Operator: Good day, and welcome to the Activision Blizzard's First Quarter 2011 Earnings Conference Call. Today's call is being recorded.
At this time for opening remarks and introductions, I would like to turn today's call over to the Senior Vice President of Investor Relations, Ms. Kristin Southey. Please go ahead, ma'am.
Kristin Mulvihill Southey - SVP, IR and Treasurer: Good afternoon and thank you for joining us today for Activision Blizzard's first quarter 2011 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 those described in any forward-looking statements.
Such factors include, without limitations, sales levels, increasing concentration of titles, shifts in consumer spending trends, current macroeconomic and industry conditions and conditions within the video game industry, our ability to predict consumer preferences among 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, product returns, price protection, product delays, adoption rate and availability of new hardware and related software, rapid changes in technology and industry standards, litigation and associated costs, the effectiveness of our restructuring effort, 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 risks, economic, financial and political conditions and policies, foreign exchange and tax rates, identification of acquisition opportunities and potential challenges 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 ended December 31, 2010, and in the Company's other SEC filings. The Company may change its intentions, believes or expectations made at any time and without notice based upon any changes in such factors in the Company's assumptions or otherwise. The Company undertakes no obligations to release publicly any revisions to any forward-looking statements to reflect events or circumstances after today, May 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 the change in deferred net revenues and related cost of sales with respect to certain of our online-enabled games, expenses related to the share-based payments, expenses related to the restructuring of our Activision Publishing operations, 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 a full GAAP to non-GAAP reconciliation and further explanation. There is also a PowerPoint overview which you can access with the webcast and which will be posted to the website following the call.
Now, I would like to introduce our CEO, Bobby Kotick.
Robert A. Kotick - CEO: Thank you, Kristin, and good afternoon. We are pleased to announce that Activision Blizzard delivered another quarter of better than expected financial results and established new first quarter records for net revenues, operating margins and EPS, which increased more than 40% year-over-year.
Our solid financial performance is driven by a 30% increase in revenues from digital channels year-over-year, because of our leadership and growth in online gaming, our focused execution and our financial discipline, we have started the year with strong momentum and we are raising our revenue and EPS outlook for the year. We continue to shift our business towards digital delivery of content and establishing direct ongoing relationships with our audiences.
While this quarter 50% of our revenues were digital, we are still scratching the surface when it comes to the role that digital delivery will play in our products and franchises. We are seeing the benefits of this focus and the development of new capabilities, the release of even better products with greater audience engagement and in our financial performance.
Our deep capital resources and long-term view of our business provide us the unique ability to continue investing in the major new growth and margin expansion opportunities we continue to find or create.
The largest and most rewarding opportunities by creating $1 billion franchises or building successful digital delivery platforms can often take years to develop require significant financial and development resources and necessitate management continuity, discipline and focus. The long list of hurdles and obstacles are why so few companies pursue these large scale opportunities and why there are still only just a handful of $1 billion franchises and successful digital platforms.
Today, we develop and support two of the largest online communities in all of consumer entertainment, collectively serving more than 30 million people. The scope and engagement of the World of Warcraft and Call of Duty communities is massive. In addition, the relaunch of Battle.net has given our audiences fantastic new functionality and connectivity across the entire Blizzard portfolio.
In terms of retail performance, our leadership remains unmatched. Of the top 10 highest grossing North American titles of all time, five are Activision Publishings and four are Nintendo.
Looking ahead, we remain excited about our prospects as there are significant potential to engage audiences and leverage our strength. As we have done historically we continue to prioritize our focus in order to maximize the many opportunities that we have.
Today, the majority of our employees are dedicated to our online product developments and service operations and initiatives. Our disciplined approach should enable us to continue raising the higher bar we created and further improve the experiences we delivered to our community of always connected players, whether it be through World of Warcraft and Call of Duty which are accessible through multiple online touch points. Battle.net or the upcoming Call of Duty micro-transaction game for Asia, our Call of Duty digital platform or the new Bungie universe which are just a few of our announced online initiatives.
With respect to release plans this year, we expect like the last few years only handful of franchises are likely to generate the vast majority of industry profits, as players continue to gravitate to the very best entertainment experiences. This year's Call of Duty has a very high bar to exceed, yet we believe that this year's Call of Duty initiatives will result in the best overall Call of Duty experiences we have created to-date. We will be releasing more details on the various Call of Duty initiatives for this year in the coming weeks and we expect to support these with the largest integrated marketing and retail campaign we have ever executed. We will once again set a new benchmark for best-in-class execution in conjunction with our partners around the world or equally invested in making Call of Duty the must-have entertainment experience of the year.
We will also launch Skylanders Spyro's Adventure, a breakthrough new play experience that brings you choice to life. Some of the most successful collectible choice that have interactive capabilities have sold in the billions of units. Later in the call, Eric will share with you some of our plans about Skylanders, which is one of the biggest investments we've ever made in a new intellectual property. Of course, the amazingly talented people of Blizzard are hard at work developing new content for World of Warcraft, StarCraft, and Diablo, as well as their next-generation MMO.
Collectively, our multi-year pipeline has never been stronger, and looking ahead, our clear leadership in digital, our strong franchise portfolio and our long-term business strategy coupled with continued investments in our strong financial foundation position us to extend our outstanding track record of performance and continue to deliver long-term growth and shareholder value.
Now, I'd like to turn the call over to Thomas Tippl, who will provide a review of Activision's financial performance. Thomas?
Thomas Tippl - COO and CFO: Thank you, Bobby. I'll begin with a recap of our record first quarter results, followed by a review of our outlook for the second quarter and our increased outflow for 2011. For your reference, in our press release is a set of schedules which provides non-GAAP comparables and these will be the numbers that I'll refer to, unless otherwise noted. Also, please refer to our earnings release for a GAAP to non-GAAP reconciliation.
For the first quarter, our GAAP results reached new heights with revenues increasing to $1.4 billion, our GAAP operating margin increasing to 47%, and our GAAP EPS increasing to $0.42, up 40% over the prior year. On a non-GAAP basis, it was also our largest and most profitable first quarter. Non-GAAP revenues grew to $755 million, exceeding the prior year. Non-GAAP EPS grew to $0.13, up 44% versus the prior year.
In addition, we expanded our non-GAAP operating margin by approximately 600 basis points over the prior year to a record 29%, again exceeding most major media companies and several leaders in internet and software.
Our record results were again driven by our products with online integration and digital revenue streams. Blizzard Entertainment achieved first quarter record revenues and earnings driven by World of Warcraft and Call of Duty, which not only maintained its momentum at retail, but shared at previous The (COD) records with the launch of the first Black Ops online content pack First Strike.
For the quarter, GAAP revenues from high margin digital channels increased by 30% and accounted for 30% of total revenues. On a non-GAAP basis, revenues from digital channels increased 30% with the prior year and accounted for more than 50% of total revenues.
Before I review the P&L line items for the March quarter, I want to highlight that I will quote all percentages based on net revenues except the tax rate.
So, GAAP product costs were 25% and operating expenses were 28%, and our tax rate was 26%. In the first quarter, non-GAAP product costs were 30% as expected. Non-GAAP operating expenses were 41%, this is lower than our prior outlook of 50% due to operating leverage from strong digital top line performance and the timing of certain expenses that were planned for the March quarter and will now be incurred in the June quarter. We delivered a 29% non-GAAP operating margin and our effective non-GAAP tax rate was also 29%.
Finally, we generated operating cash flow of $134 million for the quarter, which brings me to the balance sheet. On March 31, we had no debt and about $3.4 billion in cash which is relatively in line with yearend despite investing approximately $340 million in the purchase of our stock during the quarter.
Our receivables balance on March 31 was $95 million, a record low since the merger. Receivables were down significantly versus yearend as expected and down $39 million versus prior year. Inventories were also a record low since the merger totaling 103 million. They were down slightly versus year end and down 91 million versus the prior year due to a significant reduction in the value of our peripherals inventory. Capitalized software development costs were 194 million a decrease of 27 million versus the prior year due to fewer titles in 2011. 29 million of the capitalized software development costs relate to deferral balances.
Today, our balance sheet is stronger than ever and we continue to see working capital improvements driven by the increased percentage of our business coming from digital channels. The strength of our balance sheet and consistency of our cash flows as well as the ability to return value in the form of dividends and share repurchases and invest for future growth in our highest organic and external, internal invested capital opportunities.
So let me now move to our outlook. This year we are again reallocating our company wide resources against the biggest opportunities. Accordingly, we are focused on three initiatives to drive operating margin expansion and long term growth. So, let me quickly review them and our progress against each in the first quarter.
First, we continue to focus on our high margin digital business and in the first quarter we achieved this goal with 30% revenue growth year-over-year. Looking ahead, we have more online-enabled projects in development than ever before.
Second, we have streamlined the Activision Publishing business for higher profitability and online expansion. In the first quarter we saw the initial benefits of our restructuring, less spending and the lower fixed cost structure and for the full year we expect the run rate cost savings of more than $75 million. In addition, Activision Publishing achieved record first quarter earnings and operating margin driven by online expansion.
Finally, we are investing for the future to expand our digital leadership and expand our core brands. This quarter we continued to allocate the vast majority of our internal investments to our biggest franchises and online product and services capabilities such as Call of Duty and its online platform, Bungie, World of Warcraft, StarCraft, Diablo and scaling up Blizzards next gen MMO teams.
So in summary, for the first quarter we executed against each of our stated goals which resulted in our record financial performance and gives us confidence in our plan for the rest of the year and beyond.
So, now on to the numbers. As I mentioned on our last call, given Blizzard Entertainment has not confirmed the launch date for its next global release, our outlook at this time does not include a new game from Blizzard in 2011. Should Blizzard not release a major title this year, we would expect for planning purposes to launch a minimum of two Blizzard titles in 2012.
For calendar 2011, given our momentum in the first quarter we are increasing our financial outlook. We now expect GAAP revenues of $4.05 billion, up $100 million from our prior outlook and GAAP EPS of $0.61 up $0.05 from our prior outlook. For the calendar year we expect GAAP product costs of 27% and operating expenses of 48%. 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 now expect revenues of $3.95 billion, up $50 million from our prior outlook and non-GAAP EPS of $0.73, up $0.03 from our prior outlook. For the year, we expect non-GAAP product cost of 26%, resulting in the highest gross profit margin in our history, driven by our continued transition to digital products and services.
We also expect non-GAAP operating expenses of about 43%; this is higher than our prior outlook due to an increase in expected marketing spending for Call of Duty and our new IP Skylanders. Year-over-year, we expect operating expenses will decrease more than $150 million, 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 still expect the combination of our strong digital business and the streamlining of our Activision Publishing business will result in a record GAAP operating margin 25% and non-GAAP operating margin of 31%, and we see more opportunity for future margin expansion as we continue growing our share of digital revenues, which today produces operating margins in excess of 50%.
Now moving to the June quarter; on May 3, we released Black Ops Escalation, the second add-on content pack for the Xbox, and still to come is our first Kinect title, Wipeout In The Zone. Black Ops Escalation for the PS3 and PC, and our only multi-platform release, Transformers Dark of the Moon.
For comparison purposes, last year in the June quarter, we launched a Call of Duty map pack and four multi-platform titles, Drake, Transformers, Singularity, and Blur. For the June quarter, we expect to generate GAAP revenues of approximately $985 million with product costs of 28% and operating expenses of 41%. We expect GAAP earnings per share of $0.19.
For the June quarter, we expect non-GAAP revenues of $575 million. Revenues will be down versus the prior year, due primarily to a smaller product lineup and the expected loss of high margin revenue due to the temporary PlayStation Network shut down. We expect non-GAAP product costs of 29%, lower than the prior year due to favorable mix. We expect non-GAAP operating expenses of 59%, higher than the prior year on a percentage basis due to increased investment in Blizzard and Call of Duty, higher development expenses for Diablo III, our legal expenses and marketing expenses that we were planned for the March quarter that are now expected to be incurred in the June quarter as I mentioned earlier. Finally for the quarter, we expect non-GAAP EPS of $0.04.
With respect to the September quarter, our release schedule is more in line with the June quarter and very light as compared to the September quarter last year. In the upcoming September quarter, we expect to release only one major title X-Men-Destiny, as compared to the prior year when we launched Guitar Hero 6, Spider-Man and the record breaking StarCraft II.
In summary, we started the year with great momentum and we think that our strength in the retail and digital online segments combined with our continued cost containment efforts 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.
Eric Hirshberg - CEO, Activision Publishing, Inc.: Thanks, Tom, and hey, everyone. Before I get into the specifics of our slate, let me start with some high level comments on the industry, which provides the foundation for where we're focusing our time and resources.
Overall the major themes remain consistent with what I've said on the last call, starting with hardware. We ended the quarter with an installed base of current gen systems in North America and Europe of 277 million, and we expect to end the year 312 million units, the highest ever in gaming and up 44 million units or 16% over the prior year.
Within that, we expect the installed base of online enabled consoles mainly the Xbox 360 and the PS3 will increase even faster by 24% to 92 million.
With regards to the PlayStation Network issues Sony is facing, we obviously are hopeful that they will be up and running as soon as possible. We're planning one launching Call of Duty Escalation content pack for the PS3 later in the quarter, and are hopeful that this situation will be resolved by then.
Digital distribution continues to be the fastest growing and most profitable part of the industry. We estimate the digital sales in the U.S. and Europe at longer double-digits in the first quarter and we expect the similar rate of growth for the full year, driven by higher broadband penetration, increased consumer adoption and additional content. We believe that the largest installed base of hardware ever combined with continued and rapid growth in digital create significant global opportunities for the best games with the most passionate audiences to grow, especially high margin online-enabled franchises.
In 2011, we again expect the biggest titles will continue to take consumer mind share and will generate the majority of the industry's profits, and in fact we are seeing these ourselves with Call of Duty which continues to grow. And prior to announce it in March, Call of Duty-Black Ops became the best selling game of all time in the U.S. and Europe across the 360, PS3 and PC which is an incredible feat for a game that was launched just five months ago.
I would like to congratulate and thank everyone at Activision and at Treyarch on this amazing accomplishment. Success of this magnitude only happens when we bring together the very best, the most innovative creative product with the best marketing and execution in the industry. This is an achievement that should make everyone at Activision feel proud. And for the quarter Call of Duty-Black Ops is once again the number one title overall in the U.S. and Europe generating more retail revenue than each of the new major product releases from our competitors.
This strong consumer response enabled us to increase our total retail share in the U.S. and Europe over last year despite a very light release schedule and lower sales of peripheral-based games. With respect to online, our Call of Duty-Black Ops First Strike Content Pack shattered Xbox LIVE launch records surpassing 1.4 million downloads in the first 24 hours, a 20% increase over Modern Warfare 2 Stimulus Pack and to-date, the content pack continues to outsell the stimulus pack by more than 20%.
Our strategy of creating more in-depth and quality of gaming experiences within fewer better franchises appears to be paying off as our unprecedented strength in digital and online play shows. We no longer think about our product releases simply as launch events, but as long-term ongoing relationships with our players.
We feel that we are providing the best downloadable content ever in our history and the response from our fans underscores the success of this approach. We are making difficult decisions last quarter in order to focus the creative talents of our exceptional people and our capital investments on fewer, better creative opportunities and on the areas of greatest passion for our fans. We entered 2011 a leaner, more focused organization and we are devoting our time and resources to the areas where we believe we have the ability to make gaming experiences better to best in the world.
Our product lineup is expected to be both more focused and more profitable by delivering richer, deeper content and more connected experiences for our community players than ever before. This strategy is already working as evidenced by our first quarter results.
The best way to achieve success is to provide gamers with the highest possible creative quality and this year we have several incredible opportunities in front of us.
Starting of course with Call of Duty. By any measure, Call of Duty is one of the biggest entertainment franchises in the world and we expect this year's game will set a new standard for this incredible franchise. The creative excellence and sheer scale of the game we are making and the unprecedented online universe that will accompany it will reset the bar for this genre giving players a new level of emerging connectivity, community and of course a epic action.
The game today has exceeded every internal milestone and we look forward to sharing this with you soon. The momentum of Call of Duty continues to grow as well, be it sales, size of the online community, powers of online play, performance in DLC, consumer awareness and intent or the fact that we just passed a milestone of 10 million fans on Facebook.
Today, Call of Duty is part of the cultural landscape. The passion people are showing for this franchise is truly humbling and they are absolutely committed to making their experience even better. We are investing heavily back into our community to take the experience of playing Call of Duty to entirely new level creating even more opportunities for long-term growth in the process.
On our last call I told you that we formed a wholly-owned development studio called, Beachhead to lead the creation of an all new connected digital universe for the Call of Duty franchise. This platform will include a suite of services and content plan that will unite and ignite the community like never before. The platform will support in-game integration and bring online experiences and console play together for the first time. It's been in development for almost two years, and we're very excited about this increased value and excitement that we can bring to our community through this platform. We look forward to sharing more specifics on this exciting new endeavor to you in coming weeks.
Our next expansion opportunity this year is downloadable content. We started the year with a record launch for Black Ops First Strike and we're equally excited about the recently released Black Ops Escalation for the Xbox 360. With the release of the Escalation content pack, we accepted map pack pre-orders for the 360 for the first time and the results were incredible. The new content pack was only released a few days ago and it is already outselling the second Modern Warfare 2 map pack by over 20%. I think it's fair to say that the downloadable content for Call of Duty has more commercial potential on its own than most standalone console games, and we're seeing that prove true in this first quarter.
Our next opportunity this year is our new genre bending family entertainment franchise, Skylanders Spyro's Adventure. Skylanders truly defies categorization and creates an entirely new genre of play, bringing the worlds of digital and analog play together like never before. We unveiled the game at Toy Fair and the buzz around the title was incredible. You'd be hard-pressed to find a best of toy fair list from a major publication, which did not include Skylanders. We unveiled the game with strong support from Toys'R' Us and Gerry Storch, the CEO of Toys'R' Us called Skylanders amongst the most exciting properties he's seen at any toy fair worldwide this year.
Skylanders lets players transport real-world toys into virtual worlds. These toys with brains come to life inside the game across every major gaming platform, from Xbox to PS3 to Wii, as well as on handheld gaming devices, mobile devices, on PC and on the Web.
Whatever achievements in level ups the characters gain are written back onto the toys memory and travels with them where ever they go. The game marks a wholesale change in the interaction between toys and video games opening up new possibilities to our players and new revenue streams for the Company.
We've been working on this concept for more than two years, bringing together top talent from the world of video games, toy design and Hollywood to create a franchise like no other. To launch Skylanders we assembled a team with best in class experience from both the worlds of video games and toys. The Starter Pack will includes the game itself, three toy figures and a portal which transports the toys into this game.
The three characters from the Starter Pack will let you enjoy the game from start to finish, but there will be more than 30 other characters which further expand and enhance the experience, each toy you buy unleashes new powers, new worlds and new experiences within the game. You will be able to buy the toys separately for less than $10 a piece.
Today, the Skylanders property has tested incredibly well, that has generated tremendous (budget) support from our retailer partners and is expected to launch in the holiday quarter. Finally, this year we have a number of exciting license property launches. In the second quarter we will release Transformers Dark of the Moon, which will be release timed to the upcoming movie as well as our first Kinect title, Wipeout In The Zone, which will be in stores to coincide with the TV show season. Wipeout is a natural for connect and might be the best use of motion-based technology we've seen yet.
For the balance of the year, we plan to launch games based on the best selling X-Men and Spider-Man franchises, James Bond and the toy phenomenon Bakugan, as well as the latest movies in the longstanding Cabela's hunting franchise, which we are expanding this year to include all new peripherals and an incredible Kinect experience.
This year our slate is more focused and we believe it is well aligned against both the market opportunities and the passions of our players.
Our company-wide focus on providing the very best interactive entertainment experiences to players around the world and we continue to make the necessary investments to enhance our leadership position and invest in our communities which in turn should allow us to continue delivering industry leading returns for our shareholders.
I am looking forward to updating you on our plans and performance as this exciting year unfolds and we'll have a lot more details on our upcoming releases to share with you in the upcoming weeks and at E3.
With that, I'll now turn over the call to Mike Morhaime who will provide you with an update on Blizzard Entertainment.
Michael Morhaime - CEO, Blizzard Entertainment: Thanks, Eric. Blizzard Entertainment has come off its most successful year ever in 2010. Shipping two record breaking games in World of Warcraft, Cataclysm and StarCraft II Wings of Liberty. As we drive deeper into 2011 we are looking to build off of that momentum by providing even more epic experiences for our players and we are also working hard on our exciting pipeline of new games.
On the financial side, we grew the business year-over-year in Q1 with $357 million in revenue and $170 million in operating income. We are pleased with the growth in the Blizzard Community over the past year and expect it to grow further with the upcoming launch of Diablo III.
Looking at the World of Warcraft side of the business we were pleased to see record sales following the Cataclysm launch in the United States and Europe which helps drive the growth in subscribership.
During the first quarter of 2011, as players have eagerly consumed the new content we have seen subscribership return to pre-launch levels in the West. We finished the quarter with more than 11.4 million subscribers worldwide.
Moving forward, our objective is to continue delivering new content to players in all regions to further energize our (community). Our partners at NetEase are continuing to drive towards launching Cataclysm in China later this year, which should reinvigorate that community with some new exciting content. For all our other regions we recently launched the first content update for Cataclysm. This update includes new dungeons, special rewards for guilds and a feature to help players find a guild to join.
Player feedback has been positive and as a result we are seeing increased player engagement and higher daily concurrency. In addition, we have another major update already in testing that includes new raid and quest content as well as an exciting new dungeon journal that will make raids and dungeons more approachable for all players.
I also have some news to share with regard to our value-added services. We recently launched several value-added services for World of Warcraft players in China allowing our Chinese community access to most of the services available to players in other regions. We also launched a mobile guild chat system. This new feature allows subscribers of our premium World of Warcraft remote service to chat with their guild mates through mobile devices. Finally, we announced the new premium mount that will be offered in the Blizzard store in the near future.
Moving on to StarCraft II, the first quarter was an eventful one for this franchise. In addition to releasing new ladder and custom that content for our players, we also launched the game in China. Already the China region is one of our largest communities for StarCraft II in terms of concurrency and eSports is off to a great start in the region. We have signed with several partners to run StarCraft II tournaments in China, as well as a Chinese broadcast partner to televise Korean GSL matches in Chinese.
As we look to the future of StarCraft II, the development team is also hard at work on the first expansion, Heart of the Swarm. We will be showcasing that game to worldwide press later on this month.
On the Diablo III front, I am pleased to report that we began internal company wide testing last week. The game is looking great and we are currently targeting a Q3 launch for external beta testing. The development team is working hard to try and launch Diablo III this year, but I want to be clear that we do not have an official release date or window yet. As always, we will not compromise the quality of the game in order to hit a window.
Lastly, I want to talk a little bit about BlizzCon. Tickets will be going on sale later this month, and as in the past, we expect this to sell out quickly. We'll also offer the show via Internet stream and DIRECTV pay per view to reach our players who can't make it out to the show. Last year, we had more than 95,000 paid viewers join us via DIRECTV or the live Internet stream. As always, we look forward to sharing exciting news with our community at this year's show.
Moving into the back half of 2011, we'll continue to deliver new content and experiences to our huge community of gamers, while maintaining development focus on our exciting pipeline of future games.
Thank you and I'll turn the call back over to Kristin.
Kristin Mulvihill Southey - SVP, IR and Treasurer: Thanks, Mike. Operator, I think we're ready to take some questions. If everyone could limit their question to one per caller, that would be great.
Operator: Brian Pitz, UBS.
Brian Pitz - UBS: Couple of questions on Blizzard. Would you comment on roughly what percentage of expansion packs for WoW were sold via the online channel, was it 50% or better. Maybe you could comment if this was a significant source of any upside in margin for the quarter? Second, on StarCraft, are you starting to see a ramp up in interest in Korea as more of the professional players continue to shift to the latest version, maybe you could give us an update on the professional market over there?
Michael Morhaime - CEO, Blizzard Entertainment: For competitive reasons, we don't provide specific data on digital versus retail sales. But I can say that, Cataclysm's digital performance exceeded our expectations. Digital availability is the convenience that more and more of our players expect and is a growing part of the business as a result, but retail is still important and accounts for large majority of our full game sales. With respect to Korea, the Korean eSports our partner GomTV is running GSL, it continues to be very popular. But we are seeing that StarCraft I has maintained popularity and so the transition to StarCraft II has been slower than we anticipated.
Operator: Edward Williams, BMO Capital Markets.
Edward Williams - BMO Capital Markets: Just a couple of thoughts, Eric. Can you give us a little bit of color as to what your thoughts are on – with the significance of Call of Duty to online play for Xbox LIVE and PlayStation Network? What steps could you take or you think that taking to try and further monetize the success of that particular brand to maybe capture some of the institutional strategic you have with Battle.net on the (explicit) side?
Eric Hirshberg - CEO, Activision Publishing, Inc.: Well, we haven't released the detail of the business model of (indiscernible). You'll certainly see that that is a response to the patterns that you are talking about, the passion that people have to be getting the amount of time they are willing to engage with one and other in a connected way. Our goal has been to create and experience that was amplifying enough, and energizing enough, and igniting enough to that community to be able to be monetized.
Operator: (Mike Chitty,) Genco.
Mike Chitty - Genco: Congratulations on a great quarter. I was curious if you talk about how you are able to maintain such strong digital margins when it seems to me that your competitors aggressively grow digital sales but seemingly looking at, I saw 10% margin structure?
Thomas Tippl - COO and CFO: I think while I am not privy to the details of our competitors cost structure approach. We have a digital effort that's very focused against large franchises and large online communities and as a result we generate tremendous operating leverage behind the content development cost as well as the back office infrastructure cost and all the customer service capability that we've built overtime. That has allowed us not only to grow at a 30% clip this quarter, but to do so with margins north of 50%, which is what's a big component of what's driving our overall margins up as this part of the market continues to grow disproportionately.
Robert A. Kotick - CEO: I will say Mike having looked at some our competitors financial statements it is hard to actually understand why the margins aren't better in some of those other businesses.
Operator: Brian Karimzad, Goldman Sachs.
Brian Karimzad - Goldman Sachs: I guess, one would be you guys mentioned some new levels of connectivity with the Call of Duty initiatives this year and I don't want to steal any thunder from announcements over the next few weeks, but is it out of the realm of possibility for some of the Beachhead features part of this falls release. Then for Mike on the World of Warcraft side. Any sense there on how the return to pre-launch levels before Cataclysm on the subscriber side compared to the expectations and may be a little bit of color on what you are seeing with that competitor that launched around March?
Thomas Tippl - COO and CFO: Can you just repeat the first question for me and then Mike will take the Blizzard one.
Brian Karimzad - Goldman Sachs: Yeah, exactly so with the you guys had mentioned that you are going to have a new level of connectivity with Call of Duty this fall initiatives there. Is it out of the realm of possibility that the Beachhead initiatives will be part of that this fall?
Robert A. Kotick - CEO: The Beachhead initiatives will be part of that this fall, although it will be an integral part to the innovation signature of the Call of Duty game that we are releasing this year. And as I said in my comments that we think we will set the bar once again for that genre and that franchise. So the answer is, yes. I just wanted to back up on the earlier question and make sure that I underscore that, while we are attempting to deliver new incremental experiences that are yet (indiscernible) and unseen by our players, we are not attempting to monetize any experience away that currently comes as part of the value proposition buying the game.
Thomas Tippl - COO and CFO: I think very importantly our community of Call of Duty players is one that we celebrate and you will see a lot of new services and capabilities that will be provided free of charge to all of our customers.
Brian Karimzad - Goldman Sachs: Yeah, just how did they return to the prelaunch levels of subs after Cataclysm compared to your expectations and do you have any color on how things have trended since that competitor came online in March?
Michael Morhaime - CEO, Blizzard Entertainment: As our players have become more experienced playing World of Warcraft over the many years, they have become much better and much faster at consuming content. And so I think with Cataclysm, they were able to consume the content factored in with previous expansions, but that's why we are working on developing more content. We launched our first update last week and we have another update, that's already in test. The response that we've gotten so far from players has been very positive and we really think that we need to be faster at delivering content to players, and so that's one of the reasons why we are looking to decrease the amount of time in between expansions.
Brian Karimzad - Goldman Sachs: So you may have more frequent paid expansions, though they may be a bit lighter than a typical one has been?
Robert A. Kotick - CEO: Well, we are not ready to talk about the content and the expansions at this stage, but we are looking at ways to speed up the development process. In terms of additional competition, we knew that this year was going to be a year where we faced new competitors. It isn't the first time though that we have strong competitors into the MMO market. What we have seen in the past is, we tend to see our players leave for some period of time, try out the new MMOs and then good percentage of them historically have returned to World of Warcraft. So, so far I haven't seen anything to indicate this will be different.
Operator: Jeetil Patel, Deutsche Bank Securities.
Jeetil Patel - Deutsche Bank Securities: Two questions. One, talk about just value-added services both the Call of Duty and the Blizzard side of the business, it seems like at least Call of Duty it's a 90-10 split, right now, between software and services. I guess, do you look at that business evolving towards being more 60-40 or 50-50 over time? Second, I guess, maybe you can provide some insight as to how do you make MMO so successful in terms of it's just not about the game play, but it's a lot of other facets of it, maybe some insight into that given the scale at which you are looking at Diablo going forward?
Robert A. Kotick - CEO: I think there were two parts in that question as it relates to World of Warcraft. The first part, I think, was about actually…
Michael Morhaime - CEO, Blizzard Entertainment: The World of Warcraft question was about basically the mix between value-added services and subscribership revenue, which we don't breakdown. In terms of our philosophies on developing content we think the most important thing is engagement. So, developing content that keeps our players engaged is our big priority. When we look at the types of value-added services to offer we really try to create things that will help also drive engagement, and so things that players launch, but that we want to have some barrier potentially so that everybody doesn't go and get this thing as it could devalue the service or somehow devalue the experience for everyone if there was no barrier. So, it sort of – we try to create win-win type value added services.
Thomas Tippl - COO and CFO: With regards to digital share of our business, obviously it depends what kind of quarter we are talking about. During the holiday quarter we have a lot of new releases that still generate the majority of the revenues through retail, but if you look at the quarter like the March quarter I think it's indicative of the potential of changing up our relationship with our players who want from – once a year big event that retail through a continue it relationship where we continuously provide content and services, and keep the community engaged. As you can tell from our financial statements that's not just great for our players, but it's also very good for our shareholders. I can't tell you how quickly that percentage will continue to accelerate, but we have no doubt that all the market dynamics as well as our internal development efforts are geared towards making that happen.
Operator: Eric Handler, MKM Partners.
Eric Handler - MKM Partners: Just a question on World of Warcraft can you comment with Cataclysm now and some of these other value added services how your revenue per user sort of on the annualized basis is improving and also given that there is a lot more content with Cataclysm are you seeing the level of post release churn may be not as much as you would've for the prior two updates?
Michael Morhaime - CEO, Blizzard Entertainment: Okay so the first question was about ARPU, which is something that we do not disclose for competitive reasons. One thing I can say though is that during the last five months we brought a majority of our value added services to China and we have been very pleased with the reception and the uptick on these services in China, which is something that is very encouraging.
Eric Handler - MKM Partners: Are you seeing the lower levels of churn relative to the prior two updates given that you have a lot more content with Cataclysm?
Michael Morhaime - CEO, Blizzard Entertainment: What we have seen so far is that people have been consuming this content very quickly and so the subscriber levels have decreased faster than in previous expansions.
Operator: Atul Bagga, ThinkEquity.
Atul Bagga - ThinkEquity: Couple of questions. One on Call of Duty free-to-play version that you guys are talking about, is it just for China or is it for any emerging market? Would you also consider launching this kind of a title even, let's say, in the Western markets like U.S. and Europe? Then my second question is about the linearity of the subscriber base for World of Warcraft, and maybe if you can share what your expectation is on the sublevel, say, by the end of this year?
Robert A. Kotick - CEO: I'll start with the Call of Duty product that we're creating that is specific for the Chinese audiences, that the product that we announced today is being developed just for China. That's not to say it might not have applicability elsewhere but what we're doing right now is focused on China. On WoW subscribers, we don't provide an outlook on the specific subscriber numbers. All I would say to this point is that obviously we take WoW subscriber (trends) and factor that in together with our content release schedule, whether that free patches or paid content, like Cataclysm in China, into our outlook numbers.
Michael Morhaime - CEO, Blizzard Entertainment: You specifically asked about the linearity of subscriber growth. I think it's important to understand that historically, subscriber growth with World of Warcraft has not been linear. It has been driven by new content and seasonality throughout the course of World of Warcraft's history. So, we have a lot of reasons for optimism going into the balance of the year. We still have Cataclysm in China that we're working to launch, that seems to be going very well. We also have additional new free content that we're working on, as well as additional value-added services. In addition, there are new territories that we will continue looking at and we think that there continues to be opportunities for growth in new markets.
Atul Bagga - ThinkEquity: Mike, thanks for clarifying. If I may, just to follow up on that. In terms of the churn, are you seeing churn reducing as we are getting too closer to the end of this quarter, and starting this quarter?
Michael Morhaime - CEO, Blizzard Entertainment: We don't provide any guidance on churn, sorry.
Operator: Daniel Ernst, Hudson Square Research.
Daniel Ernst - Hudson Square Research: If I look at the marketplace for digital distribution, it's split up in my mind between PC, which is broad-based; social, which is a subset of PC behind a walled garden; mobile and console. In three of those areas, you're paying a platform fee to somebody, whether it's Facebook, it's Apple, whether it's Xbox or PlayStation, and one of them, you guys own primarily to Battle.net. As digital distribution becomes the primary part of your businesses, (50%) of this quarter to go in north in following years. How do you see that mix shifting, and then, within areas where you're paying a platform fee like to joint consoles where you have the most popular game for play online, and to have DLC for the first place. Do you have leverage in that model with the console makers as you try to build out a greater direct-to-consumer business. So, that's my kind of first question. Where you see the mix and where do you have leverage points? A follow-up to that is, do you have an ability to take that content some of that you can now in term maybe you haven't before go across platforms. So you have Blizzard games going down to social and mobile and vice versa. Is that part of a longer term strategy to have across platform digital business?
Michael Morhaime - CEO, Blizzard Entertainment: Sure, good question. So, we've always taken the approach of essentially platform agnosticism. Important thing for us is, if we can deliver an experience across a device that has a display and a microprocessor and it will satisfy our audiences, then we'll invest against that. We do have to prioritize the resources that we allocate to various platforms based on opportunity and I think we do a very good job of that. If you look out over the next three to five years, there could continue to be a lot more displays with microprocessors that are capable of playing games. I think it's one of the great dynamics of the business that we are in, and why we are so excited about our prospects for the future is that regardless of the device, if it has a microprocessor and a display, our content has applicability to that device. I think when you look at some of the great franchises that we own and control, whether it's in the geography or a variety of different platforms, you've seen us very thoughtfully take those franchises and make them available to customers in the variety of different ways, in a variety of different platforms. We'll continue to do that very successfully, but I think there are greater number of devices that are game-enabled than ever before which makes our addressable market down much more interesting. As far as platform leverage, sometimes people forget that the Sonys and the Microsofts and Nintendos and the Facebooks of the world invest billions and billions of dollars in these platforms. When you think about over a long periods of time, they continue to invest these billions of dollars to make the experiences really satisfying for our audiences. They deserve to get compensated for that. And while we as the number one Company in our category always have the benefit of scale and we have been able to get a lot of leverage against that scale. It is important to recognize they do continue invest billions of dollars against those platforms. So I will say that you hit on what is probably the most interesting of the fundamentals that are affecting companies that create interactive entertainment, which is that more people are playing games than ever before. I think Facebook has done an exceptionally good job of introducing interactive entertainment to customers, who in the past never actually engaged in game playing of any kind. When you think about the next generation of consoles that the Nintendo's, Sony's and Microsoft's are investing against, they're not just the expansion of their online capabilities but in more enhanced graphics, more powerful microprocessors. Those are enabling entertainment experience that we have not seen before and that combined the best of storytelling and the best of things that we haven't been able to use very successfully, like capturing an emotional connection between a player and what they see on the screen and these are all the things that are really driving opportunities for us for the future. So, it was an excellent question.
Kristin Mulvihill Southey - SVP, IR and Treasurer: Okay. Well, thank you, everyone. And as always, we appreciate your time and consideration and look forward to speaking you with in the future. Have a great day.
Operator: That does conclude our conference for today. Thank you for your participation.