Activision Blizzard Management Discusses Q1 2013 Results - Earnings Call Transcript

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Activision Blizzard (NASDAQ:ATVI) Q1 2013 Earnings Call May 8, 2013 4:30 PM ET


Kristin Mulvihill Southey - Former Vice President of Investor Relations

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

Dennis Durkin - Chief Financial Officer

Eric Hirshberg - Chief Executive Officer of Activision Publishing, Inc

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


Michael J. Olson - Piper Jaffray Companies, Research Division

Douglas Creutz - Cowen and Company, LLC, Research Division

A. Justin Post - BofA Merrill Lynch, Research Division

Benjamin A. Schachter - Macquarie Research

James Hardiman - Longbow Research LLC

Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division

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


Good day, and welcome to the Activision Blizzard's First Quarter 2013 Results Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the Senior Vice President of Investor Relations, Ms. Kristin Southey. Please go ahead, Kristin.

Kristin Mulvihill Southey

Good afternoon, and thank you for joining us today for Activision Blizzard's First 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.

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 risk and uncertainty. As indicated in the slide that is showing, a number of important factors could cause the company's actual future results and other future circumstances to differ materially from those expressed in any forward-looking statements.

Such factors include, without limitation, sales levels; current macroeconomic conditions; increasing concentration of titles; shifts in consumer spending trends; our ability to predict consumer preferences among competing genres and hardware platforms; maintenance of key relationships, including the ability to attract, retain and develop key personnel and developers that can create high-quality hit titles; the seasonal and cyclical nature of our industry; changing business models, including digital delivery of content; competition, including from used games; possible declines in prices; product returns; price protection; product delays; adoption rate and availability of new hardware and related software, particularly during the expected console transition; rapid changes in technology and industry standards; the current regulatory environment; litigation and associated cost; protection of proprietary rights; counterparty risks; economic, financial and political conditions and policies; foreign exchange and tax rates; and potential changes associated with geographic expansion.

These important factors and other factors that potentially could affect the company's financial results are described in the company's most recent Annual Report on Form 10-K for the period and in the company's other SEC filings. The company may change its intentions, beliefs or expectations made at any time and without notice based upon any changes in such factors in the company's assumptions or otherwise.

The forward-looking statements in this presentation are based on information available to the company as of the date of this presentation and while we believe them to be true, may ultimately prove to be incorrect. The company undertakes no obligation to release publicly any revision to any forward-looking statements to reflect events or circumstances after today, May 8, 2013, or to reflect the occurrence of anticipated events.

I'd like to note that certain numbers we will be presenting today will be made on a non-GAAP basis, excluding the impact of the change in deferred net revenues and related cost of sales with respect to certain of our online-enabled games, expenses related to stock-based compensation, the amortization of intangibles from purchase price accounting and the associated tax benefit. Please refer to our earnings release which is posted at for a full GAAP to non-GAAP reconciliation and further explanation.

There's also a PowerPoint overview, which you can access with the webcast and which will be posted to the website following the call. In addition, we will also be posting a 12-quarter financial overview highlighting both GAAP and non-GAAP results on a one-page summary sheet.

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

Robert A. Kotick

Thank you, Kristin, and thank you, all, for joining us today. For the quarter, we generated non-GAAP revenues of $804 million, non-GAAP EPS of $0.17 and $325 million of operating cash flow. Our results demonstrate our continued ability to build and sustain great game franchises that support highly engaged communities around the world. This proven ability, combined with our long-term strategy, rigorous planning, best-in-class execution and incredibly talented employees are the core strengths of our company.

Activision Publishing's Skylanders was the leading video game franchise in both North America and Europe, including toys and accessories. Call of Duty was the #2 franchise in North America and Europe combined. Blizzard's World of Warcraft remains the largest subscription-based MMORPG in the world. However, during the quarter, subscribership declined by approximately 1.3 million subscribers, roughly 14%, and we ended the quarter with approximately 8.3 million subscribers. Though the majority of our subscriber declines occurred in the East, where we have more subscribers and lower revenue per subscriber, we saw declines in the West as well. And while we do believe further declines are likely and we expect to have fewer subscribers at year end than we do today, World of Warcraft remains one of the most successful franchises in the history of entertainment.

It's important to note that the nature of online games has changed, and with the environment becoming far more competitive, especially with free-to-play games. To address this, we're working to release new content more frequently to keep our players engaged longer and make it easier for lapsed players to come back into the game. We believe in the long-term value of this franchise and will continue to commit substantial resources to World of Warcraft.

During the quarter, Blizzard also launched its expansion to the long-standing StarCraft franchise, with StarCraft II: Heart of the Swarm. The expansion pack launched to strong critical response and was the #1 title for the PC in the quarter. While we had a solid start to the year, as we've mentioned on previous conference calls, we believe the back half of 2013 could prove more challenging than we previously thought for a few reasons:

First, the competitive landscape. This year, we expect a number of well-established video game franchises and well-capitalized new entrants to compete directly for our consumers' time and attention, particularly as certain of our competitors have moved their launches into the back half of the year. Our Skylanders franchise will face much more direct and substantial competition than it has in the past. And our next Call of Duty game will face a more competitive environment than last year. The competitive landscape will likely require us to further increase our sales and marketing investments for our 3 largest franchises, especially in the important holiday season.

Two, we continue to face the uncertainties of the console transition. There are still many unknown factors, such as pricing, launch dates and quantities, the level of first-party support and, importantly, consumer purchase intent in a world where consoles are no longer just competing with each other, but also with new platforms, such as smartphones and tablets. In addition, the newest console, the Wii U, has had a very slow start. All of these factors further heighten our concerns heading into the back half of the year, particularly during the very competitive fourth quarter.

While we face headwinds in the short term, we're optimistic that our leadership position, along with our resources, scale, infrastructure and exceptional talent, should allow us to take advantage of the positive long-term fundamentals of our industry. We see numerous exciting future business opportunities, including new platforms, new geographies and new business models, and we're investing against these many opportunities with expected shareholder value creating long-term returns.

While we have concerns and face uncertainties, we believe our product pipeline for this year and the future is strong, our strategy is sound and our talent is second to none. In the fall, we hope to continue to build on the success of Skylanders with Skylanders SWAP Force, which introduces a new level of innovative game play, swapability. Similarly, the recently announced Call of Duty: Ghosts is expected to deliver an all-new experience built on new next-generation game engine technology. And Blizzard Entertainment has already launched StarCraft II: Heart of the Swarm and will launch Diablo III for the PlayStation 3 later this year.

In addition, Blizzard is also developing new titles with new business models, including Hearthstone and Blizzard All-Stars. During the remainder of the year, we'll continue to invest in our established franchises, invest selectively in new opportunities and to manage our costs very carefully.

Regardless of the near-term volatility in our industry, our focus and our disciplined approach to our business have served us well in the past and we expect will enable us to continue delivering shareholder value over the long term, as we have for the last 20 years.

Now I'd like to turn the call over to our Chief Financial Officer, Dennis Durkin, who will review our financial performance. Dennis?

Dennis Durkin

Thanks, Bobby. Good afternoon, everyone. Today, I will start with a recap of our March quarter results. Followed by a review of our outlook for Q2 and for the full year. Beginning with our Q1 results.

Please refer to our earnings release for full GAAP to non-GAAP reconciliations. For the quarter, on a GAAP basis, we generated revenues of $1.3 billion, an operating margin of 44% and EPS of $0.40. On a non-GAAP basis for the quarter, we generated revenues of $804 million, an operating margin of 31% and EPS of $0.17. Our revenues in the quarter were driven by Call of Duty, both catalog and digital; Skylanders; Blizzard's World of Warcraft and the recently released StarCraft II: Heart of the Swarm.

Turning to the specific P&L items. Please note that all percentages are based on revenues, except for the tax rate. For Q1, GAAP product costs were 24% and total operating expenses were 32%, both below our outlook due to revenue outperformance. For GAAP, our tax rate was 23%.

For non-GAAP in Q1, product costs were 25% and non-GAAP operating expenses were 44%, again below our outlook due to revenue outperformance. Finally, as expected, our non-GAAP tax rate came in at 21% due to the R&D tax credit extension we referred to on our February call.

In terms of cash flow, we generated operating cash flow of $325 million and free cash flow of $308 million. From a balance sheet perspective, our cash flow performance continued to strengthen our balance sheet. At March 31, we ended the quarter with no debt and $4.6 billion in cash and investments or nearly $4 per fully diluted share. Of that amount, almost 60% is held outside the U.S. Of note, on May 15, we will be paying our $0.19 per share cash dividend to shareholders of record as of March 20, 2013.

Now moving on to our outlook. Q1 was a good start to 2013, but as Bobby mentioned, we believe that the back half of the year will be more challenging than we previously expected. As you may recall, last November, we said we expected 2013 to be a difficult comparison for us due to the console transition, challenging macroeconomic conditions and our slate. All of these factors remain, but since our February outlook, we have also seen further declines in World of Warcraft and intensified competition in the second half of the year. While these factors have made us more cautious on our outlook for the back half the year, we are still, today, raising our revenue and EPS outlook for the full year based on our Q1 performance.

Now on to the numbers. For 2013 on a GAAP basis, we expect net revenues of $4.22 billion, a $135 million increase from our prior outlook. Product costs of 24% and operating expenses of 49%. We expect a tax rate of 26% for the year and a diluted share count of 1.15 billion. The share count can be used for all GAAP quarters. Finally, we expect GAAP EPS of $0.73, up from our prior outlook by $0.05.

On a non-GAAP basis, we expect net revenues of $4.25 billion. We expect non-GAAP product costs of 26% and operating expenses of about 44%, slightly higher than our prior outlook due to additional investments in sales and marketing for our other [ph] brands. We expect a tax rate of 27% and a diluted share count of 1.15 billion. The share count can be used for all non-GAAP quarters. Finally, we expect non-GAAP EPS of $0.82, up $0.02 from our February outlook.

Our updated full-year non-GAAP EPS outlook incorporates Q1's upside, partially offset by $0.05 for lower-than-expected WoW subscribers and additional marketing for our top franchises in the competitive holiday period, all of which, for modeling purposes, are expected to come out of the fourth quarter.

Now moving on to our outlook for the June quarter. As we said in February, seasonality this year will be very different in 2013 versus 2012 and our results will be more concentrated in the holiday quarter. Our Q2 guidance reflects this. We expect lower revenues in the June quarter versus last year due to challenging comparisons with the record-setting launch of Diablo III in May of last year. In April of this year, Activision Publishing launched Uprising, the second DLC Map Pack for Black Ops II on Xbox and we expect to launch Uprising on other platforms later in the second quarter. Other than that, we have no other significant releases scheduled for our top franchises.

For the June quarter on a GAAP basis, we expect net revenues of $980 million, product costs of 27%, operating expenses of 40% and a tax rate of 26%. We expect GAAP earnings per share of $0.21. On a non-GAAP basis, we expect net revenues of $590 million, product cost of 27%, operating expenses of 60% and a tax rate of 27%. For the quarter, we expect non-GAAP EPS of $0.05. Lastly, our revised outlook does not include the impact of any potential non-ordinary course transactions or significant related financings. And we will have no further comments on these matters today.

So in summary, Q1 was a solid start to the year. As we look forward, in spite of the near-term challenges we face in the back half of 2013, we remain committed to the strategy that has successfully guided us through many difficult market transitions in the past. Notably, focusing on doing a few things exceptionally well, managing our costs very carefully and delivering superior long-term value to both our customers and our shareholders.

We are confident that our strategy will continue to set the bar for our industry going forward both this year and beyond. So with that, now let me hand the call over to Eric to discuss our Activision Publishing business.

Eric Hirshberg

Thanks, Dennis. I'm pleased to announce that in Q1 Activision Publishing delivered another strong quarter. None of our success would be possible without the talent, passion and commitment of the best team of employees in the entertainment industry and the commitment of our retail and digital partners around the world.

Through March 31, in North America and Europe combined, Activision Publishing had the #1 and #2 video game franchises, including toys and accessories. Let's start with Skylanders. Skylanders, including toys and accessories, moved into the #1 spot as the biggest franchise year-to-date and Skylanders Giants delivered year-on-year growth compared to Skylanders: Spyro's Adventure.

The secret to Skylanders' success from the very beginning has been to continually surprise and delight our fans with meaningful innovation and superior game play. This fall, we are pushing the genre forward once again with Skylanders SWAP Force. SWAP Force introduces an all new play pattern, dynamic swapability. Retailer and consumer response has been very positive and we expect to receive even more shelf space this fall than last.

However, we will obviously see more direct competition and expect to see significant resources being spent on competitive launches. As always, we will remain laser focused on delivering the things we know our consumers care about most, innovation and great game play, all supported by the largest sales and marketing campaign in the Skylanders franchise's history. The game looks great and we're looking forward to showing you more at E3.

Now, turning to Call of Duty. During Q1, the franchise increased revenues and engagement year-over-year. In Q1 at retail, Black Ops II sales were higher than Modern Warfare 3 sales in the prior year and online multi-player engagement set new records. Q1 monthly active users for Black Ops II were up versus Modern Warfare 3 during the same period last year and total monthly active users for the franchise achieved a new Q1 high.

Creating a great game and year-round digital content is not easy. And I want to thank all of our teams and our team at Treyarch for their incredible work. Call of Duty also generated strong non-GAAP digital revenues in Q1, driven by multiple digital business models, which we could not have achieved without the help of our first-party and retail partners who sell our digital content so effectively.

Over the last several years, we've also been building direct relationships with our fans, using CRM and a sophisticated in-game store, both of which are delivering results. In fact, over 60% of the first week sales for Black Ops II Uprising Map Pack took place in our in-game store.

We continue to improve our digital models. As you may recall last year, we made our Elite services free to increase engagement and offered players 2 options to purchase Black Ops II DLC. The proven à la carte 1-map-at-a-time model and a Season Pass, which lets fans buy all 4 DLC map packs for a discount.

The changes have been well-received and our growth shows we've more than restored the Call of Duty digital business model. In addition to selling map packs, this quarter we introduced an all-new digital model selling micro DLC that lets players personalize, customize and expand their Call of Duty experience. Although still a small contributor to the franchise overall, we're pleased with our results and most importantly, we've struck the right balance between providing items which have real value to our fans, but in no way compromise the core game play experience.

Looking to the back half the year, we plan to continue building Call of Duty momentum with the release of Call of Duty: Ghosts on November 5 for the Xbox 360, PlayStation 3 and PC. Ghosts will also be available on next-gen platforms and will be supported by one of the largest sales and marketing plans in the brand's history.

This is a new direction for the franchise, as Ghosts is expected to deliver an all-new story, all-new characters and an all-new Call of Duty world all powered by a new next-gen Call of Duty engine. Infinity Ward set the gold standard for the first-person genre in the current generation and we expect to do it again with Ghosts. We look forward to sharing more about the game at the Xbox reveal on May 21.

Now let's talk about Destiny. We remain very positive about Bungie's new shared world action game, which is expected to launch next year. Destiny combines the visceral thrill of a great first-person action game, with the character development, social play and depth of a great online role-playing game. So to summarize, Activision Publishing delivered another strong quarter and looking ahead, we have a great pipeline.

We also have many challenges and risks to contend with for the duration of 2013. However, our commitment to innovation, strong brands and our continued focus and investment on our biggest opportunities should enable us to continue expanding our leadership position in the long term.

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

Michael Morhaime

Thanks, Eric. On the product side, Q1 was an exciting time for Blizzard as we announced 2 new games: Hearthstone, a collectible card game on Windows, Mac and iPad; and Diablo III for PlayStation 3 and 4. These games not only bring Blizzard into the mobile and console spaces, but in the case of Hearthstone, also represent our first entry into free-to-play.

We ended March with $330 million in revenue, up 31% year-over-year and $135 million in operating income, up 52% from the same quarter last year. This increase was driven in large part by the launch of Heart of the Swarm, as we didn't have a comparable launch in Q1 2012.

For World of Warcraft, we ended the March quarter at 8.3 million subscribers globally. While we saw declines in the West, the majority of the decline came from the East, which has historically seen greater volatility. Given a more competitive market and the length of time since the last expansion, we do expect further volatility this year.

Looking forward, our objective is to deliver new game content at a quicker pace to improve engagement. Our next content update will release later this month and we will continue to invest in additional updates and improvements to continue to evolve the game.

More specifically, we're examining ways we can ease the transition back into the game for returning players. We've always seen players come and go from World of Warcraft. Smoothing out that transitional period is something we're studying, as we adjust our approach to player behavior and preferences.

On the StarCraft II side, the highlight from last quarter was a successful launch of Heart of the Swarm. In partnership with popular community personalities, we hosted an unprecedented 21-hour global Internet broadcast to celebrate the launch of the game. More than 1.1 million viewers tuned in to this broadcast to see eSports' show matches, interviews and community produced content. By the end of the second day on the market, Heart of the Swarm had already sold 1.1 million copies. And then that weekend, more than 1.1 million viewers watched the first major Heart of the Swarm tournament at Major League Gaming's Winter Championship.

We've ridden that strong momentum into announcing this year's StarCraft II World Championship Series, a global partnership between Blizzard and some of the biggest organizations in eSports. As a result of this partnership, world-class StarCraft II eSports can be viewed in prime time online throughout the world during the week. And StarCraft II is now available on Korean cable television 5 days a week. Viewership of the tournament has been consistently high and we look forward to continuing to improve the spectator experience over the course of the year leading up to the global finals at BlizzCon.

Moving on to Diablo III. We announced that the game would come to Sony PlayStation 3 and PlayStation 4 and showcased the demo of the PS3 version at PAX East in March. Press on the PS3 version has been very positive, as we have put a lot of work into adapting the game to take advantage of the console platform's strength. The controls and interface have been modified to suit consoles and the game will have local and online multiplayer capability. We recently announced pre-orders for the PS3 version, which is scheduled to ship later this year.

Rounding out our game updates, I'd like to talk about Hearthstone: Heroes of Warcraft, our new free-to-play collectible card game for Windows, Mac and iPad. Players will be able to earn cards through game play and have the option to purchase card packs if they want to fill out their collection a little faster. Hearthstone is being developed by a small team at Blizzard, whose goal is to create a Blizzard-quality game experience at a smaller scale and scope than our typical project. At this early stage, it's already clear that the team is achieving the depth and accessibility of the traditional Blizzard game with Hearthstone. Simply put, it's a lot of fun.

The announcement at PAX East generated a great deal of interest and excitement from attendees. And thus far, we've received a massive response from players interested in trying out the beta. We expect the Windows and Mac versions of Hearthstone to go into public testing this summer and released later this year. The iPad version will be available for download shortly after.

Finally, I want to remind everyone that BlizzCon is coming this November to the Anaheim Convention Center. Ticket sales took place 2 weeks ago and our players enthusiastically claimed all available tickets in a matter of seconds. Details on virtual ticket sales will come at a later date. As usual, we'll be sharing the latest news on Blizzard games at the show. We'll also be hosting the World Championship Series' Global Finals and crowning a true StarCraft II world champion.

Overall, Blizzard has had a good start to a challenging 2013. We successfully launched StarCraft II: Heart of the Swarm and announced 2 new games that we feel will deliver Blizzard-quality experiences to new players on additional platforms. And there's still more in the pipeline with our teams continuing to work on Blizzard All-Stars and our unannounced MMO. With these new games and continued development on existing franchises, we hope to welcome even more gamers into the Blizzard community as we build towards the future.

Thank you, and I'll turn the call back over to Kristin.

Kristin Mulvihill Southey

Thank you, Mike. Operator, this will open it up for questions.

Question-and-Answer Session


[Operator Instructions] We'll go first to Mike Olson with Piper Jaffray.

Michael J. Olson - Piper Jaffray Companies, Research Division

So you mentioned that your focus is doing a few things exceptionally well, and as we enter the next cycle, depending on how you would define major franchises, you'll have 4 or so major franchises that generate the majority of your profits. What are your expectations for what that number will be during the middle innings of the next cycle? And then if I can kind of sneak in other one, the Wii has historically been relatively important for -- platform for Skylanders. Is there potential for Skylanders to face some headwinds versus last year, due to the weakness of Wii U?

Dennis Durkin

I guess I can take this. We aren't going to give specific guidance on new launches outside of the ones that we've talked about in our overall disclosure and what's in the investment portfolio inside Activision Publishing and inside of Blizzard. So I think -- but when you look -- so we do concentrate on a few things and making sure those scale and that's driven the margin structure that we have inside the business, which is really, really great. But I would say, when we look at new investments, we aren't looking to do new investments unless they provide the kind of -- same kind of scale and investment return that we have in our existing businesses. So I think, even as you look to next-generation, we'll still be very focused in terms of the investments we're making regarding new franchises. Eric, why don't you take the second one relative to the Skylanders and the Wii platform?

Eric Hirshberg

The main thing to look at is first -- we've been receiving similar questions about the weakness of the Wii since the beginning of the Skylanders franchise. And Skylanders has done great both before the Wii U and has done great after the Wii U. Obviously, a growing installed base of family friendly consoles would be a benefit. And console prices and sales are one of the risks and one of the issues that we articulated for the fourth quarter. That said, we've done well despite weaknesses for both the Wii and the Wii U and seeing the Wii U take off would be great, but remains to be seen.


We'll go next to Doug Creutz with Cowen and Company.

Douglas Creutz - Cowen and Company, LLC, Research Division

Thus far, your approach to emerging game platforms, and I'm specifically thinking about mobile, has been somewhat cautious as you said, you don't want to throw money at unproven business models. It feels to me like we've seen a bit of an inflection in the mobile business in the last 6 to 9 months where you're starting to see some games generate some real sustainable revenues. I wonder if your prioritization of mobile has changed recently? And if so, what are you doing about it?

Robert A. Kotick

I think we've always said, we're constantly exploring all different platforms for opportunities. But, I don't think we would exactly share your view that 3 months suggests they're sustainable franchises. And if you look at the last 4 or 5 years, you've seen changes in the top 10 almost every year, they're significant. And nothing that's really driven any sizable amount of operating profit and while we are going to continue to look at it and we think that over the long term, there'll be opportunities, right now we just don't see anything that would suggest that changing the way that we're approaching investing against mobile would be a good idea.


[Operator Instructions] We'll go next to Justin Post with Merrill Lynch.

A. Justin Post - BofA Merrill Lynch, Research Division

Appreciate your help with the outlook for the back half. Maybe you could just help us a little bit more with what's kind of changed over the last 3 months. Have you seen some things with the title slates getting more crowded and competitive? Or some things with console pricing that may be concern you? Or is it just really the Wii that's starting to slow -- that's incorporating your guidance? I'm talking more about the cycle -- I'm sorry, the console side of your business, of course, versus the World of Warcraft side.

Dennis Durkin

Yes, no problem. So -- thanks, Justin. Yes, I mean, a couple of things. As we said in our last call and we've sort of said repeatedly since November, obviously that's the console transition year and those years bring significant volatility just as you have the lead off, there's a lot of noise in the market and a lot of other factors that just kind of contribute to the fact that there's more volatility. You only have to go back to the last generational change to see that. So that's one of the biggest things. And we've been talking about that since the beginning. But what we've really seen since then is obviously a little bit of a decline in our WoW business. And then there has been several large titles that have moved from the front half of the business -- front half of the year to the back half of the year, which has driven more competition into that slate. And against some of our main line franchise -- we have 3 large competitors, who are coming directly at us in the back half of the year. And so I think, for us, from a prudent prospective, we need to be able to meet that head on relative to those competitive entrants. And as you know in the past, platform transitions are really opportunities for people to reestablish franchises. So we really need to defend in this window. In light of all that though, like we do in -- across all of our spending decisions, we're going to be very, very prudent and only spend money when it's -- we have a solid return on that investment. So we'd like to build the firepower into our plan, but of course, we're going to be prudent as we get closer and making sure that we're spending that wisely.


We'll go next to Ben Schachter with Macquarie.

Benjamin A. Schachter - Macquarie Research

A couple of questions. First on WoW, in China, was there any meaningful change to the promotional activity around the game in the quarter? And will that change going out for the back half the year? And then, Bobby, if you could just talk about the potential for any new business models that might be enabled by the new consoles? Should we expect more meaningful microtransactions, et cetera?

Michael Morhaime

So on the promotional activity in China, we're constantly running various promotional efforts, so I would say no meaningful impact. And we are busy planning with the local teams there and [indiscernible] to plan out our efforts for the balance of the year. But we're continuing to actively promote the game.

Robert A. Kotick

And then with respect to new business models, I can't comment specifically on the next-generation consoles. But our general view is we approach new business models skeptically. And we take our time. And we look for those that will turn out to be something that is sustainable for a long term. I think we're seeing there are a lot of exciting new ways to allow customers to pay for their experiences, there are a lot of new ways [ph] for us to monetize our content. But I can't say that you're going to see any dramatic shifts in the way that we monetize on the console.


We'll go next to James Hardiman with Longbow Research.

James Hardiman - Longbow Research LLC

So if I think about your guidance, you beat by $0.07 in the first quarter, you raised guidance by $0.02. On the top line you beat by I think $114 million, you raised by $75 million. I guess the point I'm getting at, it seems like more of the sales beat is flowing through to the full year than the earnings beat. Obviously it's difficult to anticipate. But should we take that to think that -- you still think you're going to be able to capture your fair share of sales with your key games, but it's going to cost you a little bit more and what does that say, if anything, about your outlook for transition-related costs, versus sort of how you were thinking about things 3 months ago?

Dennis Durkin

Sure. Let me just take the outlook question. Yes, I think -- you're reading the right feedback relative to our guidance that there is more competition in the second half of the year and we're going to have to probably spend a little bit more in order to achieve some of those results. And that's sort of -- that's what's baked into our numbers. But we feel very comfortable with what's inside those numbers. So I don't think that there's anything different relative to that. I don't know, Eric, do you have anything that you'd like to add about marketing in the second half of the year?

Eric Hirshberg

Just seconding what Dennis said, we're going to keep our ability to defend our market share vigorously and there are also all the risks that Bobby and others mentioned in their prepared comments today, just related to the console transition overall.


[Operator Instructions] We'll go next to Colin Sebastian with Robert Baird & Co.

Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division

I guess, first, just comparing your comments from last quarter on uses of cash, we noticed in the 10-Q you still have the language around potential substantial buybacks, that's not included in the earnings press release. So just hoping you could confirm if there's been any change in plans around capital allocation? And then just as a follow-up regarding World of Warcraft subscribers, Mike, I'm just curious what you think precipitated the latest decline, if there was a specific competitive title or other factor that you'd care to point out?

Dennis Durkin

Thanks, Colin. I'll take your first one regarding the language in disclosure. The disclosure language is exactly the same that's inside of our 10-Q and there's no change relative to that. And we're not going to be speaking about any other capital allocation related matters on this call.

Michael Morhaime

Okay. And in terms of whether there was anything specific. I don't really think there was anything specific. We are seeing competitive titles releasing all the time. I do think that there has been an increasing competition, especially with free-to-play games out in Asia. And what we're seeing over time is an evolution of player behavior, both to consume content quickly, as well as to come and go as we release new content, so that's why I think it's really important that we continue down the path of creating more frequent content updates and also looking to innovate in terms of the design and creating more innovative content.


And our final question will come from Edward Williams with BMO Capital Markets.

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

Just kind of following up on Colin's and James' questions. Mike, if you can give us a little bit of color to as to what you think happened in the first quarter with regards to the WoW subscriber numbers? And what we should be able to kind of look for over the course of the balance of the year? I mean, obviously, I think you pointed out that about $0.05 of the delta or the lower sub-numbers about a $0.05 contribution to reduction in your guidance? But what steps do you think you can take to kind of reverse that trend?

Michael Morhaime

I'll let Dennis comment on the $0.05 number.

Dennis Durkin

Yes, so maybe I could just talk -- I could start with that. Just to clarify the $0.05, when you think about, we were up $0.07 in Q1, we passed on $0.02 in terms of raising our guidance for the year going from $0.80 to $0.82. Of that $0.05 what's factored into that is really a couple of things: One is further declines, as Bobby mentioned and Mike has mentioned relative to our WoW business and a lot of that's happened in the East. You'll see in some of the subscription revenues, where it's not quite as severe on the P&L as maybe the top line subscriber number, but it is impactful. So we put some of that in. And then the second piece is relative to just the incremental spend that we're going to have to have in -- relative to our top 3 franchises and making sure that those have great firepower against what are great products this holiday. Just -- I wanted to make sure that there was that texture on the $0.05.

Michael Morhaime

So on the decline side, as we mentioned, most of the decline did come from the East. And by the East, since the -- a large percentage of our subscriber base in the East is out of China. I can confirm that most of the decline did come from China. What we've seen is there has been a decrease in especially casual player engagement in the games, the amount of time the casual players are spending in the game. We do have a content update coming out later this month. It's currently being tested. And we'll continue working on a frequent content update to keep the community engaged. With Mists of Pandaria, we've provided some new types of game play experiences. We'll continue to explore new ways of innovating on our design. I think that, that's really important. I think that it's also really important that we spend some time easing the transition when players come back to the game. If you think about player could be gone for a week, they could be gone for several months and when they come back, it can be a very disorienting experience and I think that there's a lot that we can do to make that better. So that when players do come back, we have a better chance of retaining them longer.

Kristin Mulvihill Southey

Okay, operator? I just want to say, on behalf of everyone at Activision Blizzard, we want to thank you for your time and consideration. And we look forward to seeing some of you at E3. Thank you.


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

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