Activision Blizzard Q1'16 Earnings Conference Call: Full Transcript

Operator:

Good day and welcome to the <b>Activision Blizzard</b> ATVI Q1 2016 Earnings Call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn today's call over to Amrita Ahuja, Senior Vice President of Investor Relations.

 

Amrita Ahuja:Senior Vice President of Investor Relations:

Good afternoon and thank you for joining us today for Activision Blizzard's First Quarter 2016 Conference Call. With us today are Bobby Kotick, CEO; Thomas Tippl, COO; and Dennis Durkin, CFO. And for Q&A, Eric Hirshberg CEO of Activision; Michael Morhaime, CEO of Blizzard; and Riccardo Zacconi, CEO of King will also join us.

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 uncertainties. A number of important factors could cause the company's actual future results and other future circumstances to differ materially from those expressed in any forward-looking statements, including the factors discussed in a Risk Factors section of our SEC filings, including our 2015 Annual Report on Form 10-K which is on file with the SEC and as indicated on the slide that is showing. These forward-looking statements in this presentation are based on information available to the company as of the date of this presentation and while we believe them to be true, they ultimately may prove to be incorrect. The company undertakes no obligation to release publicly any revision to any forward-looking statements to reflect events or circumstances after today May 05, 2016.

Unless otherwise indicated, our speakers will be referencing non-GAAP measures which exclude the impact of the change in the core net revenue and related cost of sales with respect to certain of our online enabled games, expenses related to stock-based compensation, the amortization of intangible assets, expenses including legal fees, costs, expenses and accruals related to acquisitions including the acquisition of King Digital Entertainment, related debt financing and the associated tax benefits.

Please refer to our earnings release which is posted on www.activisionblizzard.com for a full GAAP to non-GAAP reconciliation and further explanation. There is also a PowerPoint overview 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 financial overview, highlighting both GAAP and non-GAAP results and a one page summary sheet.

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

 

Bobby Kotick: President and Chief Executive Officer:

Thank you, Amrita, and thank you all for joining us this afternoon. This year, the global market for interactive entertainment is expected to reach $94 billion. With more than $6 billion of revenues forecasted for this year, Activision Blizzard is clearly the world's most successful standalone interactive entertainment company, yet we only have a 7% participation. These forecasts don't really contemplate the growth in Esports or the introduction of advertising into games and they certainly don't contemplate the introduction of price and cash flow in the games, all of which are emerging and potentially significant opportunities for the company.

Esports has unique meaning to our audiences. Frank Pears one of the founders of Blizzard captured what makes our games and the organized competitions we host, so special to our players. He said our players feel a unique sense of belonging from their engagement with our content. Their social experiences are shaped by the communities they are a part of and the investment our players make in our games is rewarded by being part of a community that celebrates their play and recognizes their accomplishments. Our audiences spent 42 billion hours playing and watching our games in the past 12 months, similar to the number of hours people spent watching Netflix and greater than the number of hours people consumed video on Facebook.

But because these are principally social and truly interactive experiences, the commitment to our franchises is deeper and much more personal than other forms of entertainment.

One special example is that of a high schooler whose father is deployed in Afghanistan. The son and the father stayed connected by regularly playing World of Warcraft throughout his deployment. The shared experiences and high engagement required to play our games creates a unique bond and a special sense of belonging for the players. A great multi-generational example is an 84-year old grandfather who for 10 years now has played Wild with both his son and grandson.

And another example of a life changing experience is our most recent Heroes of the Dorm competition. The result changed the lives of five players when they won the championship and had their college tuitions entirely paid for.

There isn't any other form of entertainment that generates the passion, engagement, and commitment, that game players experience and we're at the very beginning stages of providing opportunities to celebrate and reward our audience commitment. This year our franchises will provide over $10 million in prize money for players and shoutcasters and commentators are earnings real revenues and yet we are barely in the first inning of opportunity for games as organized sport. Today collectively Esports viewership is greater than the individual audiences for NHL, Major League Baseball, or the NBA.

In the future, Call of Duty, Hearthstone, and Overwatch, could each have audiences in excess of any of the most well-known sports weeks.

Advertising and subscription revenues for Esports events are dwarfed by major league sports and yet the passion of a Call of Duty player is no less than the passion of the most ardent NFL fan. My friend Robert Kraft, the owner of the New England Patriots paid a little less than $180 million for the Patriots in the early 1990s and he told me it was the best investment he ever made. 15 to 20 years from now pro team owners of our major franchises will likely be sharing similar sentiments.

Our network itself has over 0.5 billion users each month. Only Facebook, YouTube, and VChat have bigger audiences and we continue to transform our business to franchise focused frequent content delivered directly to our 0.5 billion audience members in 196 countries around the world. Value is delivered through a variety of player investment models, all providing flexibility to our audiences and as we introduce new player investment opportunities like advertising and we start seeing our Esports events command their fair share of broadcasting revenues, our players will have their efforts recognized and their achievement rewarded, and their sense of belonging to their communities will only deepen.

Because of our uniquely talented 9000 employees around the world, we are better positioned than other entertainment company to take advantage of the sizeable opportunities ahead. Our challenge, a challenge of prosperity, is the prioritization of these many opportunities and our 25 years of disciplined careful execution is what will enable us to pursue these opportunities with success as we have for 25 years. Since I joined the company, I have some more excitement for our prospects and now Thomas will discuss the key drivers of our overall performance at our operating units and Dennis will review our financial results. Thomas?

 

Thomas Tippl: Chief Operating Officer Of Activision Blizzard:

Thank you Bobby and good afternoon everyone. 2016 is off to a great start. We overperformed our plan for the first quarter, delivered year-over-year growth, achieved record digital revenues, and raised our full year guidance. These results are driven by focused and execution against our three strategic pillars. First; expanding our audiences, second; deepening engagement, and third; providing opportunities for more player investment.

Let's start with our progress on growing our audiences reach which grew to 544 million monthly active players this quarter. With the close of the King acquisition, we massively expanded our audience reach. King brought a diverse network of 463 million global players to the Activision Blizzard family. The acquisition also provides us with significant audience expansion opportunities going forward as mobile is the fastest growing platform and has the greatest global reach.

The team at King continues to execute with excellence as they grew monthly active users 3% over a large base last quarter. King's growth was driven by the release of Candy Crush Jelly Saga which became a top-ten grossing game on the iPhone in the US and Google Play worldwide. This combined with continued strong performance of the first two Candy Crush games which are regularly updated with new content, features, and live ops, return the Candy Crush franchise to sequential growth. This further demonstrates that continued investment and innovation in existing franchises drives longevity.

We have also seen strong organic audience expansion in the Activision and Blizzard businesses. Both divisions set new all time records with quarterly MAUs up 10% year-over-year for Activision and 23% for Blizzard. Activision's audience expansion was driven by Call of Duty which on the back of high quality DOC that the new franchise record for MAUs in the quarter impressively growing its MAUs to exceed that of the holiday quarter. With the number one title on both next-gen platforms last to date and with two other titles in the top-10 list, Call of Duty is the preferred choice on next-gens.

In fact about 85% of all PS4 buyers in North America this quarter opted for the Black Ops III Bundle, an amazing statistic which bodes well for the franchisers engagement in play investment continue to expand rapidly.

On top of the Black Ops III momentum, Activision plans to build upon the community with an innovative new release this holiday, Call of Duty Infinite Warfare expected to launch November 4. This is the first 3-year development cycle for award winning studio Infinite Ward and they have been taking full advantage. With Infinite Warfare, they are redefining and building upon the classic war story that takes place in a bold new setting which includes what happens when space becomes militarized. We can't wait to share more with you including a hands on experience later this year.

Activision also revealed Infinite Warfare's Legacy and Digital Delux editions which include Call of Duty Modern Warfare remastered. Activision is thrilled to fulfill the Call of Duty community's passionate request by remastering with great care one of the most beloved games of all time for this console generation. Not only do these additions represent an incredible value but they also represent the largest content offering we have ever provided filled with both innovative new experiences and classic cop game play in one-way package which will appeal to a wide audience.

Blizzard's 3% MAU growth was driven by the continued success of Hearthstone which recently surpassed the 50 million registered player milestone. This is a testament not only to how awesome the game is, but also to its accessibility on multiple platforms as well as Blizzard's ability to deliver regular pace of content updates. Hearthstone has had 6 major releases since the game's launch just over two years ago.

And the next major initiative to expand Blizzard's audience is just around the corner with the upcoming launch of the highly anticipated new IP Overwatch. On May 24, Blizzard will enter the largest draw in gaming with this very compelling and innovative team-based shooter. Overwatch will not only Blizzards current loyal community but also introduce Blizzard's signature high quality experience to a whole new audience. The open beta which just started last night is off to a terrific start with millions of people playing already and the player feedback has been exceptional.

We expect Overwatch to be Blizzard's biggest launch since Diablo in 2012. We also believe Overwatch will resonate well in Esports which provides yet another way for audience expansion. In fact Esports is not only a driver of audience expansion but also importantly drives growth in terms of time spent with our franchises.

So let's talk about the progress we made on our second strategic pillar, deepening engagement. As a result of our creative teams providing outstanding gameplays and frequent content updates, we were rewarded with players spending more than 10 billion hours playing our games during the first quarter. Over the last 12 months, players spent about 42 billion hours playing and watching our games. This level of engagement is in line with Netflix’s 2015 viewership of 42.5 billion hours, higher than Facebook's video consumption of about 37 billion hours annually, and more than four times the national viewership of professional US sports leagues including the NFL, NBA, MLB, NHL, and MLF, combined.

And the secular trends you are seeing are going to further expand our advantage. Viewership of those additional sports leagues increased only 2% last year while player and viewer time spent with Activision and Blizzard games increased nearly 20% last year. We have confidence that we can further build on this momentum as we expand our ability to deliver more frequent and meaningful content updates on our core franchises and provide new ways for our audiences to engage with our franchises.

On this note, last week's release of hearthstone's third expansion card set, Whispers of the Old Gods is off to a great start with record daily active users and record hours played per daily active user. In addition to what I already mentioned, our content pipeline includes new expansions for World of Warcraft and for the Destiny Universe in the second half of the year which will drive re-engagement across vibrant communities.

With World of Warcraft's next expansion Legion which will release on August 30, players will not only be able to dive into the new zones, quests, dungeons, and raves that they expect but will also gain access to features that deepen and expand engagement post launch of the expansion. There will be ongoing social interactions in -- customization by -- weapons and new character class and a revamped player versus player system. Players that have been away from World of Warcraft will be able to jump right into Legion content with an included boost to Level 100. Before the expansion though the whole world will get to experience the epic Orks versus Humans conflict on big screens with the release of the Warcraft film produced by Legendary Pictures.

It's an exciting time for players to dive even deeper into the game to come back to World of Warcraft or to try it for the first time.

Destiny's loyal passionate community also remains highly engaged. Bungie has released over 40 updates since launch in an effort to continually improve the game which has helped attract new players and keeps them coming back. The game now has nearly 30 million registered players with average over 100 hours of game time each. In April, Bungie released an update to the game which was well received by players and drove strong reengagement.

We also successfully introduced a new look box feature which had double-digit attach rate. Later this year, Activision and Bungie plan to launch a large new expansion for the Destiny Universe which you will hear more about in the coming months.

Beyond new content, we are also driving increased engagement with our Esports initiatives which are making great progress. Since the beginning of the year, we have delivered millions of hours of audience engagement with our markee Esports event. Specifically on Call of Duty, Activision concluded the stage one finals of the Call of Duty world league and will host the Call of Duty Championship presented by PlayStation 4 this fall where teams are competing for a $3 million price pool. You will soon hear more about the Call of Duty championships this year and the amazing player celebrations we are putting together.

Also Call of Duty is partnering with MOG on a number of fronts. MOG's sanctioning systems now govern the Call of Duty world league. MOG will produce their first event this summer and we are making strides inside the game with MOG's live event video viewer now embedded.

Blizzard is also expanding engagement this year through its biggest Esports calendar ever including the second year of Heroes of the Dorm collegiate tournament which ESPN again aired during prime time. Audience was up 17% versus 2015. Additionally Blizcon 2016 was announced on November 4 and 5 and once again thousands of tickets sold out within minutes of going on sale. The annual celebration Anaheim will bring passionate players from around the world together to compete and to celebrate all things Blizzard.

Finally Esports is not only helping us grow our franchises but also developing as a business opportunity. Our Media Networks division held an event for Valve’s Counter-Strike Majors at the end of the quarter and delivered 45 million hours of viewer ship which ranks amongst the top Esports events ever. It's 6 day celebration of players and teams. It was notably a profitable event for MOG on the standalone P&L basis including ticketing, merchandising, broadcast rights, advertising, sponsorship, and NTX revenues.

It extended our partnership with Valve’s based on the success of this event. Advertisers will hear more about the plans from Media Networks at next week's Digital New Forms in New York.

Now turning to the third pillar of our strategy, providing increased opportunities for player investment. During the March quarter, revenues from in-game content reached over $620 million, an increase of 20% year-over-year from the base Activision and Blizzard businesses and up 80% with the inclusion of King's third quarter results. Growth in this area has been broad base. Kings metrics improved quarter-over-quarter in terms of the number of monthly unique payers and gross bookings per paying player as well as overall gross bookings.

King is doing a great job implementing live as well as adding fresh content across their games. These update serves to drive engagement and provide value added services to the players.

On the Activision business Call of Duty is setting new records for follow-on digital content sales. Season past attach rates are all time high and the number of players who choose to purchase in-game content more than doubled while maintaining average revenue per paying user. Most importantly, engagement with the game is stronger than ever. And within the Blizzard business, Hearthstone delivered 20% revenue growth year-over-year by growing audience reach, engagement, and providing more opportunities for players to invest in the game.

This performance across the businesses again shows that increased player investment and deeper engagement are a virtual cycle when executed well. So in summary, Q1 was a great start to the year and confirmed that our execution against our strategic pillars is paying off.

And with that I'll now turn it over to Dennis to talk us through the details of the financials.

 

Dennis Durkin: Chief Financial Officer of Activision Blizzard:

Thanks Thomas. Good afternoon, everyone. Today I will review our better than expected Q1 financial results, our outlook for Q2, and our increased outlook for 2016. Q1 was a great start to the year that included the close of the King transaction and strong trends in our year around franchises.

We overperformed our non-GAAP February guidance by $108 million on revenue and $0.12 on EPS. Our results grew year-over-year by 29% or $205 million on non-GAAP revenues and by 44% or $0.07 on EPS. This increase is largely due to the inclusion of King in our results since the closing date of the acquisition February 23. Excluding King non-GAAP revenues and EPS were relatively flat to Q1 of last year.

Reflecting on some highlights by segment; Activision exceeded plan and last year's results on revenues and profit with record Q1 digital revenues that were up 54% year-over-year. Activision also continued its next-gen leadership with four of the top-ten titles on PS4 and Xbox One life-to-date including the number one spot with Call of Duty Black Ops III which as Thomas mentioned accelerated user engagement in Q1. This outstanding Call of Duty performance was partially offset by continued weakness in the market. As expected, Blizzard's Q1 was relatively quiet and consistent with expectations as the team prepares for the onslaught of upcoming content for expanse.

But starting this quarter, Blizzard entered into what may the busiest stretch of releases in their history with activity across cost franchises, genres, platforms, and linear media, to appeal to Blizzard's current community while attracting new and last players.

In Q1 we also completed the successful integration with King and the team did not skip a beat. They continue to stay focused and execute through the closing of the transaction and once again had at least three of the top fifteen grossing games on both the Apple App Store and Google Play Store in the US for the ninth consecutive quarter. Important over-quarter in both engagement and gross bookings.

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

For the quarter on a GAAP basis we generated revenues of $1.46 billion, up 14% year-over-year and operating margin of 32% and EPS of $0.45. As we said on our February call, our GAAP earnings were expected to be down in 2016 versus prior year as our expected results will be impacted by additional accounting charges associated with the King transaction which include among other things transaction related costs and the amortization of intangibles resulting from purchase price accounting adjustments. The majority of these GAAP accounting charges will not impact the economics of our business or our cash flows although they will have a material impact on our 2016 GAAP results.

For the quarter on a non-GAAP basis, we generated revenues of $908 million and operating margin of 28% and EPS of $0.23. On a non-GAAP basis digital revenues in Q1 grew 48% year-over-year to a quarterly record. These increases were due to the inclusion of King in our results in Q1 of 2016 as well as the higher performance of Activision's Call of Duty, and Blizzard's Hearthstone year-over-year. Of the $0.12 in non-GAAP EPS overperformance versus guidance about $0.07 was related to timing, about $0.03 was related to strong franchise momentum and the earlier King close, and about $0.02 was related to one-time tax benefits.

Please note that when you look at the segment results King's Q1 financials are not directly comparable with their previously reported quarters. Among other things we have adjusted King's compensation plan from an equity-based program to a cash-based profit sharing plan and we have also allocated corporate overhead to the Group as we do with our other divisions. Both of these changes are value neutral to the company.

Controlling for those factors and comparing their full quarter results, in addition to gross bookings and engagement, King's overall revenues and operating income were up quarter-over-quarter.

Turning to specific P&L items please note that all percentages are based on revenues except for the tax rate. For Q1, GAAP product costs were 21%, operating expenses were 47%, interest expense was $52 million, and our GAAP tax rate 18%. Our GAAP and non-GAAP fully diluted weighted average share count was $750 million including participating securities. On a non-GAAP basis for the quarter product costs were 24%, operating expenses were 48%, and our adjusted EBITDA margin was 31%, interest expense was $51 million.

Our non-GAAP tax rate was 14%. As mentioned this tax rate was as a result of one time discreet benefits.

In terms of cash flow, in Q1 we generated strong cash flow with non-GAAP adjusted EBITDA of $277 million, up 24% year-over-year, operating cash flow of $309 million, up 48% year-over-year, and free cash flow $282 million after CapEx, up 50% year-over-year.

Turning to the balance sheet. We closed the King transaction in February for approximately $5.8 billion which was funded with $3.5 billion in cash held internationally and $2.3 billion of cash from new debt. The enterprise value was $4.7 billion after factoring in the $1.15 billion of cash that came along with King or about 6 times King's 2015 EBITDA. Directly following the transaction, we also paid down a net $500 million of our outstanding debt balance which ended the quarter at $5.92 billion in aggregate.

As mentioned on our last, we are authorized to pay down an additional $1 billion of debt this year. As of March 31 we had approximately $2.91 billion in cash and investments of which roughly half was held internationally.

On the dividend front, next week on May 11 we plan to pay to a $0.26 per share cash dividend or approximately $192 million in aggregate to shareholders of record as of March 30, 2016.

So in summary, Q1 was a very strong start to the year for the company and sets us up well for the coming quarters ahead.

Now let's turn to our slate and our outlook for Q2 and the balance of 2016.

Our Q2 slate includes Call of Duty second map pack and Hearthstone's latest expansion Whispers of the Old Gods which released last week. And on May 24, Blizzard plans to release its newest IP, Overwatch. We also plan to continue to release new content and updates across our portfolio to keep our players engaged while at the same time beginning the ramp in sales and marketing spending for our major releases later this year.

For Q2 on a GAAP basis, we expect net revenues of $1.425 billion, product cost of 24% and operating expenses of 65%. We expect GAAP interest expense of $62 million, a GAAP and non-GAAP tax rate of 23%, a GAAP and non-GAAP share count of 755 million, and EPS of $0.10.

For Q2 on a non-GAAP basis, we expect revenues of $1.375 billion, product cost of 23%, and operating expenses of 46%. We expect a non-GAAP interest expense of $60 million and non-GAAP EPS of $0.38.

In the back half of the year, Blizzard plans to release World of Warcraft's next highly anticipated expansion, Legion. Activision plans to release two more map packs for Call of Duty, a large expansion for Destiny, and new releases in Q4 for Skylanders and Call of Duty. King plans to release two non-Candy Crush franchise games this year, one this summer and another later this year.

Now to our 2016 full year numbers. On a GAAP basis, we expect revenues of $6.13 billion, product cost of 25% and operating expenses of 60%. Our GAAP interest expense is expected to be $243 million. Our GAAP and non-GAAP tax rate is expected to be 24%, one point better than our February guidance.

We expect 765 million fully diluted shares both for GAAP and non-GAAP and EPS for GAAP is expected to be $0.69.

For 2016, on a non-GAAP basis, we expect revenues of $6.275 billion an increase of $25 million versus our February guidance, product cost of 24%, operating expenses of 44%, and an operating margin of 32%. Our non-GAAP interest expense is expected to be $235 million.

Though it is still early in the year and nearly all of our major launches are still in front of us, we are raising our full year outlook by $0.03 on EPS to a $1.78 related to business performance and tax benefits.

In summary, Q1 was an incredibly productive quarter for the company and a great start for the year. With the closing of the King acquisition, we now have global leadership across major gaming platforms and one of the largest interactive entertainment networks on the planet. Our franchise focus has delivered growing audience reach, deepening player engagement, and more player investments that ever before. In addition, the tailwind in emerging areas like Esports provides compelling option value going forward.

As a team, we couldn't be more excited about the large opportunities for growth that we have ahead of us.

Now I will welcome our business leaders; Erick, Mike and Ricardo, as they join us for the Q&A portion of the call. Operator?

 

Question & Answer

 

 

Operator:

Thank you. Will go first to Neil Doshi with Mizuho.

 

Neil Doshi:Mizuho:

Great. Thanks guys. A quick question on Overwatch seems like the beta has been quiet successful. So I wanted to know how we should think about units for the quarter when it's released and then as well as for the year.

In the seems like there is a much bigger audience than there is for Diablo. So any thoughts or color on that front would be very helpful. Thanks.

 

Michael Morhaime: President and Chief Executive Officer of Blizzard Entertainment:

Well we are very excited about the open beta so we are less than 24 hours in but the game is now live and freely accessible to players around the world including China. We've already seen million of players try out the game in open beta. The feedback has been extremely positive. This is our first global simultaneous multi-platform launch and so we are on PS4, Xbox, PC, across all of our regions.

We don't project out specific unit numbers but like Thomas mentioned, we do expect this to be our biggest launch since Diablo III which was heavily anticipated and the Diablo franchise was something that has been loved for many years. This is brand new IP. We are doing it time to expose players to the richness of this world that we have created but it is new IP in a very popular genre.

 

Neil Doshi:

Great. Thanks Mike.

 

Operator:

We'll go next to Chris Merwin with Barclays.

 

Chris Merwin: Barclays:

Hi. Great. Thank you. So now that the King acquisition is close, I was wondering if you could just update us on the strategic plans for King.

At what point does King start to plan for the development of some of Activision's IP and maybe given the size at King's user base, does it make sense to integrate some third party advertising into the mix and if so, what would the ramp look like there? Thanks.

 

Riccardo Zacconi: Chief Executive Officer Of King Digital Entertainment:

Hi Chris. It's Riccardo here. First of all, it's nice to talk to you again and thank you for the question. So if I answer the first part of your question on the strategic plans, as part of Activision Blizzard vision I would like to highlight that the integration went extremely smoothly and is effectively complete.

King has been part of the Activision business family as you know now for two months and we have retained our key talents and have remained focus on driving the business and executing on our existing plan. As you have heard in Q1 we have delivered both top line and profit growth by growing our player and payor networks as well as the investment per player. We're first of all focused on executing on our strategy and we have a strong pipeline across our franchises and we're working on new titles within this franchises. We're also developing additional new IPs within our studios.

In addition to developing the new titles, we're also continuing to invest in our existing franchise games with new content, new features and with live box, live box as a brief reminder are the time limited events. And all of this content is driving engagement, retention and investment per payer.

Now as part of the Activision business family, beyond the existing plans, we have now new opportunities to create even greater games for our massive player network by combining Activision Blizzard's top performing IPs on console and PC with our mobile expertise. The deal as you know closed two months ago and we have started conversations with Activision and Blizzard to explore those opportunities.

In regard for the second part of your question regarding advertising, I want to say that first and foremost we are focused on retaining our players and we're focused on providing a great player experience and we will not compromise on this part. That said, given our massive network, we do believe that advertising could be a meaningful revenue stream for King in the long term. We have 463 million monthly active users and with that it's one of the largest untapped audiences for advertisers in the world. But it's early days and we have just begun experimenting with that in two of our games.

So we do not expect any impact to this year's results from assets.

 

Chris Merwin:

Thanks Riccardo.

 

Operator:

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

 

Doug Creutz:Cowen and Company:

Thanks. You mentioned on the call that you got some good reengagement at Destiny around the -- just wondered if you could may be kind of size how engagement is trending relative to the peak you had back in September on the King launch? Thanks.

 

Eric Hirshberg: Chief Executive Officer Of Activision:

Hey Doug it's Eric. So, Destiny has nearly 30 million registered players now and our April content successfully reengaged the community and was very well received. We think engagement has remained remarkably strong even after the release of some competitive games in the genre but it’s clear that our fans are hungry for more content that we've been able to create and that passion and loyalty from our fans is something we don't take for granted which is why we are working side by side with Bungee to make sure that in the future we're able to deliver a more consistent stream of great content and drive even more engagement.

 

Doug Creutz:Cowen and Company:

Great. Thanks.

 

Operator:

We'll go next to Eric Handler with MKM Partners.

 

Eric Handler:MKM Partners:

Thank you very much. A question from Mike regarding Hearthstone. Mike so users are now you said there are 50 million I think it’s' up from about 40 million players in November, so a big increase there. Can you talk about user monetization trends for the game and are the newest players spending as much, less or more than those that have been playing longer?

 

Michael Morhaime:

So we don't publicly discuss specific monetization trends but we are very happy with the continued strong performance we are seeing from Hearthstone. As Thomas mentioned, we are very excited that engagement both in terms of daily players and hours per player, rose with the Old Gods launch. Hearthstone revenues were also up 20% year-over-year in the first quarter. So in general we are very pleased.

 

Eric Handler:

Thanks.

 

Operator:

We will go next to Arvind Bhatia with CRT Capital.

 

Arvind Bhatia: CRT Capital:

Great. Thank you. Congratulations on another good quarter. I got two part question.

First if you could maybe touch a little bit more on the Call of Duty Black Ops III extension pack performance year-over-year and also maybe talk about the Infinite Warfare the trailer and some of the YouTube dislikes that its getting, what do you make of that?

 

Eric Hirshberg:

Thanks Eric. It's Eric. So Black Ops III is performing very well but before I address our digital performance specifically, I think it's important to take a step back and first talk about overall engagement. We have made a great game that our fans love and that's demonstrated by the fact that our monthly active users are at all time high and as a result of that our digital business is also operating at Q1 all time highs and is up significantly year-over-year.

Season pass is at an all time high and in fact we expect to deliver the most map packs ever to players with Black Ops III. So the most important thing for us is that we are delivering all this performance while seeing record engagement with the game.

On the second part of your question related to Infinite Warfare, first of all you got to love the passionate gamers. This is an industry like no other and a fan base like no other and we love that our fans treat this franchise like it's their own and have such strong points of view about it. There just aren't as many entertainment franchises on earth that can generate the kind of passion that Call of Duty can and that's a good thing.

Secondly of course we know that there are people in our community who are nostalgic for the boots on the ground style gameplay and that's why we made Modern Warfare Remastered but we also have millions of people in our community who want to have new innovative experiences in the game each year and Infinite Warfare is going to deliver that. And the good news is this year we found a way to deliver both in one package while keeping our community together.

And while of course we see the passionate opinions online we also look at other measurements and the fact is while its very early, pre orders are off to a very strong start, views of the revealed trailer that you referred to are up and in fact the number of likes per view on the Infinite Warfare Reveal trailer are also the highest we have ever seen. We have seen this in the franchise before. The Reveal trailer for Black Ops II which took the franchise into the future for the first time had the most dislikes of any revealed trailer we had ever made at that time and that of course went on to become our most successful game ever. And right now the franchise has never been stronger.

We have more people playing Black Ops III, a game that takes place in the future with boost jumps and fictitious weapons and all the rest than any game in our history.

So what we know for sure is that if we always just did what worked in the past and never took any creative risks, we wouldn't have a franchise. The day to worry is the day we stop trying new things.

 

Arvind Bhatia:

Very helpful. Thank you.

 

Operator:

We will go next to Brian Pitz with Jefferies.

 

Brian Pitz: Jefferies:

Thanks. A question on Overwatch marketing. Maybe you could discuss how you build Overwatch into a true trance-media franchise including the types of media such as esports, movies, cartoons, and comic books, et cetera as well as merchandising opportunities you might see overtime as the game is successful and basically is it fair to compare to say that you are building essentially your own version of the Marvel universe here. Thanks.

 

Michael Morhaime:

Thanks for the question. I think it's a great question. We see a ton of opportunity here. We have put a lot of work into creating a game universe with awesome characters and a deep back story.

We think there is a big opportunity for Overwatch to try it across all sorts of media. That game itself is vibrant and rich with personality. We've seen a overwhelming positive response to our animated shorts and comics and we're working on more of those. We think that there is a lot of potential to go even further in the future.

When it comes to esports we feel Overwatch has huge potential. We put a lot of focus on the viewing experience and making sure the action is fun to watch. We designed the game with esports in mind and we have big plans in this area which we'll talk more about later this year.

 

Brian Pitz:

Thanks Mike.

 

Operator:

We'll go next to Colin Sebastian with Robert Baird.

 

Colin Sebastian:Robert W Baird:

Thanks. I guess this is a follow up to an earlier question on the mobile business and King. Hoping you can talk a little more detail about Jelly Saga's performance since launch in terms of usage and monetization and then also how you view the prospects for the performance of the Candy Crush franchise as a whole through the balance of the year especially as we consider promotion across the network. Thank you.

 

Riccardo Zacconi:

Hi Colin, it's Riccardo. Thanks for the question first up all. The overall Candy Crush franchise is very healthy. It continues to produce strong performance, growing sequentially in Q1 as you've seen and this validates our franchise focused strategy.

We continue to execute on our four pronged approach to creating enduring franchises by number one, adding new content, implementing live ops, delivery delivering extensions in our existing games, as well as offering players new sister or sequel titles. This approach has led to continued strong performance by the Candy Crush franchise. In fact the original game, the Candy Crush Saga is already four years old and it continues to lead the casual category and was the number three top grossing game in the US in Q1.

In regards to your question on Candy Crush Jelly Saga we launched the game in January of this year and it's a sister title to Candy Crush Saga. It has the same star ratings as Candy Crush Saga and our players are clearly enjoying the game. It's our third largest title in a top-10 grossing game in the US on iPhone it's also worldwide top-10 grossing game Google Play. The game brought new players to King's network in Q1 and after doing the franchise to grow.

When you look across the entire franchise, all three Candy Crush titles were top 15 grossing games in the US in Q1 which demonstrates the longevity and strength of the brand. So we believe we have an enduring franchise with Candy Crush and we're executing to keep innovating for our players

 

Colin Sebastian:

Great thanks and maybe I could sneak in another follow up around Esports more specifically around monetization in Esports longer term beyond the loyalty and improving the brand halo around certain titles. Thank you.

 

Bobby Kotick:

Yes you know our first priority has been the opportunity to celebrate our players and when you think about the commitments that our players make to our games by providing them with the recognition, the organized competitive experiences, highlighting their accomplishments, being able to provide higher levels of prize player we ever had, these are all in the service of enhancing engagement and building value in the equity of our properties. I think when you look at the untapped opportunities though that enable you to do a lot of those things, we have this very virtuous cycle. People pay to participate, sponsors are willing to finance events, those events then become the content that's broadcast on our network for another networks, those events then lead to having the ability to have regional events, national events, international events, all of these things have the opportunity for us to expand broadcast rights, licensing and merchandising, ticket sales, local sponsorships, national sponsorships, and these are all things that we are very actively engaged in.

Not to mention all the opportunities to sell our professional teams for our professional leagues. And so, over the long term, we view this as a tremendous opportunity both to celebrate our players and to create a lot of value for our shareholders.

 

Colin Sebastian:

Thanks Bobby.

 

Operator:

That was our final question so at this time I will turn the call over to Dennis Durkin for any additional or closing remarks.

 

Dennis Durkin:

Alright. Thank you everyone. We appreciate your dialing in and participating in this call and we look forward to seeing you on next quarter's call in early August. Thank you.

 

Operator:

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

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