Activision Blizzard Q1 2013 Financial Results Conference Call – Transcript

Robert A. Kotic – Activision Blizzard CEO

Robert A. Kotick: 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.

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.

Mike Morhaime – Blizzard Entertainment President

Mike Morhaime: 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.