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Activision Blizzard, Inc. (NASDAQ:ATVI)

Q4 2013 Earnings Conference Call

February 6, 2014 04:30 p.m. ET

Executives

Kristin Southey - Senior Vice President, Investor Relations

Robert Kotick - Chief Executive Officer, President and Director

Thomas Tippl - Chief Operating Officer

Dennis Durkin - Chief Financial Officer

Eric Hirshberg - Chief Executive Officer of Activision Publishing, Inc.

Michael Morhaime - Chief Executive Officer and President of Blizzard Entertainment, Inc.

Analysts

Edward Williams - BMO Capital Markets

Brian Pitz - Jefferies

Colin Sebastian - Robert W. Baird

Doug Creutz - Cowen

Eric Handler - MKM Partners

Andrew Crum - Stifel, Nicolaus

Neil Doshi - CRT Capital

Operator

Good day, and welcome to the Activision Blizzard Quarter Four 2013 Results Conference Call. Today's call is being recorded.

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

Kristin Southey

Good afternoon, and thank you for joining us today for Activision Blizzard's fourth quarter 2013 conference call. With me today are Bobby Kotick, CEO of Activision Blizzard; Thomas Tippl, COO of Activision Blizzard; Dennis Durkin, CFO of Activision Blizzard; Eric Hirshberg, CEO of Activision Publishing; and Mike Morhaime, CEO of Blizzard Entertainment.

And I would like to remind everyone that during this call, we will be making statements that are not historical facts. These are forward-looking statements that are based on current expectations and assumptions that are subject to risks and uncertainties.

A number of important factors could cause the company's actual future results and other future circumstances to differ materially from those expressed in any forward-looking statements, including the factors discussed in the Risk Factors section of our SEC filings, including our most recent quarterly report on Form 10-Q will define filing with the SEC and those indicated on the slide that is showing.

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

I'd like to note that certain numbers we'll be presenting today will be made on the 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; the amortization of intangible assets; expenses relating to the purchase transaction and related debt financing; and the associated tax benefit. 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 is also a PowerPoint overview, which you can access with the webcast and which will be posted to the website following the call. In addition, we will also be posting a 12-quarter financial overview, highlighting both GAAP and non-GAAP results and a one-page summary sheet. This quarter, we have also added a number of EBITDA metrics to our earnings release and slides for our new debt investors and analysts.

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

Robert Kotick

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

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

Our combination with Blizzard five years ago brought together in one company the two most creative talented groups of employees in our industry and a collection of some of the most valuable intellectual property in all of entertainment. The merger also came with the majority shareholders, whose interests understandably were not always aligned with the interest of Activision Blizzard. The challenges and constraints that came from being a controlled company have all been eliminated, and we believe as an independent company we can generate strong returns for all of our stakeholders as we have for over 20 years.

For the full fiscal 2013, Activision Blizzard delivered better than expected financial results, based on the continued success of our games. On a non-GAAP basis, we generated over $4.3 billion in revenues, 31% operating margin, earnings per share of $0.94 and operating cash flow of over $1.26 billion.

Our Board of Directors authorized an increase in our annual cash dividend to $0.20 per share and an accelerated debt repayment of $375 million based on our strong cash flows.

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

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

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

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

For 2013, including toys and accessories in North America and Europe combined, Skylanders was the number three overall videogame franchise or retail across all platforms. And in the fourth quarter, Skylanders was the number one children's franchise again.

In 2013, Blizzard Entertainment's StarCraft II: Heart of the Swarm was the number one PC title in North America. Diablo III, following its record-breaking success on the PC was the first Blizzard game to come to console in more than a decade, launching on Xbox 360 and PlayStation 3 in 2013. And Diablo III ended the year with over 15 million units sold through cumulatively across all platforms, which (bodes) well for the upcoming launch of the Diablo III PC expansion pack in March. And World of Warcraft will remain the number one subscription-based MMORPG, ending the year with approximately 7.8 million subscribers.

Much to our positive surprise, the Xbox One and PlayStation 4 sold over 7 million units combined in 2013, faster than their predecessors did at their launch.

Not only these devices deliver faster processing and better graphics, but these new consoles and continuing improvements to broadband infrastructure world-wide provide new and improved capabilities for online gaming, including same-day downloads, improved social features and new opportunities for emerging potentially higher margin business models like the sale of virtual items, downloadable content and other value-added online services that will provide a greater flexibility for our audience to access, consume and pay for content.

The new console should be catalyst for growth and margin expansion. And over the next two to three years as their install base grows, we expect to have greater opportunity to capitalize on a rapidly expanding audience, broader international penetration and more profitable business models.

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

In particular, free-to-play games have achieved scale that should now allow us to realize great returns from the investments that we've been making in this area. Over the next few years, we plan to introduce at least three potential groundbreaking franchises operating on our free-to-play transaction systems designed to appeal to players across numerous platforms and in numerous geographies. These games including Hearthstone, Heroes of Warcraft, Blizzard's Heroes of the Storm and Call of Duty online, all have enormous potential.

We released Hearthstone and closed beta in 2013, and then opened beta earlier this year on PC only. It is off to an incredible start attracting millions of players in both the West and in China with strong engagement and monetization. Hearthstone is on track to join the World of Warcraft, Diablo and StarCraft as Blizzard Entertainment's fourth mega franchise.

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

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

Over the next few years, we expect to realize the broad potential and increased opportunities for monetization from these games, and we will be bringing our focus expertise as developing and investing against these franchise for the long-term to excite audiences for many years to come.

We believe our new games have the potential to be among the largest and most profitable in their respective categories and could generate meaningful profits over the next few years.

In addition to our established brands, we're currently deep in development with the richest plate of new IP in the company's history, which should position us well for long-term growth.

In 2014, we expect the global video game industry will grow, and we plan to release several new games that we hope will set new benchmarks for innovation and should enable us to grow revenues year-over-year and well into the future.

In 2014, Activision Publishing plans to release new games based on Call of Duty and Skylanders, as well as Destiny, our new game from Bungie, which has the potential to be our next billion dollar franchise.

Destiny delivers a groundbreaking new universe, and it capitalizes on advances in connectivity to create an innovative shared world action experience. We expect that Destiny will become the best selling new video game IP in history when it launches across Xbox and PlayStation consoles on September 9.

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

On March 25, Blizzard released Diablo III, Reaper of Souls, the PC expansion for the record-breaking Diablo III.

Blizzard is also working on an exciting new expansion for World of Warcraft, Warlords of Draenor, which should unveil the great excitement at BlizzCon.

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

2014 is our first full year with new consoles from Sony and Microsoft, our first full year of renewed independence and our first year of commercializing broad appeal free-to-play games.

In 2014, we also plan to launch the biggest new IP in our company's history, Destiny, and perhaps the best Call of Duty game ever created. We remain well positioned to pursue the many opportunities throughout all of interactive entertainment whether new business models, new platforms, new geographies or new genres.

In 2014 and beyond, we are well positioned to take advantage of these trends to provide great games for our fans and strong returns for our stakeholders.

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

Dennis Durkin

Thanks, Bobby. Good afternoon, everyone. Today I will review our better than expected Q4 and full year 2013 financial results. And then I will review our outlook for growth in 2014.

From nearly every perspective, 2013 was an important year for Activision Blizzard. We have been talking about the risks and volatility associated with the console transition for more than a year now. As expected, these risks materialize in Q4. A strong next-gen demand was enabled to offset the decline in current-gen software. We also saw a significant amount of consumer spending shift from software to hardware with the new console launches.

Despite the volatility and uncertainty of this transition, Activision Blizzard still produce better than expected financial results, achieved a non-GAAP operating margin of 31% and generated operating cash flow of more than $1.26 billion.

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

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

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

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

Our Q4 results were better than expected with revenues in the quarter driven by Activision Publishing's Call of Duty: Ghosts, Skylanders: SWAP Force and Blizzard Entertainment's World of Warcraft.

Turning to the specific P&L items, please note that all percentages are based on revenues, except for the tax rate. For Q4, on a GAAP basis, we generated better than expected revenues of $1.52 billion and an operating margin of 19%. We have interest expense of $51 million and our tax rate was 25%. Our GAAP and non-GAAP fully diluted share count was 780 million and GAAP EPS was $0.22.

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

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

On a non-GAAP basis for the year, we generated better than expected revenues of $4.34 billion. Non-GAAP operating income was $1.36 billion, reflecting an operating margin of 31%, adjusted EBITDA margin of 33% with adjusted EBITDA being defined as non-GAAP operating income plus depreciation.

Our tax rate was 23% and our EPS was $0.94. We exceeded the non-GAAP outlook we gave last February for revenues of $4.18 billion by 4%, and operating income of $1.26 billion by 8%.

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

And today our Board of Directors approved two important capital allocation matters. Based on our better than expected financial performance, the Board authorizes $375 million repayment as part of our term loan, which will be paid in February.

In addition, for the full straight year our Board approved an increase to our cash dividend per share to $0.20 payable in May.

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

Now, let's turn to our 2014 outlook, which calls for non-GAAP revenue growth, record digital sales and record EPS driven by the strongest product slate in our history and the full year benefit of our new capital structure.

Beginning with Blizzard, this year Blizzard will launch a minimum of three titles; it's most ever in one year, which include a brand new franchise and unique monetization models. Hearthstone, Blizzard's newest franchise moved to opened beta in January and already has millions of players globally, and early engagement and monetization trends look very promising.

On March 25, Blizzard plans to launch PC expansion Diablo III: Reaper of Souls. And later this year, Blizzard is expected to deliver another great major game release. This year we expect Activision Publishing to launch a record three tentpole franchise titles.

In Q1 and Q2, we expect to generate revenues primarily from Skylanders and Call of Duty catalog sales and downloadable content, although we do not expect these will exceed the first half performance in 2013 due to weakness in current-gen sales.

In Q3, we expect the launch of Bungie's Destiny to drive revenues, although we will incur significant marketing, amortization of development costs, which will impact the initial contribution to operating income consistent with launching large new scale IP like this.

And in Q4, we expect to launch new highly innovative games based in Skylanders and Call of Duty, which Eric will talk about in just a moment.

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

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

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

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

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

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

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

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

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

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

In terms of seasonality, we expect the year to be more backend loaded as our major new releases are scheduled to be in the back half of the year.

So in summary, Activision Blizzard delivered better than expected financial results during a transformational year, which saw as return to independence, improve our capital structure and establish a strong position on next-gen consoles, while making progress developing significant new games and high margin business models.

In 2014, we expect to generate non-GAAP revenue growth and record non-GAAP EPS. We have never had larger opportunities and have never had a better pipeline to address them. As always our focus, strategy of doing a few things extremely well while keeping a closed eye on cost has served us well and we expect it to continue to serve us well in the future.

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

Eric Hirshberg

Thanks, Dennis. 2013 was another year of industry-leading performance for Activision Publishing. We were the number one console and handheld publisher in North America and Europe combined. We delivered non-GAAP operating income of nearly $1 billion despite significant headwinds from the ongoing console transition.

Our performance is driven by our two blockbuster franchises, Call of Duty and Skylanders, which including toys and accessories were two of the top three franchises in North America and Europe combined. We also had four of the top 10 games of the year in both North America and Europe.

Additionally, Call of Duty: Ghosts was the number one game in the fourth quarter in both North America and Europe and was the number one game on both next-gen consoles.

In 2013, Call of Duty was the number one franchise in North America for the fifth consecutive year. Call of Duty also delivered franchise record digital revenues and industry-leading engagement levels. Also in 2013, Call of Duty had four of the top 10 most played games on Xbox Live, for Xbox 360. In addition, Black Ops II alone was played for 4 billion hours in 2013.

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

We also continue to make progress on Call of Duty online for China and our next tentpole franchise, Destiny. Destiny won over 50 awards at E3 and Best in Show at Gamescom. Destiny finished 2013 as the most pre-ordered 2014 game and is on track to become the most pre-ordered new IP ever. We also believe we are on track to make this the biggest new IP launch in the industry's history.

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

I want to thank Infinity Ward, Raven and Neversoft for making a great game that our fans love, Call of Duty: Ghosts, and that carries visions for making Skylanders: SWAP Force the highest rated game in Skylanders' franchise history.

Turning to our industry, in 2013 we estimate that video games drove consumer spending in excess of $60 billion worldwide, which we expect to grow in 2014. We have never had more or larger opportunities. The console cycle had started strong and demand for next-gen games was higher than expected partially offsetting weaker than expected demand for current-gen titles.

In 2014, we expect demand for next-gen games to grow; however, we again expect that to be offset by lower demand for current-gen games. Long-term, we expect the new consoles to drive industry growth and expand our opportunities.

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

There are several advantages of doing this. The first is, of course quality. This will give our designers more time to envision and to innovate for each title. Simultaneously it will give our content creators more focus on DLC and micro DLC, which as you know have become large and high margin opportunities and significant engagement drivers.

Finally, it will give our teams more time to polish, helping to ensure that we delivered the best possible experience to our fans each and every time.

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

The development of this year's Call of Duty game is being led by Sledgehammer Games. Sledgehammer is a AAA studio built from the ground up around proven talent with a 90 plus rate of pedigree, both in studio leadership and throughout the organization. They've demonstrated their skill on Call of Duty: Modern Warfare 3 and on their past highly rated games. They are the perfect choice to support our new approach and bring fresh ideas and creativity to this great franchise and to raise the bar for next-gen games overall, which we believe they can do. We look forward to sharing more details on future calls.

During 2014, we also have exciting digital plans including full game downloads, DLC and micro DLC for Call of Duty: Ghosts.

On January 28, we released Onslaught, the first DLC pack for the Xbox, which will be launched on other platforms shortly. We are also once again offering season packs; this provides four Ghosts DLC packs were discounted to adjust the retail price of $50.

In 2013, we introduced micro DLC items for the first time and they have been very successful. This year for those who are outstanding on micro DLC offerings given players a wider range of options to personalize and customize their experience. Let's turn to Skylanders.

In North America and Europe combined, Skylanders was the number three best selling franchise in 2013, including toys and accessories. And we are focused on maintaining our leadership again this year.

For 2014, the latest wave of SWAP Force toys arrived on retail shelves in January, and we have more toy releases plan for this year than year ever have before. For this Skylanders game, Toys for Bob, the originators of both the franchise and the genre are back at the home.

We expect our new game to once again move the category we created forward with yet another creative breakthrough and new play pattern. We will share the details with you soon. However, for competitive reasons we will be reviewing the Skylanders game this year later than we had in previous years.

Now, turning to Destiny, as Bobby said, we believe Destiny could be Activision Publishing's third billion dollar franchise and we are working hard to make it the biggest new IP launch in video game history. Bungie's last franchise is Halo, which sold over 50 million games on Xbox and Xbox 360 with an average 90 rating on their watch. The potential of pairing the creators of Halo with the publishers of blockbuster franchises like Call of Duty and Skylanders should be self-evident. Together, we are bringing gamers an ambitious and innovative game, which combines the intensity of great first-person action with the character investment and social connections within RPG in an immense connected universe.

We believe the game is on track to deliver record pre-orders for our new franchise. A public beta is planned for summer. We expect to launch the game on September 9 on PS4, Xbox One, PS3 and Xbox 360. We look forward to expanding this universe for years to come and you will see much more in the months ahead.

In addition to our 2014 slate, we are also focused on bringing the biggest console franchise in the West to the biggest online gaming audience in the world with Call of Duty online for China.

Our partner Tencent redefined the free-to-play action game model in China and is working closely with best optimized Call of Duty online for Chinese fans. This is a new and important opportunity for us and we look forward to updating you on our progress on future calls.

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

And now, I will turn it over to Mike Morhaime.

Michael Morhaime

Thanks, Eric. Hello, everyone. 2013 ends on a strong note with our most successful BlizzCon yet. More than 4.5 million viewers around the world tuned into the show where we gave you two news games, Heroes of the Storm and the next expansion for World of Warcraft: Warlords of Draenor.

More than 24,000 attendees got a chance to download those games in addition to Diablo III: Reaper of Souls on PC and PS4 and Hearthstone are free-to-play digital card games. We received very positive player feedback in press coverage on all of our games that has come given us great momentum as we head into the great 2014.

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

We should use the strength in Q4 for a few factors. The excitement from BlizzCon, seasonality from the holidays and a refresh of the recruit of final program which offer special test inbound to players to bring revenue into World of Warcraft.

As we head into Q1, we are not going to benefit as much from the same factors that drove Q4. So we will continue to work ways to drive engagements as we move closer to the release of the next expansion.

Warlords of Draenor will reintroduce players with some classic settings and characters from our Warcraft strategy games. In addition through a new confident, and inventions, Warlords will include Garrisons, which are personal fortresses within the game. Players can collect computer controlled followers to work in that Garrisons, customize their face with structures for special battle sets and invite friends to explore their personal piece (inaudible).

Players will also get the ability to instantly boost one character to level 90 when they purchase the expansion. We recently announced that players will get access to this boost when they pre-purchased a game. So, people would be able to enjoy their new muscular character right away in Mists of Pandaria.

We think that this is a great feature that will make it easier for friends to play together in World of Warcraft. It's also attractive for veteran players, who have already experienced the level and process multiple times and wants to quickly raise a new character to deal ending combats.

We also had some exciting news for Diablo III: Reaper of Souls in Q4. The game will shift for Windows and Mac on March 25, and we began taking pre-orders in December. We also kicked-off beta testing in December and feedback from players has been positive. The expansion will add a new class, the Crusader as well as new areas for players to explore and new features like adventure mode and Nephilim Rise, which enhance for replay ability.

An output modeling system will make playing and collecting gear even more satisfying. We're also removing the auction house from the game on March 18, a change that has been welcomed by players.

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

Entry into a special game mode called Arena can also be purchased with Indian gold or real currency. Millions of players across North America, Europe, Asia Pacific and Latin America participated in Hearthstone's closed beta test. And a couple of weeks ago, the game transitioned into open beta, which means that anyone can now download the game without any special invitation.

Concurrently across the globe, it has grown steadily since open beta started. And Hearthstone continues to be one of the most popular games watched on Twitch.

The launch of open beta is a great follow-up for the success we had at BlizzCon, while a 100,000 concurrent online viewers watched the finals of our Hearthstone invitational tournament.

We also announced at BlizzCon that we're working on in iPhones and Android versions of the game, which we expect to ship this year. In the near-term, we hope to just quickly transition into launching on iPad.

Hearthstone isn't the only free-to-play game on our site. At BlizzCon, we also announced Heroes of the Storm, a new free-to-play online team brawler. Players can choose from an array of iconic Blizzard characters, customize their abilities and team up with friends to battle other players. Heroes take a more fast pace accessible approach to a genre that has grown extremely popular in online gaming over the past few years.

Players and staff are very excited about the game at BlizzCon. We also showcased Heroes at G-Star in Korea, where it was named most anticipated new game by a (forward) G-Star attendee.

Brand new auto franchise is StarCraft II. The Heart of the Swarm expansion is the number one selling PC game at North American retail last year. And a couple of weeks ago, we made the StarCraft II arcades available to anyone via the free starter version.

We're hoping on a change or encourage new players to try StarCraft II and bring visibility on the thousands of user made games and maps created using our in-game tool.

Since the patch, we are seeing increased player engagement. Going forward, we will continue in (inaudible) with the World Championship series. And we're hard at work on the final chapter to the StarCraft II saga: Legacy of the Void.

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

Thanks. And I'll turn the call back over to Kristin.

Kristin Southey

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll take our first question from Edward Williams. Please go ahead sir.

Edward Williams - BMO Capital Markets

Just looking at a couple of things, if I could quickly, you guys continue to generate quite a bit of cash. Can you give us a sense to how you prioritize dividends and stock buybacks, debt reduction and M&A activity?

And then secondly, you alluded to it little bit, but can you give us a sense of the console transition, where we should look for demand for legacy software, adoption of new software from new systems and kind of what you're seeing at current retail inventory levels?

Dennis Durkin

Okay. Hey, Ed, it's Dennis. Thanks for the question. I'll start with the first one, and then maybe I'll hand over to Eric to talk about some of the console transition trends.

Obviously our priorities with our new capital structure are around debt repayments and debt servicing. We're very comfortable with the sort of the leverage ratios that you see inside of our capital structure, it's very modest.

We obviously are committed to making sure that we're delivering value to all of our stakeholders. You'll see that by the dividend today. We currently don't have a share repurchase authorized by the Board currently, but like all things whether it's M&A or other activities, we're going to be opportunistic relative to new opportunities, whether it would be inorganic opportunities, but with the same discipline that we've always used in terms of evaluating those and making sure that they're going to be accretive to the things that we do as a company. I think those are larger priorities relative to our cash.

Eric Hirshberg

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

Edward Williams - BMO Capital Markets

Okay, great. Thank you.

Operator

And we will take our next question with Brian Pitz from Jefferies.

Brian Pitz - Jefferies

Thanks. Question is for Michael or maybe Dennis. Heroes of the Storm is going after a big market opportunity and game looks great so far from what we've seen. Given that Heroes though is a trickier free-to-play model, how should we think about the impact? How many users would really be required to deem it successful?

And then quickly on the level 90 boost for Warlords, what impact could this follow the seat change essentially have on the WOW sublevels longer term? Thank you so much.

Michael Morhaime

Okay. Well, on the Hero side from my perspective, I think it's too early to tell. Our focus right now is just getting the game right.

On the level 90 boost and its impacts of long-term sustainability to the game, I think actually we view this as a positive. I think on the one hand, I think it really helps with winning back players and making it easier for them to catch-up to their friends. And also from a content creation standpoint it allows the developers to really focus on the endgame, which is where most players are anyway and making out most fun.

Dennis Durkin

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

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

Brian Pitz - Jefferies

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

Michael Morhaime

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

Brian Pitz - Jefferies

Great, thank you.

Operator

And our next question comes from Colin Sebastian with Robert Baird & Company. Please go ahead, sir.

Colin Sebastian - Robert W. Baird

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

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

Eric Hirshberg

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

As far as the second question, as of everything we do on Destiny is a partnership. The partners of Bungie are interestingly completed aligned and we're building this as a ten-year franchise and we need the best game possible. So, we will make any decisions as we have in the past with the partnership.

Michael Morhaime

Okay. And the other part of the question was on the East-West split. So, in Q4 we were slightly down in the East and slightly up in the West.

Colin Sebastian - Robert W. Baird

Thanks, guys.

Eric Hirshberg

Thanks, Colin.

Operator

And our next question comes from Doug Creutz with Cowen.

Doug Creutz - Cowen

Yes, thanks. Sort of we can talk about Call of Duty a little bit. I think you acknowledged a little earlier in the call that you did add some inventory in the channel. Does that imply that the game maybe underperform where you're expecting going into the launch? And given that and given the competition the shooter genre are coming into 2014, how should we think about your expectations for performance this year? Thank you.

Eric Hirshberg

I think that I addressed at the last question about the channel inventory and the fact that there is really nu surprise there. We expected the console transition to create some headwinds. And they happened in the ways that I described. We think that we are properly funded to sell that inventory through.

Looking forward to 2014, as both Bobby and I said, we think we have a superlative game in the works and that we have some new approaches this year that we think are going to be very positive, with the three-year development cycle with the injection as a lucrative leadership from some very intelligent folks at Sledgehammer games. And that we think the 2014 game is going to be one of it's not the best Call of Duty game ever.

Doug Creutz - Cowen

Okay, thank you.

Operator

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

Eric Handler - MKM Partners

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

Eric Hirshberg

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

So, then on Hearthstone question, Mike, do you want to start with that?

Michael Morhaime

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

Eric Handler - MKM Partners

Great, thank you.

Operator

And our next question comes from Andrew Crum with Stifel.

Andrew Crum - Stifel, Nicolaus

Okay, thanks. Good afternoon everyone. So I want to ask about Skylanders, just give us your thoughts on the competitive landscape in 2013, what you're anticipating for 2014, and any changes that might be brought to the game play?

And then separate from that, Dennis, if you could comment on the timing and recognition of the NOLs you require as part of the Vivendi transaction, any of that contemplate in your guidance for 2014? Thanks.

Eric Hirshberg

Sure. And I'll take the first part of Skylanders. As far as the competitive landscape, again there is really nothing new for us here. We always had competition in every category, we operate and that's nothing new. Actually what was new was not having competition for a brief spell on the Skylanders franchise because we invented the category. But as we've said a number of times, it was only a matter of time before competition entered the category-based, given the success of Skylanders.

I think that the important thing to know is that we're able to grow the business in 2013 despite both the console transition and new competition for the first time. We grew and the category grew. We think that also shows the same power of the playback. And we were able to outsell our competition from their launch forward and from my launch forward.

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

Dennis Durkin

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

Andrew Crum - Stifel, Nicolaus

Thanks, guys.

Dennis Durkin

Thank you.

Operator

Thank you. And our final question of the day will come from Neil Doshi with CRT Capital. Please go ahead sir.

Neil Doshi - CRT Capital

All right, thanks guys. Mike, I wanted to know if you could maybe talk about Diablo III: Reapers of Souls and how should we be thinking about the opportunity for that game, especially as it kind of hits the consoles later on?

And then also, maybe just broadly speaking, what do you think could really help reignite growth at World of Warcraft within the first set for World of Warcraft beyond this year, but trying to get back to kind of the levels that you guys had a couple of years ago? Thanks.

Michael Morhaime

We're very excited about the upcoming expansion of Diablo. There is a lot of excitement in the community about new Diablo content. We don't provide forecast in terms of how we think it will perform. But I guess if you want to compare to previous expansion releases, Diablo does have a very large base and it is larger than the Wings of Liberty base at the time launched Heart of the Swarm last year.

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

Neil Doshi - CRT Capital

Thank you.

Kristin Southey

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

Operator

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

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