Activision Blizzard (NASDAQ:ATVI)
Q4 2010 Earnings Call
February 09, 2011 4:30 pm ET
Michael Morhaime - Chief Executive Officer of Blizzard Entertainment and President Blizzard Entertainment
Thomas Tippl - Chief Operating Officer and Chief Financial Officer
Robert Kotick - Chief Executive Officer, President and Director
Kristin Southey -
Eric Hirshberg - Chief Executive Officer of Publishing Unit
Eric Handler - MKM Partners LLC
Douglas Creutz - Cowen and Company, LLC
Edward Williams - BMO Capital Markets U.S.
John Taylor - Arcadia
Collis Boyce - Morgan Stanley
Jeetil Patel - Deutsche Bank AG
Good day, and welcome to the Activision Blizzard's Fourth Quarter Fiscal Year 2010 Earnings Conference. [Operator Instructions] At this time, for opening remarks, I would like to turn today's call over to the Senior 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 Fourth Quarter and 2010 Conference Call. With me today are Bobby Kotick, CEO of Activision Blizzard; Thomas Tippl, COO and CFO of Activision Blizzard; Eric Hirshberg; CEO of Activision Publishing; and Mike Morhaime, CEO of Blizzard Entertainment.
I would like to remind everyone that during this call, we will be making statements that are not historical facts. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties. As indicated in the slide that is showing, a number of important factors could cause the company's actual future results and other future circumstances to differ materially from how they're described in any forward-looking statement. Such factors include, without limitation, sales levels; increasing concentration of titles; shifts in consumer spending trends; current macroeconomic and industry conditions, and conditions within the video game industry, or our ability to predict consumer preferences in our competing genres and hardware platforms; the seasonal and cyclical nature of our industry; changing business models, including digital and used games; competition; possible declines in pricing and product returns; price reception; product delays; adoption rate and availability of new hardware and related software; rapid changes in technology and industry standards; litigation and associated costs; protection of proprietary rights; maintenance of key relationships, including the ability to attract, retain and develop key personnel and developers that can create high-quality hit titles; counterparty risk; economic, financial and political conditions and policies; foreign exchange and tax rates; identification of acquisition opportunities; and potential changes associated with geographic expansion.
These important factors and other factors that potentially could affect the company's financial results are described in the company's annual report on Form 10-K for the period ending December 31, '09, and in the company's other SEC filings. The company may change its intentions, beliefs or expectations made at anytime 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 9, 2011, or to reflect the occurrence of unanticipated events.
I would also like to note that certain numbers we will be presenting today will be made on a non-GAAP basis, excluding the impact of change in deferred net revenues and related cost of sales, with respect to certain of our online-enabled games, expenses related to share-based payments, the operating results of products and operations from the historical events in gaming businesses that the company has exited or substantially wound down, costs related to the business consummation between Activision and Vivendi Games, the amortization of intangibles and impairment of intangible assets and the associated tax benefits.
Please refer to our earnings release, which is posted at www.activisionblizzard.com for full GAAP to non-GAAP reconciliation and further explanations. We have also, for the first time, included in the release, a statement of cash flows and a schedule that breaks out revenues by distribution channel, including Digital. Finally, there is a PowerPoint overview which you can access with the webcast and which will be posted to the website following the call.
And now, I would like to introduce our CEO, Bobby Kotick.
Thank you, Kristin, and thank you for joining us today, as we report the results of another extraordinarily successful year for our audiences and shareholders.
Activision Blizzard delivered another quarter and calendar year of better-than-expected financial results. For the year, we grew revenues, increased non-GAAP EPS by 15% to a new record and generated operating cash flow of $1.4 billion. This continued strong performance is only possible because of the thousands of extremely talented employees around the world, who continue to set the standard for innovation and execution, as we remain the world's most successful interactive entertainment company.
I want to highlight a few of the many successes we've had this year in 2010. We again succeeded in managing the largest launch of an entertainment property of all time, and we were once again the number one independent digital publisher and provider in interactive entertainment. We were also number one, again, in retail sales for the industry across North America and Europe, and we are very appreciative of the commitments our retail partners make and the support they continue to provide.
And we, of course, shattered launch records and grew the online audiences for Call of Duty, World of Warcraft and StarCraft beyond even our own expectations. We also continue to manage our capital with focus and discipline. Despite significant investment for our future, including new platforms, infrastructure and service capabilities, we returned $1.2 billion in value to our shareholders through our buyback and became the first independent game company ever to issue a dividend. Today, I'm happy to announce that our Board has authorized another repurchase program of $1.5 billion and confirmed our second-ever dividend with an increase of 10%.
Since our merger with Blizzard in 2008, we have engineered a deliberate shift towards digital delivery of content and towards establishing direct ongoing relationships with our audiences. This has resulted in the development of new capabilities, the release of new and innovative products and greater audience engagement across our top franchises. We now have more predictable revenues and cash flow and derive the majority of our profit from very high-margin digital channels.
The confidence in our cash flows allows us to provide our shareholders with a dividend return in addition to continued investment in our business. Our experienced management team, talented work force, deep technology and development base, industry-leading franchises and deep capital resources provide the ability for us to continue to invest in the many new growth and margin expansion opportunities that are available to us in interactive entertainment. I actually can't recall a time over the last 20 years that there were more interesting opportunities to engage audiences and leverage our strengths as long as we remain focused on the prioritization of these many opportunities.
One consequence of this focus is that this year, we'll move away from certain initiatives that have played an important role for us in the past, but that offer limited opportunities as we move forward. This means we're accelerating our investment into areas that offer higher growth and margin potential and better experiences for our gamers.
Our audiences now live in an online-connected world and demand the same from their entertainment. Activision and Blizzard have led the evolution of video game from something that people play for hours by themselves to a connected social experience. The depth of interaction enabled by technology today presents a massive opportunity to form lasting relationships with audiences. It also requires a different set of organizational capabilities and talent. We spent the last few years investing against this opportunity, and we built significant advantages over would-be competitors.
Another important point is that new distribution channels have emerged that offer efficiency and convenience for audiences and better profits for us as a content creator. We believe the sustained online engagement and enjoyment of Call of Duty audiences is taking a share away from many other forms of leisure, as an example. Focusing on the delivery, digitally, of new innovative Call of Duty content and services will enable tens and millions of players around the world to continue to enjoy the experience Call of Duty offers. We have a very clear long-term strategy to ensure that Call of Duty remains the world's best interactive entertainment experience.
Similarly, Blizzard Entertainment, leaders in the massively multiplayer games that they produce, has built a competitive moat over many years of investment and development that has allowed World of Warcraft to achieve a place in history as one of the most profitable interactive entertainment franchises of all time. This was accomplished through a rigid discipline of ensuring that the player is always the first priority.
Next, we've established a leadership position and expertise in online service operations. Today, we operate and support two of the largest online communities in consumer entertainment, collectively serving over an estimated 30 million people. The scope and engagement of the World of Warcraft and Call of Duty communities is not only massive in relation to other video games, but even compared to all entertainment communities. Since our merger was announced, Blizzard has seen a 25% growth in subscriber shift on just World of Warcraft alone.
As for Call of Duty, our incredible team at Treyarch managed an amazing feat this year with Black Ops, developing a game that supports an even larger community than its record-setting predecessor Modern Warfare 2.
Since November, about as many people have played Black Ops, as there are subscribers in Netflix. And record numbers have extended their experience far beyond the packaged software game and into the various online services that we provide.
We continue to focus our efforts on product innovation for that lasting value to our global communities. We've expanded the capabilities and presence of our core franchises into the browser, the apps store and through social networks. The 24/7 World of Warcraft environment, Battle.net and, in addition, a new user-generated content our World of Warcraft and Call of Duty mobile offerings and our Call of Duty digital platform are all great examples of how we will continue to lead the way in delivering ever-improving online experiences.
Today, we have multiple teams and studios fully dedicated to online development and service operations. Our leadership in online entertainment technologies continues to grow, as illustrated by our announcement today of our studio called Beachhead, which is focused solely on the development of an innovative new digital platform and special services for our Call of Duty community.
And we believe we are best positioned to take advantage of retail and digital distribution channels that can collectively deliver content to more players in more places and with better economics than ever before. We've always said that the big are getting bigger but not only are the big getting bigger in retail, as players gravitate to the best experiences and we push the limits on our best-in-class execution, we have also leveraged our internal platforms to offer audiences choice and convenience through the provision of direct distribution of Blizzard games. We expect to enhance the Call of Duty experience in similar ways with our new digital platform from Beachhead.
This year, Blizzard launched StarCraft II, both directly through Battle.net and retail storefronts worldwide. Blizzard followed with the first-ever preloaded online direct distribution offer for World of Warcraft players with Cataclysm with the launch in December, a service that was met with an extraordinary response from Blizzard players.
As we look ahead, we're excited to make the most of each of these tremendous opportunities in digital engagement, social connectivity and the growing appeal of our content, both through internal investments and highly focused external transactions. Our 2008 merger with Blizzard and our alliance last year with Bungie are two examples of our ability to execute transformative transactions in an accretive manner.
We believe our plans this year will allow us to extend a outstanding track record of performance, and we expect to deliver meaningful growth in 2012 and beyond. Now I'd like to turn the call over to Thomas Tippl, who will provide a review of Activision Blizzard's financial performance. Thomas?
Thank you, Bobby. I'll begin with a recap of our record December quarter and calendar year results, followed by a review of our outlook for the first quarter and full-year 2011. For your reference, in our press release, there's a set of schedules which provide non-GAAP comparables by business segment, and these will be the numbers that I will refer to unless otherwise noted. Also, please refer to our earnings release for a GAAP to non-GAAP reconciliation.
For the calendar year, GAAP net revenues grew to $4.4 billion and GAAP EPS increased to $0.33. This includes a $0.16 per share non-cash reduction in the valuation of intangible assets, reflecting weakness in the casual and music genres. On a non-GAAP basis, net revenues for the calendar year grew to $4.8 billion, and non-GAAP EPS increased 15% to a record $0.79. This tight challenging retail conditions and tough comps for Call of Duty, we still well-exceeded the non-GAAP revenue and EPS outlook of $4.4 billion and $0.70 we gave last February.
In addition to growing full-year non-GAAP revenues, we expanded our non-GAAP operating margin by 300 basis points to a record 29%, which reflects a standard of profitability, exceeding most major media companies and several leaders in Internet and software. Finally, we converted these record profits into record operating cash flow of $1.4 billion, which is the equivalent of an approximately 10% cash yield over our market capitalization for the second year in a row.
Now moving on to the December quarter results. GAAP net revenues came in at $1.4 billion, and we had a GAAP loss per share of $0.20. This includes the $0.16 per share non-cash reduction intangibles I mentioned earlier. On a non-GAAP basis, the December quarter was our largest and most profitable ever. Net revenues grew to $2.55 billion, exceeding the outlook we gave in November by more than $350 million. Non-GAAP EPS increased 8% to $0.53, which was $0.06 ahead of our outlook.
The December quarter was driven by Activision's Call of Duty and Blizzard Entertainment's World of Warcraft. Products with strong online integration and digital revenue streams continue to drive growth. For the calendar year, non-GAAP revenues from digital channels increased more than $270 million or more than 20% over the prior year. Despite the fact that our Digital business is, by far, the largest in the industry and growing double digits over the last three years, today, digital revenues represent only a third of our total revenues, suggesting significant opportunity for profitable growth.
The greatest and most immediate pockets of expansion rest within our premium-quality, online-enabled franchises including Call of Duty, World of Warcraft, StarCraft, Diablo, Bungie's project and the next Blizzard MMO. Strong execution against the new business model and geographic expansion opportunities that each of these franchises present has the potential to drive continued operating leverage, strong earnings and cash flow.
Our 2010 results reflect this relationship between focused investment and our fast returns. Before I review the P&L line items for the December quarter, I want to highlight that I will quote all percentages based on net revenues except the tax rate.
So for GAAP, product costs were 56%, operating expense, including the reduction in intangible assets, were 82%, and our tax rate was 40%. In the fourth quarter, non-GAAP product costs were 34%, had in our November outlook, due mainly to reduction of value of our remaining peripheral inventory. Non-GAAP operating expenses were at 31%. We delivered at 35% non-GAAP operating margin, and our effective non-GAAP tax rate was 27%.
Now let me turn to the balance sheet. On December 31, we had no debt and $3.5 billion in cash and investments, an increase of $263 million versus the prior-year end. This is higher than the year ago, despite returning $1.2 billion in value to shareholders through dividends and share repurchases. And today, the Board have authorized a new $1.5 billion repurchase program, bringing the three-year total to almost $3.7 billion. The Board also increased the cash dividend by 10% to $16.005 per share.
The transition to a digital business model and management's focus on cash flow has delivered more than $0.5 billion of working capital improvements over the past two years. Our receivables balance on December 31 was $640 million, a decrease of about $100 million versus the prior year, despite an increase in revenues. Inventories were $112 million, down $130 million versus the prior-year end, due to a significant reduction in the value of our peripherals inventory. Capital and software development costs were $202 million, a decrease of $32 million versus the prior year end, due to fewer titles in 2011. Of the $202 million, $94 million is related to deferrals for online-enabled games.
Today, the strength of our balance sheet and consistency of cash flow is a major competitive advantage that affords us the ability to give our shareholders the best of all worlds. First, return value in the form of dividend and share repurchases; second, invest for future growth in our highest organic return on invested capital opportunities; and third, allocate capital to potential external growth opportunities.
So let me now move on to the outlook. As we've done historically, we begin 2011 with a reasonably conservative approach due, in part, to the continued uncertainties related to the broader macroeconomic and retail environments. We enter the year with strengths in marketable franchises and unique capabilities that should afford us opportunity for the long term. We are also reallocating our company-wide resources against the biggest opportunities.
Accordingly, we have focused this year on the falling building blocks to continue driving operating margin expansion and long-term growth. First, we expect growth from our high-margin Digital business. Blizzard Entertainment's World of Warcraft provides a strong foundation bolstered by the recent record-breaking launch of Cataclysm. We also expect growth from Blizzard in China, which could benefit from the launch of StarCraft II, World of Warcraft: Cataclysm and growth in value-added services. And for the Call of Duty franchise, we expect growth in online revenues, driven by the release of more downloadable content and a high install base of hardware.
Second, we are streamlining the Activision Publishing business to position us for future growth, higher profitability and online expansion. Eric will elaborate on that in a moment. The actions we are taking in our Publishing business, I expect it to significantly expand its operating income and operating margin year-over-year.
And finally, we continue to invest for the future, expanding our digital leadership and expanding our core brands. This year, we will allocate the vast majority of our internal investments to our biggest franchises and online product and service capabilities.
So now on to the numbers. Because Blizzard Entertainment has not yet confirmed the launch date for its next global release, our outlook at this time does not include the new game from Blizzard in 2011. Should we not release a major title from Blizzard this year, we would expect, for planning purposes, to launch a minimum of two Blizzard titles in 2012.
For calendar 2011, we expect GAAP net revenues of $3.95 billion and non-GAAP net revenues of $3.9 billion. Revenues are expected to be down year-over-year, with about $500 million of the reduction coming from low- to low-margin businesses. Specifically, we will release no new music or skateboarding games, and we expect our distribution and affiliate businesses to decline. In addition, we have about $125 million of negative FX factored in to protect against volatility in the currency markets. The balance is primarily due to the timing of Blizzard releases since, as of now, our outlook assumes we will have two titles less this year as compared to last.
Year-over-year, we expect earnings will perform better than revenues, due to contribution from our high-margin Digital business and the lack of new peripheral releases, which were unprofitable in 2010. For calendar 2011, we expect GAAP EPS of $0.56 and non-GAAP EPS of $0.70. For the calendar year, we expect GAAP product costs of 30% and operating expenses of 46%. We project the GAAP effective tax rate of about 29% and a diluted share count of about 1.2 billion, both of which can be used for all quarters.
On a non-GAAP basis, we expect product costs of 29%, resulting in the highest gross profit margin in our history, driven by our continued transition to digital products and services. For the year, we expect non-GAAP operating expenses of about 40%, a decrease of more than $250 million versus the prior year, including the significant investments we are making in Blizzard and Call of Duty. We project a non-GAAP effective tax rate of about 30% and a diluted share count of about 1.2 billion, both of which can be used for all quarters.
For the calendar year, we expect a combination of our strong Digital business and the streamlining of our Activision Publishing business will result in a record 31% non-GAAP operating margin, exceeding the long-term operating margin goal we gave in 2008. And we see more opportunity for future margin expansion, as we continue growing our share of digital revenues which already today produced operating margins in excess of 50%.
Now moving to the March quarter. This quarter, our only release will be Call of Duty: Black Ops - First Strike, the first add-on content pack for Black Ops. For the March quarter, we expect to generate GAAP net revenues of approximately $1.28 billion, with product costs of 30% and operating expenses of 32%. We expect GAAP earnings per share of $0.28, which includes approximately $0.02 to $0.03 of expenses related to the restructuring initiatives.
For the March quarter, we expect non-GAAP net revenues of $640 million. Revenues will be down versus the prior year, due primarily to lower peripheral base game sales and a decline in our Distribution business. We expect non-GAAP product cost of 31%, lower than the prior year due to favorable mix. We expect non-GAAP operating expenses of 50%, higher than the prior year as a percentage due to increased investment in Blizzard and Call of Duty, in addition to our legal expenses. For the quarter, we expect non-GAAP EPS of $0.07.
So in summary, 2010 was another year of strong financial performance, and we think that our strengths in the retail and digital online segments, combined with our continued cost containment efforts, will position us in 2011 for another year of operating margin expansion and returning value to shareholders. And most importantly, for profitable growth in 2012 and beyond. So now let me hand it over to Eric to discuss our Activision Publishing business.
Thanks, Thomas, and hey, everyone. I would like to start by thanking everyone at Activision Publishing for their hard work and dedication in 2010. Without the focus, drive, creativity of every person in this incredible organization, we could not have been the number one publisher in North America and Europe this year and successfully executed the largest entertainment launch in history, two years in a row. It's something no one in media has ever done. Before I get to the specifics of our slate, let me start with some high-level comments on what we see in the industry, which provides the foundation for the changes we're going to be making and where we'll be focusing our time and energies and resources.
There continues to be tremendous reason for optimism, starting with Hardware. We expect an install base of current-gen systems in the U.S. and Europe to increase 44 million units or 16% to a total of 312 million units this year, the highest ever in gaming. Within that, we expect that the install base of online-enabled consoles, Xbox and PS3, specifically, will increase 24% to 92 million, and that software sales of these platforms will once again grow this year.
Digital distribution continues to be the fastest-growing and most profitable part of our business, and we expect significant growth of more than 20% in the U.S. and Europe this year, driven by higher broadband penetration, complete consumer adoption and additional content.
And with respect to the huge Asian online marketing, excluding Japan where we are setting our sights longer term, we expect growth of more than 15%, concluding our significant scale and global opportunity for big propositions, especially with respect to the high-margin online-enabled franchise where we are strongest.
In 2010, we ended the year as the number one publisher in North America and Europe. And although we did well with the core gamer in 2010, we did feel the effects of changing consumer demand for peripheral-based and mid-tier titles which performed well below our expectations. What you're seeing today is this, first, the big keep getting bigger. Everyone of the top 10 titles this year was based on established franchises and, with the exception of one, all had online functionality. These 10 titles generated the vast majority of the entire industry's profits. Second, sales of mid-tier titles are being squeezed out, and these can come with some fairly high development and marketing costs. Third, on the other end of the spectrum from the top 10, smaller titles made for passionate audiences with right-sized development budgets, like our Cabela's franchise, are also able to succeed.
Finally, and maybe most importantly, with the growth of online play, we're continuing to move away from thinking about our product releases simply as launch events and viewing our brands as an opportunity to build long-term relationships with our players.
As a result of these changing dynamics, we have had to make some difficult decisions to ensure that our capital and the creative talents of our exceptional people are applied against the biggest opportunities. After two years of steeply declining sales, we've made the decision to close our Guitar Hero business unit and discontinue development on our previously playing Guitar Hero title for 2011.
Despite a remarkable 92 rating on DJ Hero 2, a widely well-regarded Guitar Hero: Warriors of Rock, as well as the 90-plus rated release from our most direct competitor, demand for peripheral-based music games declined at a dramatic pace. Given the considerable licensing and manufacturing costs associated with this genre, we simply cannot make these games profitably based on current economics and demand. Instead, what we'll do is focus our time and energies on marketing and supporting our strong catalog of titles and downloadable content, especially to new consumers, as the install base for hardware continues to grow.
In addition to changes in Music, we announced our decision to discontinue development on True Crime: Hong Kong. Even our most optimistic internal projections show that continued investment is not going to lead to a title at or near the top of the competitive open-world genre. In an industry where only the best games in each category are flourishing, to be blunt, it just wasn't going to be good enough. Since the day I arrived at the company, I've said that I believe the best way to achieve commercial success is to provide gamers with the highest possible creative quality. The decision to stop production on True Crime is based solely on that belief.
These are tough decisions, but we believe they're the right decisions being made for the right reasons. And they reflect our ongoing commitment to delivering the games that gamers want to play. As a result of these decisions, we enter 2011 a leaner, more focused organization. We intend to devote our time and resource to the areas, where we have true competitive advantages and the potential to make gaming experiences that are best-in-class. Our product lineup will be more focused, should be more profitable and will provide deeper online experiences than ever before.
As we look at our slate in development, we have a number of opportunities both announced and unannounced that have top 10 potential. Our big areas of focus for the next few years are in the following areas: Number one, of course, Call of Duty. Call of Duty is the biggest retail video game franchise and one of the biggest online entertainment franchises in the world. We've assembled an unprecedented team of some of the worlds best development and business talent to keep this game ahead of the curve, and our slate for this year will be anchored by an all-new first-person shooter release in the Call of Duty franchise. This franchise has shown remarkable staying power. Call of Duty has grown its audience every year of its seven-year history.
And by any dispassionate measure, be it sales, size of the online community, hours of online play, performance of downloadable content or consumer awareness and intent, the momentum we have today is stronger than ever.
Call of Duty is at the epicenter of online gaming, making it perhaps the stickiest franchise of all time. The online stats are truly incredible. For the Call of Duty franchise, more than 27 million gamers have played more than 2 billion hours online. And Black Ops players alone have spent roughly the same amount of time playing online per day as the average user spends each day on Facebook.
All of this gives us confidence to continue investing heavily in new markets and business models which should offer more opportunities for long-term growth than ever before, which brings us to Project Beachhead. Today, we're pleased to announce our new wholly-owned development studio, Beachhead, which will lead the creation of our all-new digital platform for the Call of Duty franchise. Beachhead will create a best-in-class online community, exclusive content and a suite of services for our Call of Duty fans to supercharge the online gaming experience like never before. The platform will support in-game integration and bring online experiences and console play together for the first time. The platform has been in development for over a year, and we're very excited about the increased value we can bring to the community. We look forward to sharing more specifics on this exciting new endeavor with you in the near future.
Third, downloadable content. The downloadable content we have planned for the Call of Duty universe, alone, should have more commercial potential on its own than most standalone console games. In fact, our first DLC release, Black Ops: First Strike launched on the Xbox 360 on February 1, and that pack set new Xbox LIVE record with more than 1.4 million downloads in the first 24 hours, an increase of more than 25% over the day one performance of our first DLC Map Pack for Modern Warfare 2 last year. Black Ops: First Strike will be released on the PS3 later in the quarter.
Fourth, China. We're developing a free-to-play micro-transaction based Call of Duty title for the exploding market in China. This effort, although not slated for this year, has tremendous potential in its own right, but will also offer learnings that we can use throughout our organization.
Finally, in just two days at New York Toy Fair, we'll be announcing a big, broad appeal, new entertainment franchise. It's an all-new gaming universes that brings together the worlds of toys, video games and online play in a way that I believe to be unprecedented. This new universe has tested incredibly well and has generated tremendous support from our retail partners and is expected to launch in the back half of this year.
Number six, licensed properties. This year, we plan to release two movie-based titles an all-new X-Men game, tied to the feature film X-Men: First Class and Transformers 3, which will coincide with Michael Bay's blockbuster movie release. Also, this year, we plan to launch games based on the best-selling Spider-Man franchise, the toy phenomenon Bakugan, hit TV shows Wipeout and Family Guy, as well as the latest release in the long-standing Cabela's Hunting franchise. As I mentioned earlier, these are all strong franchises with passionate niche audiences that can achieve repeatable and profitable success.
And finally, Bungie. This is an opportunity that speaks for itself. Bungie is one of the world's most gifted developers with one of the best track records in the industry. And although the title is not expected to launch this year, Bungie's new universe will represent a tremendous long-term potential through Activision Publishing. I can't share the specifics of the game with you today, but I want to voice our absolute commitment and excitement to the team at Bungie. This is one of our key strategic growth initiatives, and we are setting the stage for this project now.
Our theme is all about focus, focusing on best opportunities where we have true competitive advantages and where we have the potential to deliver best-in-class entertainment experiences. This, in turn, should lead to continued industry-leading returns for our shareholders. I'm looking forward to updating you on our plans and performance, as this exciting year for us unfolds.
With that, I will now turn it over to Mike Morhaime, who will provide an update on Blizzard Entertainment.
Thank you, Eric. Before I discuss our performance in 2010, I wanted to note that yesterday was the 20th anniversary of Blizzard Entertainment. It's hard to believe that the company has grown from a trio of UCLA engineering graduates to one that serves millions of gamers around the world. That success has been fueled by continuity. Many of the original Blizzard employees who joined us in those early years are still with us today, and we've worked hard to pass on our core values and reinforce the culture of excellence with our new employees.
We were a company of gamers back then and are still a company of gamers today. We've assembled some of the strongest and most passionate development teams in the industry and are positioned well to continue delivering epic entertainment experiences.
Blizzard's 20th year was our best yet. We shipped two games, StarCraft II: Wings of Liberty and World of Warcraft: Cataclysm that were incredibly successful. StarCraft II and Cataclysm were the top two selling PC games in 2010 at retail in North America and Europe combined. These two games helped deliver a record year. Our 2010 non-GAAP revenues exceeded $1.65 billion, an increase of 38% from 2009. In addition, our non-GAAP operating income reached $850 million this year, increasing 53% over the prior year.
As we have previously announced, World of Warcraft reached 12 million subscribers worldwide late last year and has grown from there, following the release of Cataclysm in December. That release was another record-breaker for Blizzard Entertainment. Worldwide sales, as of day one, topped 3.3 million units and one-month sales hit more than 4.7 million units. These sales numbers are reflection of the ongoing strength of World of Warcraft and our community, even as the game has passed the sixth year mark.
Our critics have also reacted positively. With the games currently holding a 90 average on Metacritic and winning numerous end-of-the-year awards. Our developers have continued to raise the bar for quality and creativity in the MMO space. The award-winning content they've created in Cataclysm will help us maintain our competitive advantage, as new competitors come online in the future.
In addition to Cataclysm, we're seeing continued success with StarCraft II. The game has won several major gaming awards, including a spot in Time Magazine's Top 10 Games for 2010 and Wired's overall game of the year. Sales continue to be strong, with StarCraft II approaching 4.5 million units sold to date worldwide.
With our developers working hard to support this huge new community, we have added new features such as chat channels on Battle.net at the request of our players. We also just released a trio of official custom games a few weeks ago. These custom maps are important for the longevity of StarCraft II, as they showcase puzzle and party game modes that are popular with casual players. The new map releases also include a lot of artwork for the community to use in creating their own custom maps. To date, worldwide StarCraft II community developers have uploaded more than 150,000 maps to Battle.net.
As we head into 2011, we want to build upon the momentum from the launches of Cataclysm and StarCraft II. We will focus on growing our World of Warcraft community by supporting our players. The developers are already hard at work on additional updates for the game. We're also working with our partner NetEase to prepare Cataclysm for launch in China, which includes getting the proper government approvals. Our goal is to reduce the amount of time between our game launches in China versus the rest of the world.
On the StarCraft II front, we will continue to improve the Battle.net experience, as well as create new content for our players. We recently began public testing on a handful of new ladder maps to keep the game fresh for our multiplayer community. And as with Cataclysm, we're working with our partners at NetEase to prepare StarCraft II for launch in China.
However, we have no specific updates to share at this time. Finally, the development team is hard at work on Heart of the Swarm, which is first expansion to StarCraft II. We're looking forward to sharing more information about that expansion, as I said, in the coming months.
As for Diablo III, development continues to go well, and we're very excited about the game. Our most recent public showcase for Diablo III was at the G*Star show in Korea, where demo stations attracted huge lines of players. I'm looking forward to sharing some more news about the game and our upcoming beta on the next call.
Finally, I wanted to remind everyone that we just announced our BlizzCon show for 2011, which will be taking place on October 21 and 22 at the Anaheim Convention Center. Our shows keep getting better and better every year, and we're looking forward to meeting with our players and sharing exciting news about Blizzard at the event.
In summary, 2010 was a great way to cap off an amazing 20-year run at Blizzard Entertainment. We added more titles to our stream of best-selling, award-winning games, and more gamers around the world are playing Blizzard games today than ever before. The next 20 years promise to be even better. The games we operate today and the games we have in the pipeline represent the best and widest slate of content that Blizzard has ever produced. The future looks bright. As more and more people around the world get access to broadband and become interested in online gaming, Blizzard is in a unique leadership position to attract those players to become part of our community.
Thank you, and I'll turn the call back over to Kristin.
Operator, I think we're ready to take a few questions.
[Operator Instructions] We'll go first to Brian Pitz with UBS.
This is Tim O'Shea speaking on behalf of Brian Pitz I was wondering, I wanted to talk about Cataclysm. The launch looked to be very successful with about 4.7 million units sold in the first month. Two questions here. First, can you give us an idea of the percentage of gamers that digitally downloaded the game through Battle.net, and perhaps comment on how that affects margin and; then two, maybe you can help us understand how these expansions impact the subscriber levels in the Western markets, and if you can give us any idea on how many or what percentage of the 4.7 million units were sold to new subscribers relative to existing subs?
Regarding the breakdown between digital and retail, unfortunately, we don't provide that level of detail. I can tell you that Digital sales are becoming a more and more important part of the business, but at the same time, Retail is still important to us, and especially when it comes to our boxed product, our retail activations, Retail is still the lion's share of our sales. Expansions, historically, have been very major drivers of attracting and retaining players to the subscriber base of World of Warcraft, and Cataclysm is no different. And so, we have seen players come back to try out the new Cataclysm. We have seen a number of players come in to play World of Warcraft for the first time through December. And I can tell you that Cataclysm sales have continued strong into January.
We'll hear next from Collis Boyce with Morgan Stanley.
Collis Boyce - Morgan Stanley
I was wondering if you could talk about what you are baking in for the full year, when it comes to your key franchises, the Call of Duty and World of Warcraft? I think last year, kind of in the fourth quarter you had guided down for the Call of Duty franchise and just directionally trying to understand what's in this year's guidance?
First of all, on Call of Duty, we are seeing, as Eric mentioned, tremendous strengths on the digital front. We also have more downloadable content offered this year than last year. So we think we will see growth on Call of Duty on the digital side. But in order to be prudent and given the enormous success of Black Ops, at this point, we have still planned a retail release in the fall below the levels of success that we have seen with Black Ops. So that's very consistent with how we treated that last year. On the World of Warcraft, I think the franchise is going from strength to strength. Obviously, with Cataclysm just out of the gate recently, subscriber trends are very healthy. I would expect that the release of Cataclysm in China, which should also happen sometime during 2011, is going to drive further subscriber growth, overall. And so we are pretty optimistic about the prospects of our core franchises over the next 12 months.
Collis Boyce - Morgan Stanley
And then one quick follow-up, as you guys talk about Beachhead, is there anything that you can say about the potential for any type of subscription-based revenue affiliated with that?
We're not yet ready to talk about the details of Beachhead, but when we are, we are going to present in detail what the content is, what the services are, et cetera. So you just have to stay tuned on that.
And Eric Handler with MKM Partners has our next question.
Eric Handler - MKM Partners LLC
Two things. First of all, can you talk about maybe quantifying some of the growth on the revenue side you may see this year in Asia, sort of break down between Korea and China? And also in Korea, are you starting to see a significant uptick now from StarCraft II, as the tournament schedule picks up a bit? And then secondly, with regard to guidance, am I correct in hearing you that the buyback really is not taken into account in your share count for the year?
Well, let me take the last question, first, and then I'll have Mike address your question as it relates to Korea and China. We have a limited amount of buyback authorization baked into our EPS forecast at this point. Share buyback program is going to be opportunistic, and we're going step in when we see market volatility. So as such we have provided ourselves some flexibly, as opposed to be forced to execute the whole program in order to deliver the EPS outlook. Mike, do you want to talk about Korea?
Sure. Well, we don't give regional breakdowns, but I can say that we feel pretty good about our growth prospects, especially in China, given that we haven't launch Cataclysm yet. We also are in a situation where we only have one of our value-added services in operation that's the paid character transfer. But we have other value-added services that are operating globally, and we hope to bring those to China soon as well. We remain excited about the Global StarCraft League, our partner with GUMTV [ph] is producing some excellent content, and the Koreans remain very excited about the League and we're hoping that to continue to gain traction this year, both in Korea and actually internationally as well.
Doug Creutz with Cowen and Company has our next question.
Douglas Creutz - Cowen and Company, LLC
I was wondering if you could just give a number for what your downloadable content revenues were in Q4?
Downloadable content as it relate to Call of Duty Map Packs?
Douglas Creutz - Cowen and Company, LLC
Well, I don't think that was a very significant number, because we haven't released a new Map Pack in Q4. The Map Pack behind Black Ops was just released at the end of January. So I think it's not a large number in Q4.
We'll go now to Jeetil Patel with Deutsche Bank.
Jeetil Patel - Deutsche Bank AG
Your 2011 guidance for the year, you have a comment in there in that it does not yet include a Blizzard title. I guess what is the qualifier to get a Blizzard title out this year? I guess it seems like the commentary seems awfully interesting in that. Are you waiting for some sort of percentage completion, competitive slate? Can you just maybe elaborate more as to why there isn't a Blizzard title this year? Second, can you or do you plan to leverage your World of Warcraft or Call of Duty kind of user base to reach and offer a services model similar to Netflix? I mean it's interesting that you've got a great content offering as a services offering at Netflix, can you leverage your two major IPs or two significant subscriber bases today to do something similar in gaming? Or do you think you need a new or different platform to deliver content in the form of gaming as a service?
I don't know how many questions those were but hopefully we kept track of all of them. On the first one, with regards to the commentary around the Blizzard title. As you know and, as we said before, we think that in the long run, Blizzard is good for one major release a year. But of course, what always rules is the quality of the game has to be there. And that's why, for example, we didn't have a release in 2009, but we had two releases in 2010. And as you can see, the results speak for themselves. I think that has played out well for our shareholders. With regards to Diablo, we don't have a date yet. So we felt it was prudent not to bake it in, because again we don't want to find ourselves in a situation where we either disappoint or would have to make any compromises on the game quality which we would never do. If the title ships, obviously, that will present material upside to the outlook that we have provided. And then I think with regards to your distribution platform question, maybe I'll let Bobby elaborate.
The plan, Jeetil, is to continue to focus on investing against services that are specific to the franchises. I can't say that we have any plans presently to offer a broader subscription service that would incorporate lots of different types of games like Netflix does, if that's what I understand your question to be.
Jeetil Patel - Deutsche Bank AG
I guess going back to the Diablo question, I guess can you talk about how far along it is in terms of percentage of completion?
I don't have a percentage of completion rating for you today, other than to say that the game's coming along very well. We're very happy with the development progress that the team is making, but until we get to beta and we have the community help us test the game, we aren't going to lock in a release date. And so I just want to clarify that we're not setting a date. I'm not saying that it's going to be 2012. I'm just saying that there isn't a date yet. And so given that we haven't locked into a date, we fully support the decision not to include it in guidance.
Up next, we have John Taylor with Arcadia Investment Group.
John Taylor - Arcadia
Eric, with the refocus of resources on the Activision Publishing side, I wonder if you could talk a little bit about what the implications for headcount are this year? That's the first one. And the second one is, I'm wondering what assets the intangible -- could you break that charge down and allocate it on the balance sheet and did it only touch the intangible line or were there some other lines that kind of got taken into that?
I'll let Thomas handle the breakdown of the balance sheet portion of the question. In terms of the headcount, first of all, I just want to say that we never make decisions that lead to reduction of headcount lightly, but it will impact about 7% of our overall global workforce. Thomas?
John Taylor - Arcadia
Of the Activision Publishing workforce?
7% is related to the global workforce. So it's about 500 people for total headcount of just over 7,000. Now I would say that we are making significant investments elsewhere. So while we have headcount impacted from the changes we are making on the Music and the Casual business, we are investing in headcount at Blizzard as well as on Call of Duty. So our net headcount at the end of the year is probably not going to be materially different, given that we are ramping up development teams around Blizzard's new MMO. We are ramping up our development teams around the Call of Duty initiatives. So after all is said and done, at the end of the year, I don't think our headcount will be all that materially different. It will just be allocated to more profitable growth opportunities for the next few years to come. On your balance sheet question, I just want to make sure I understood, you're talking about the impact of the $0.02 to $0.03 restructuring for 2011 or are you talking about 2010?
John Taylor - Arcadia
No, mostly 2010, looking back?
So in 2010, we had probably, related to the portfolio, decision we made already taken about $0.02 to $0.03 of expenses in the fourth quarter and part of that related to inventory write-downs and part of that related to severance costs on studio actions that we have already announced such as Blizzard, for example.
John Taylor - Arcadia
Just to be clear, those were runs for the P&L, separate from the intangible restructure though, right?
Correct. Those are runs for the P&L separate from intangible structure, these intangibles simply relates to the sign-of-lift intangibles that were sitting on our books as a result of merger accounting. And those $0.02 to $0.03 also ran through our non-GAAP numbers.
And we do have time for one final question, that will be from Edward Williams with BMO Capital Markets.
Edward Williams - BMO Capital Markets U.S.
First of all, with Call of Duty, can you talk a little bit about what the sales mix is like on a geographic basis, North America versus international for the property today, and what your goals are for that going forward? Also, then also within Call of Duty, what the digital sales are like today? And again, as you go more international, how we could see that Digital quality of revenue shaking out going forward?
Yes, the Call of Duty add is going from strength to strength everywhere. So we have been growing our Call of Duty in the U.S. of a very substantial base already. We have made even more progress in Europe. Where with Modern Warfare 2, we already did very well in markets like the U.K., but have really turbocharged the penetration, the attach rate of Call of Duty now also in Continental Europe. So we are seeing strong double-digit growth across the board behind Call of Duty: Black Ops. Digital, I expect is becoming a bigger part of our overall revenue mix on Call of Duty, because more consoles are online-connected, more people are getting comfortable and are enjoying the multiplayer experience. And last but not least, we have tremendous amount of content lined up. We have now dedicated resources against providing a continuous flow of online content, and I think that's going to keep players engaged and it's going to continue to drive the revenue mix towards Digital. Now having said all of that, I think we have a blockbuster retail release lined up for the fall that we are extremely excited about, which will be hopefully again the biggest game of the year.
Edward Williams - BMO Capital Markets U.S.
Have you seen much of a change in the attach rate of the digital content in calendar '10 versus what you saw in calendar '09, is it kind of going with the installed base or is it growing faster than the installed base of the hardware is growing?
No. I wouldn't relate it to the install base of Hardware. I would relate it to the install base of Black Ops, probably. And as such, we have seen a stronger attach rate, yes.
Edward Williams - BMO Capital Markets U.S.
And then the last question, is can you comment, I know in a couple of days you'll announce more about your initiative, but can you give us a little bit color as to the significance of the product you're announcing at Toy Fair in terms of looking at your fiscal '11 guidance?
I think it would detract from the announcement that we're making at Toy fair. So probably best to wait until Toy Fair, Edward.
Thank you, everyone. And as always, we appreciate your time and consideration, and we look forward to speaking with you in the future.
That concludes today's conference. Thank you all for joining us.