. We’ve got premium priced software at $59, Guitar bundles at $99, and Band bundles at $189. And while we see some opportunity for premium collector's editions and added value and increased realization, for that value, that we're contemplating, I think in general terms you see that the average pricing is the same.
And we haven't announced the price for DJ Hero.
Ben Schachter – UBS
And some Piper Jaffray, we will hear from Tony Gikas.
Tony Gikas – Piper Jaffray
Thanks guys. Maybe you could just give us a quick update on your comfort level with company and retail inventory levels, and then any pricing strategies that you might have on some of the Guitar Hero products that's in the channel right now. Thanks.
Overall on the inventory we are about in line on a percent of sales to our historical ratios as we entered January. Nothing we sold in isn't connected to some to move though program. As I mentioned just a minute ago, we saw very strong sell through results in early January, a little bit of that slowed, I guess, as retailers prepared to close their fiscal year and the impact of lower gift card sales in December. But then toward the end of the month, we have seen them rebound and into February. So we are comfortable with where we see the inventories at this point.
We will hear from Heath Terry with FBR Capital Markets
Heath Terry – FBR Capital Markets
Great. Thanks. I was wondering, you talked a little bit about the installed base of $32 million that you have on Guitar Hero, can you give us a sense of what you feel like the active, I'm assuming that's a total sales number, kind of life to date for system, given the multiple purchases and the Guitar upgrades that you had over the years can you give us a sense of what you feel like the active install base of Guitars and now band kits is out there that you will be selling software into this year?
I think that you are right in that that install base number includes all units we sold to households do own multiple guitars. And so there is a little bit of repetitiveness in that number. But we also know that the genre represents only 11% of software sales. So we think that there is a tremendous upside growth opportunity. So beyond just selling the software into our current installed base of hardware, we think we’ve got continued strong growth prospects to get hardware into new households as the software. So, you know, we think it's going to be a combination of those the components. Not to mention that we’ve got particularly strong expansion opportunities in Europe, and we have multiple titles.
Heath Terry – FBR Capital Markets
Of course, and then just quickly, do you have a sense for what your expectations for share this year, particularly given that there is apparently not going to be a rock band three out of MTV games this calendar year?
Well, the genre has exploded and grown very fast. That's – you know, one thing that we've enjoyed and that's attracted competition. And you're right to date there have been others rock band has been the serious competition. And it's hard to say exactly what our share is going to be. We are focused more on our absolute performance, and continuing to build our installed base and building out titles with existing users. So I can't really comment on what rock band might or might not do. But I will say that we've consistently outsold them quarter by quarter by a substantial amount, in total by more than four to one, and in Europe by significantly more than that. So I think we are well-positioned to maintain leadership portion in the genre. And we really focused on our own program and satisfying the consumers with many opportunities that we know are still out there.
Heath Terry – FBR Capital Markets
Great. Thank you.
We will take a question from Colin Sebastian with Lazard Capital Markets.
Colin Sebastian – Lazard Capital Markets
Thanks. Hi, good afternoon. I was wondering roughly what portion of your 2009 operating income or EPS are you expecting to come from online revenue sources, broadly speaking including subscriptions, downloads, and micro-transactions?
Hi Colin. We are not providing guidance by revenue line item. So what we generally expect to see is based on World of Warcraft’s track record, continued to growth of subscribers. Now this is being somewhat pampered when you look at the dollar revenue result by the fact that a large portion of Blizzard subscribers are outside of the US, and I mentioned earlier the strength, the stronger – the significantly stronger dollar in our assumptions is partially offsetting that. When you look beyond the subscription revenues from Word of Warcraft we continue to expect growth from other digital revenues where we have made good progress over the last couple of years and it’s becoming a more meaningful part of our of our business. I think last year we've done somewhere around $70 million or so in ancillary revenue streams and we expect that to grow probably closer to somewhere in the $100 million range.
Colin Sebastian – Lazard Capital Markets
Thomas or Paul, did you break out the portion of subscribers in Western markets versus Asia?
We haven't broken it out but I think Paul mentioned that the rough being 55, 45 between West and East, rather the East and the West. The East 55%, the West 45%, and that has been pretty consistent as they were able to grow the subscriber base in all regions.
Colin Sebastian – Lazard Capital Markets
Thank you very much.
Next we hear from John Taylor with Arcadia.
John Taylor – Arcadia
Hi. I wonder if you could go into a little bit more detail on the music side of things, I guess maybe talk about your assumptions related to the mix of disks versus guitar bundles versus band bundles in '09 versus '08, how that might shift. I see your ASP assumption is similar, I wonder if there is kind of what's lying behind that? And also in December quarter and for calendar ‘08 I wonder if you could tell us how much of the music business was in the US versus elsewhere in the world? Thanks.
Sure. I think for starters on the Guitar Hero business and the music genre in total, as I mentioned already, the genre has continued to grow. It grew in the year, it grew in the quarter, it grew in December, our businesses through is up month over month in January. So, the trends are continuing to suggest strong consumer interest on into the future. But we've got a lot more to do on this business. You know, starting with the fact that our business has still been somewhat narrow and we are expanding that this year. And our international sales, is second part of your question, while it doubled, there's still below average, kind of in the 20%, 30% North American levels representing our international side of the business. So we've still got some room to grow internationally to get up to the average ratio between North America and Europe. We also see expansion opportunities and we haven't talked a lot about DJ Hero, and we are going to talk about that more on a later call. But that takes the franchise into completely new area with new hardware and new revenue opportunities. And we've learned a lot from the band launch in the holiday quarter and the stratification of price points that we are incorporating into a major restage of the business for holiday 2009. So I think all of those components lead us to believe that we’ve got a lot of opportunities in front of us, a lot of good elements in our plans that support the protections that we put in front of you. But we are not going to get into the specific granularity of the SKU by SKU expectations.
John Taylor – Arcadia
Okay. Thank you.
And we take our next question from Doug Creutz of Cowen & Company.
Doug Creutz – Cowen & Company
Thanks. I noticed in your launch plans for the Guitar Hero Metallica, you didn't mention the PS2 as a release platform. Are you backing away from the PS2 on Guitar Hero, and more generally from your broader lineup? Thanks.
On Metallica, we will have a PS2 SKU, I may not have mentioned it. But it's going to come out not with the initial launch in the March quarter, but it will come out a couple of months later. So we are watching the trends very carefully, on PS2 our strategy is always to match to the market. And we are focusing on where the opportunities are. But on Metallica, yes, we will have PS2.
And we'll have a selective release schedule for the rest of the year. Reevaluated for the following year but as Mike pointed out we do match to the market. I think one of the things we’ve realized is as started to focus even more on the international territories where Sony has a more significant share, particularly in Europe, there may be some selective opportunities there that you don't necessarily have here in America. But overall, I think that we are going to need to see some price-cutting on the hardware if we're going to keep some momentum on the PlayStation2 platform.
And we have time for one more question. And your final question will come from Brent Thill of Citigroup.
Brent Thill – Citigroup
Thanks. Thomas, you're guiding '09 margins up a couple hundred basis points kind of in the backdrop of what is perhaps one of the worse economic environments we've seen. What are the levers that you see, that you're the most confident in for achieving that margin leverage in the backdrop?
I think couple of things why we are confident in that trend is first of all , our strongest franchises are wholly-owned franchises that have the most success in the marketplace. We again have the strongest plans for next year, whether that’s Call of Duty, whether that is the Blizzard business, whether that is our entry into a new genre like racing. These are all very high margin opportunities for us. In addition, you're going to get the full year impact next year of the synergy initiatives that we have executed this year and that we will continue to execute into the spring of next year. And on top of that we, as I mentioned earlier, I think we have not perfectly executed the Guitar Hero World Tour launch from a cost perspective this year. We were extremely successful in the market and with consumers. But I think we could have done a lot better on the cost front. We now have some additional time to refine our supply chain and we think we can take out a significant amount of cost (inaudible) business also helped by much lower raw material input prices now that, you know, we now, around $40 for the foreseeable future versus $150 right ahead of our production last year. So it's a multiple pronged plan, it to focus on owned IPs, it is a focus on making sure we put the marketing investments behind, the half return investment, franchises, take out cost and what Bobby mentioned at beginning, which is, we’ve always been very focused on keeping a lean OpEx budget. And you know, you're going to see the same thing from us next year in terms of very limited and selective headcount additions and very tight cost control.
And I would just add, if you look over the last four years we have – at the beginning of each one of our fiscal years articulated a margin objective, and either achieved or exceeded that margin objective. I would say some of the things that, as Thomas pointed out, that are the easier drivers this year compared to last year. Freight costs will be lower as a result of lower fuel cost. The impact of oil last year not just affected our freight cost, but also our cost to the plastic – plastic injection molding that the use for the manufacture of guitars and some of the other products that we are selling. So with the lower fuel costs we will get more efficiency there. The benefits of scale, we continue to see in our ability to negotiate better freight forwarding, shipping and logistics expense. When you look at the product portfolio this year as compared to last year we had even more owned intellectual property this year than last year. So across the boards, I would say when you look at just efficiency gains that we've gotten over the last two or three years, continuing to stay focused on things like managing our G&A, managing headcount tightly, that upright duty within us studios, more efficiency, and performance and reward systems that are more oriented towards operating margin and cash flow's than ever before, I think we are especially well positioned this year to actually get the couple of point of operating margin leverage that we are looking for. And it really is that product slate that we've ever had across more geographies, more platforms, more diversity so less volatility in the mix between online subscription revenue and every other platform that we support. And we've had the benefit of over the last year looking deep into the operations to the restructuring process. So, we now get really the benefit of a very lean, focused, proven management team with a lot of operating efficiencies in the company. I think you will see as you have for the last few years we will continue to perform better than our peers and capitalize on the growth that you see in the market.
Brent Thill – Citigroup
Okay. On behalf of everyone at Activision Blizzard, we thank you for your time and consideration and we look forward to speaking with you on our next call.
Ladies and gentlemen, that does conclude today’s presentation.
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