Activision Blizzard, Inc.
Q3 2011 Earnings Call Transcript

Published: 9 Nov 2011

[Operator:]

Good day, and welcome to the Activision Blizzard's Third Quarter 2011 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn today's call over to Ms. Kristin Southey. Please go ahead.

[Kristin Mulvihill Southey:]

Good afternoon, and thank you all for joining us today. 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 expressed in any forward-looking statements. Such factors include, without limitation, the 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 delivery of content, competition, including from used games; possible declines in pricing, product returns, price protection, and product delays; adoption rate and availability of new hardware and related software; rapid changes in technology and industry standards; litigation and associated costs; protection of proprietary rights; maintenance of key relationships, including the ability to attract, retain and develop key personnel and developers that can create high-quality hit titles; counterparty risk; economic, financial and political conditions and policies; foreign exchange and tax rates; identification of acquisition opportunities; and potential 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, beliefs or expectations made at anytime and without notice, based upon any changes in such factors in the company's assumptions or otherwise. The company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after today, November 8, 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 share-based payments, expenses related to the restructuring of our Activision Publishing operations, the amortization of intangibles and impairments of intangible assets and the associated tax benefit. 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's also a PowerPoint overview, which you can access with the webcast and which will be posted to the website following the call. In addition, we will also be posting a 12-quarter financial overview highlighting both GAAP and non-GAAP results. And now, I'd like to introduce our CEO, Bobby Kotick.

[Robert A. Kotick:]

Thank you, Kristin, and thank you all for joining us today. As you can see from our quarterly results and our updated outlook, Activision Blizzard is having a year of many records. While we have powerful franchises, fantastic brand recognition and some of the industry's finest technologies and marketing skills, what enables us to achieve records every year -- the highest game rankings, record-setting sales, standout marketing programs or stellar financial results, what enables these accomplishments is a team of people around the world committed to excellence. Our conference call is focused on our financial statement, but our balance sheet doesn't reflect the incredibly talented, driven, enthusiastic people who come to work at Activision Blizzard every day. We're one of the world's best entertainment companies because of the dedication and hard work of an extraordinarily accounted group of people, who are the driving force behind our superior financial performance. The passion and dedication that our teams around the globe bring to each and every project is truly remarkable. As we assess our success this year, we're entering rarefied territory. Life-to-date sales for World of Warcraft and Call of Duty now rank with worldwide box office sales for Star Wars and Harry Potter, 2 of the most successful entertainment franchises of all time. And our industry-leading capability to develop original, globally-appealing innovative intellectual property, which we do exceptionally well, continues with Skylanders. For the third quarter, Activision Blizzard delivered better-than-expected results driven by record revenues from online channels and the continued strength of our online-enabled franchises. Today, we're raising our 2011 revenue and EPS outlook and now expect to deliver record operating margins and earnings per share, reflecting the strength of our business and confidence in our ability to engage audiences with our uniquely immersive experiences. We remain the largest, most profitable independent interactive entertainment company. For the past 3 consecutive years, we've delivered record operating margins and earnings per share, something few companies have been able to achieve, especially in a volatile economic environment. Our consistency and success are driven by 2 things

[Thomas Tippl:]

Thank you, Bobby. I'll begin with a recap of our third quarter and year-to-date results, followed by a review of our increased outlook for the fourth quarter and full year and provide some initial comments for 2012. For your reference in the press release, there's a set of schedules that provide non-GAAP comparables, and these will be the numbers I'm referring to unless otherwise noted. Please refer to our earnings release for a full GAAP to non-GAAP reconciliation. Also note that the numbers I'll be quoting are compared to the prior year, unless otherwise noted. For the third quarter, on a GAAP basis, we generated revenues of $754 million and record earnings per share of $0.13. For the third quarter, on a non-GAAP basis, we generated revenues of $627 million and EPS of $0.07, representing our 13th consecutive quarter of non-GAAP EPS generation. As expected, our results were below prior year due to the fewer large scale launches, but were well ahead of expectations as revenues from digital channels increased to a new third quarter record of $386 million Our strong performance for the quarter and year-to-date has been driven by our products with online integrations and digital revenue streams, including Blizzard's World of Warcraft and Activision's Call of Duty. For the first 9 months, GAAP revenues from digital channels, including subscriptions, value-added services, downloadable content and full game downloads, increased 25% over the prior year and accounted for 38% of total revenues, driving a record 39% operating margin and a record EPS, which increased 62% over the prior year. On a non-GAAP basis, year-to-date revenues from digital channels increased 16% over the prior year and accounted for 60% of total revenues, driving a record 23% operating margin and record earnings per share, which were up 15% over the prior year. Turning to the P&L line items for the third quarter. Please note that all percentages are based on net revenues, except the tax rate. For GAAP, product costs were 26%; operating expenses were 52%; and our tax rate was 11%. Non-GAAP product costs were 30%. This is down from our prior outlook due to digital overperformance. Non-GAAP operating expenses were 57%, significantly lower than our prior outlook, due mainly to operating leverage from strong digital top line performance and term movement of expenses from Q3 to Q4. Also, our tax rate came in lower due to discrete benefit items resulting from the September filing of our 2010 tax returns. This benefit amounted to about $0.01 of EPS. Turning to the balance sheet. On September 30, we had no debt and approximately $2.9 billion in cash and investments, roughly in line with the prior quarter. Our receivables balance was $139 million, down $107 million versus the prior year due mainly to fewer releases. Inventories of $207 million increased sequentially ahead of the Skylanders launch, but was down $51 million versus the prior year due to a reduction of peripheral inventory. Capitalized software development costs were $254 million, a decrease of $21 million versus the prior year, also due to fewer titles in 2011. With respect to cash flow, for the trailing 12 months, our operating cash flow and free cash flow were over $1 billion, despite significant investments in the most robust pipeline of new products and services Activision Blizzard has ever had. Our ability to not only invest but also generate returns on investments is what continues to set us apart from most of our competitors. So let me now move on to our outlook. As we have said, this year, we are focused on 3 initiatives to drive operating margin expansion and long-term growth. So let me quickly recap our progress. First, we continue to focus on our high margin digital business and online-enabled franchises. To put our strength in perspective, for the trailing 12 months, we generated $1.7 billion in digital revenues, up more than 22% versus the prior 12 months. Importantly, these digital revenues generated operating margins in excess of 50%. Our digital scale and operating income generation is also well ahead of anyone in our industry, and looking ahead, we have more online product and services in development than ever before. Our second initiative to drive operating margin this year is to streamline the Activision Publishing business for higher profitability and online expansion. And this year, Activision Publishing alone is projected to generate record digital revenues and a record operating margin of more than 26%. And as I mentioned a minute ago, we are investing for the future to build our pipeline, extend our digital leadership and expand our core brands. We continue to allocate the vast majority of our internal investments to our bigger franchises and online product and service capabilities, including Call of Duty and the Elite online service, the new Call of Duty micro-transaction game for China, Bungie's new gaming universe, World of Warcraft, StarCraft, Blizzard's next-generation MMO, Battle.net and Diablo III, with its new real money option house model and our social and mobile initiatives. So in summary, we continue to execute against each of our stated goals, and our strong execution this year has enabled us to increase our financial outlook for the third time this year. So now, on to the specifics of our outlook. In terms of our 2011 GAAP outlook, we now expect revenues of $4.33 billion, up $150 million from our prior outlook and EPS of $0.76, up $0.08 from our prior outlook. For the calendar year, we expect GAAP product cost of 25% and operating expenses of 48%. We project a GAAP effective tax rate of about 25% and a diluted share count of about 1.2 billion. On a non-GAAP basis, we are increasing our revenue outlook to $4.25 billion, up $200 million from our prior outlook. And we are increasing our non-GAAP EPS outlook to $0.85, up $0.08 from our prior outlook. Since February, when we gave our initial calendar year outlook, we have increased our earnings per share expectation by more than 20%, and are now on track towards another year of record EPS even without a single Blizzard frontline release. 2011 is expected to mark the third year in a row, since our merger, that we have generated record earnings despite the economic downturn. For the year, on a non-GAAP basis, we expect product cost of 28%, resulting in the highest gross profit margin in our history, driven by our continued transition to digital products and services. We also expect operating expenses of about 41%, and projecting an effective tax rate of 26%, and a diluted share count of about 1.2 billion. For the calendar year, we continue to expect the combination of our strong online-enabled franchises and the streamlining of our Activision Publishing business to produce a record GAAP operating margin of 27% and a record non-GAAP operating margin of 31% for the combined company. And we see more opportunity for future margin expansion as we continue growing our share of digital revenue, which, for us, generates significantly higher margins than our corporate average. Now moving to the December quarter. On a GAAP basis, we expect revenues of $980 million, product cost of 27% and operating expenses of 86%. We project an effective tax rate of 24% and a basic share count of 1.2 billion and a GAAP loss per share of $0.08 due to revenue deferrals. In terms of non-GAAP, we expect revenues of $2.17 billion, product cost of 26% and operating expenses of 34%. We project an effective tax rate of 27%, which is in line with the prior year and a diluted share count of 1.2 billion. We expect EPS of $0.55, which reflect our increased product expectations, offset somewhat by the movement of expenses from the third to the fourth quarter. In summary, the year is progressing with great momentum and this gives us further confidence that the growth objectives we presented at our recent analyst day are achievable. In fact, with our increased outlook for the year, we are generating shareholder value even faster than anticipated. And the early look at how our 2012 slate is coming together suggest another year of profitable growth, and record EPS is ahead of us. As always, we look forward to sharing with you the details of our 2012 annual operating plan on our February call. So now, let me hand it over to Eric to discuss our Activision Publishing business.

[Eric Hirshberg:]

Thanks, Thomas. Today, I'm going start with some high-level comments on the industry, and then I'll discuss Activision Publishing's performance in Q3 and year-to-date and provides some commentary around our recent launches, the groundbreaking Skylanders

[Michael Morhaime:]

Thank you, Eric. So Blizzard just enjoyed another successful BlizzCon a few weeks ago, sharing exciting news with 26,000 live attendees and more than 1 million online viewers from 144 countries around the world. We made several big announcements. These included the world premiere of our new World of Warcraft expansion, Mists of Pandaria and a showcase of the multiplayer side of our StarCraft II expansion, Heart of the Swarm. We also featured our upcoming Blizzard DOTA free-to-play online game and generated even more excitement for Diablo III. We hosted packs of crowds for our most exciting e-sports tournaments yet. And finally, we announced our World of Warcraft annual pass. I will go into more detail on everything in a moment, but first, I want to touch on our results for the past quarter. Our revenues for the third quarter 2011 are down versus last year, which included the record-setting launch of StarCraft II. World of Warcraft finished the quarter with 10.3 million active subscribers worldwide, which is down from the previous quarter. While the majority of these declines are coming from the East, World of Warcraft continues to be one of the most popular online games in China and remains by far the most popular subscription-based MMO in the world. That said, we know there are improvements that we can make in gaming content. The level-up content in Cataclysm is some of our best works. But it was consumed quickly compared to our past expansions set, Wrath of the Lich King. Once players reached max level, the end-game content in Cataclysm is more difficult. Balancing this content for our diverse player base can be very challenging. Our development team is constantly analyzing the game, and we're continuing to explore ways that we can adjust the game to better satisfy both hard-core and casual players. To that end, our next free major content update for World of Warcraft is already in testing and will be available for players in the coming weeks. This is our largest update since Cataclysm launch. It will include our biggest and best rated content ever, featuring the iconic dragon Deathwing, as well as a new raid finder feature. The raid finder will make it easier than ever for casual players to experience end-game content, and it will open up a big part of the World of Warcraft to more of our players. Looking beyond our next content update, the development team is already hard at work on our next expansion set, Mists of Pandaria. We introduced the Pandarian race to the Warcraft universe with Warcraft III, and players have already been -- always been eager to see them introduced to World of Warcraft. We're finally making them a playable race in Mists of Pandaria. And the announcement trailer has already collected more than 3 million views on YouTube. We'll be introducing a number of new features to World of Warcraft this expansion set. But one that's gotten a lot of positive buzz from players and press is our new pet battle system, which we believe will be very appealing to casual players. For hard-core players, we have plans to focus the story heavily on the Horde alliance conflict. Combined with some new PVP features, we believe the new expansion will have a lot of appeal for our diverse audience. Aside from the new expansion set, we made another exciting announcement at BlizzCon, the World of Warcraft annual pass. The annual pass is an initiative we created to reward the loyalty of our current subscribers, as well as welcome back lapsed players. The deal is pretty simple, if you make a 12-month commitment to World of Warcraft, we give you Diablo III for free, along with an invitation to the next World of Warcraft beta and an exclusive in-game mount. This is a limited time offer that's only available to players who had already created a World of Warcraft account as of October 18. We have received a tremendous response to this promotion, and we believe it's a great way for us to leverage the size and passion of our World of Warcraft player-base to drive even more momentum around Blizzard games. We have other aggressive marketing plans in the coming months for World of Warcraft, but we're not ready to share details yet. Closing out our discussion on World of Warcraft, we have recently announced that a new localized version of the game will hit the Brazilian market on December 6. As we mentioned in the past, Brazil is one of the fastest-growing markets in terms of online connectivity and is already in the top 10 countries in terms of broadband users. We're looking forward to seeing how our expansion into Brazil, our new content updates and other initiatives contribute to the growth of World of Warcraft. Moving on to StarCraft II. We showed off the multiplayer aspect of Heart of the Swarm at BlizzCon for the first time. Players were very excited to try out the new units, and the game has generated a ton of buzz. The new sizzle trailer that we released for the game has also gotten a lot of press and attention with more than 1 million views on YouTube. In addition to Heart of the Swarm, the StarCraft development team has been hard at work on a new free-to-play online game, Blizzard DOTA. This game was created by our development team using the StarCraft II engine, and we debuted a new version of it at BlizzCon. Blizzard DOTA drew a lot of positive interest from press who attended the show and will be our entry into an increasingly popular genre of online games. Similar games in the market operate on a free-to-play basis with micro-transaction elements. With that in mind, we're currently exploring what type of business model will work best for Blizzard DOTA, and look forward to sharing more information about the game in the near future. On the Diablo III front, we are still targeting an early 2012 launch. We've been collecting great feedback from our ongoing beta test and BlizzCon, and the team is using that feedback to continue polishing and improving the game. We've also been testing the gold auction house functionality through the Beta and are gearing up to test the real mining systems very soon. We have very high expectations for Diablo III. The buzz surrounding the game continues to the tremendous, and our debut of a new trailer for the game at BlizzCon was one of the highlights of the show. In closing, 2012 is shaping up to be one of the busiest and most exciting years in Blizzard's history. We plan on having at least 2 major releases, and as BlizzCon demonstrated, we have a lot of great games coming down the pipeline. We continue to invest in development and customer service to support long-term growth. But for now, the company is focused on execution and getting these great games out for our players. Thank you, and I'll turn the call back over to Kristin.

[Kristin Mulvihill Southey:]

Okay, operator, we're going ready to take questions.

[Operator:]

[Operator Instructions] And at this time, we will go to Brian Pitz with UBS.

[Brian J. Pitz:]

Can you give us some additional color on what's happening to engagement and subscriber levels for World of Warcraft, particularly following that big expansion pack announcement? Where do you think the subscribers are actually going? And I've got a quick follow-up.

[Michael Morhaime:]

Okay. Well, as you know, we don't provide a forecast on subscribership levels. What I'll say is that the announcements at BlizzCon were incredibly well received. There's a lot of excitement around the expansion and the upcoming content in the next patch, which will be introduced in the next couple of weeks. It is currently in test on our public test realm, and we're very excited about that content. I guess, I can say this, the majority of the declines were in the East. China still represents more than half of our global player base and historically, December has been a very good month for subscriber trends. We have a number of initiatives planned. We plan to be very aggressive in terms of our marketing promotions, and we're looking forward to the end of the year.

[Brian J. Pitz:]

Great. And maybe this is a question for Thomas, as well. How should we think about the Diablo III promotional offer that's being provided with the annual subscription option?

[Thomas Tippl:]

From our perspective, the reception to the offer has been phenomenal. As you would expect, I think, it's a tremendous value offer for existing and lapsed players. So we're not surprised. And I think it's going to continue to help broaden and deepen the engagement of the Blizzard community overall, and I think that's particularly desirable to us because as we look into the future, I think we recognize there's more competition heading into the MMO genre overall because it's a very attractive genre. And so we want to make sure we continue to offer our players, not only the best content but also the best value.

[Brian J. Pitz:]

And should we assume that's a margin-neutral event for the most part?

[Michael Morhaime:]

Well, we think that it is -- the more interest that we drive towards Diablo III, we think the more interest our players will continue helping to drive for us Diablo III.

[Thomas Tippl:]

And I think from a margin perspective, I think that it still remains to be seen. As you know, Diablo III launches with a real money auction house. So it provides an opportunity to potentially generate high-margin revenues from additional Diablo players which we might not otherwise get to. But I think obviously, that's still early days, and we'll find out about that once we use the product in the market.

[Operator:]

Moving along, we will go to Neil Doshi with Citi.

[Neil A. Doshi:]

Thomas, I had a question about the Blizzard operating margins. It looks like margins have been coming down from the traditionally high 50% range to now kind of 40%. How would you think about margins going forward? And would we continue to see continued pressure on Blizzard margins? Or has most of the development been done there, and we can hope to expect margins get back in that 50% range?

[Thomas Tippl:]

I don't think it's a surprise that this year the margins are down because we are developing a whole host of products within Blizzard. Effectively, we have 5 products in development, none of which has launched this year. So you got all of the development costs and none of the revenue. So next year, we are seeing at Blizzard, as Mike mentioned earlier, a minimum of 2 releases. So I think with that kind of additional leverage on the top line, I think you will see those trends reversing.

[Robert A. Kotick:]

And things like the auction house, where it's still -- we haven't shared a lot of detail about what the margin strategy looks like, but obviously, it's a very high-margin component of the overall franchise.

[Michael Morhaime:]

Yes, I think it's a difficult comparison this year because if you look at last year, we had 2 major launches. This year, 0.

[Neil A. Doshi:]

I understand. Okay. And then Mike, on the Diablo beta, what learnings have you found so far from the players' community and how's the auction house testing going relative to your expectations?

[Michael Morhaime:]

Feedback and testing have been extremely positive in the beta. Keep in mind, the amount of content that we're exposing to players is very limited because we do want to save the vast majority of that content for the actual release. But even within that small amount of content, people are playing it over and over, experiencing with the various characters, and we've been reading the feedback and talking to people at BlizzCon. One of the most common questions that I got asked at BlizzCon was just, hey, they want to get their friends into the beta, how do they do that? Of course, it's very difficult to do.

[Operator:]

Next up, we'll hear from Conor Irvine with Deutsche Bank.

[Jeetil J. Patel:]

It's Jeetil Patel. A couple of questions. One, as you look at the Diablo, Warcraft bundling strategy, I guess, the idea behind that is to get as many users on Diablo and the real opportunity from a modernization standpoint will be auction house in terms of the transactional flow there. I'm curious. How much do you think there'll be in terms of the cannibalizations of the pre-packet offer sale through the bundling strategy? And then second, on Warcraft, 10.3 million subs, what's your best guess as to where that number kind of settles in at as we look out over the next 12 months or so?

[Thomas Tippl:]

All right. First, Jeetil, on Diablo, I think that benefits that we see from the Diablo are really two-fold. I think one, it's going to -- because it requires a 12-month subscription to World of Warcraft, it's going to extend the subscriber life. And as a result, it's going to generate more revenues, more high-margin revenues at World of Warcraft. And in addition, as Mike and Bob had mentioned earlier, we also think that the larger the Diablo community is and the larger the marketplace around Diablo's real money transaction auction house is, the greater the opportunity to also generate income and have a long tail behind Diablo. And then on the subscribers, Mike mentioned earlier, we're not providing any subscriber forecast. We haven't done so in the past. We're not starting right now. I think we're providing you a financial forecast, which includes, as always, prudent proven assumptions around all of our variables that go into our financial plan.

[Jeetil J. Patel:]

Maybe if you look at Auction House going backwards to the prior Diablo or maybe what you're seeing in early testing, can you talk about how many transactions the average player typically does in a given month? Is there a way -- any way to quantify that?

[Thomas Tippl:]

There isn't really because the experience that we are going to offer is going to be so much better than anything players were able to see in the past on Diablo. So where we are really looking is -- so that's number one. Number two, I think, the general acceptance of gamers for our different types of business models existing in the past in terms of more micro-transaction base has increased substantially over time. So we are really looking more for benchmarks really outside of currently relevant micro-transaction games. And as you know, those trends have been very encouraging. But for us, we'll have to see until we get into the marketplace. I mean, if we didn't think it's a significant opportunity, we won't be doing it.

[Michael Morhaime:]

So let me just add to that. It's really impossible to extrapolate behaviors from the limited beta experience we're offering to the more open-ended ultimate Diablo III experience. But if you look at Diablo II and even Diablo I player behaviors, there was a big need to trade items between players, and we found that a lot of our players were going to third-party sites to perform that trading. And the main reason that we're doing this is to provide them a safe and secure environment to perform this trading. We think it's going to make for a better game. We think it's going to lead to longer engagement with the game. But in terms of the volume, I think it's very difficult to predict.

[Operator:]

Moving forward, we will go to Eric Handler with MKM Partners.

[Edward S. Williams:]

Just out of curiosity, when you've had big patches before with World of Warcraft, what type of subscriber uplift do you typically see? And then going to an alternative question with Skylanders, I'm just curious what type of attach rates you're seeing with the action figures with the game purchase.

[Michael Morhaime:]

Well, historically, with the content updates that we've done, it's really not intended to go out and drive new user acquisition, that's a whole other strategy. But it does drive engagement with the game, and so that will impact churn, if we do it successfully and eventually will drive win back, as players tell each other about the content they're enjoying. We'll hopefully see a lift in our ability to win back players that may have already churned.

[Eric Hirshberg:]

And in terms of Skylanders, we're not going to discuss exact attach rates but it is -- we can say that it is higher than we expected.

[Thomas Tippl:]

It's surprising this early in the game because people are going in the store and they're not just buying a starter pack, but because of the attractiveness of the toys and the value proposition of the toys itself, we are seeing a lot of initial purchases including already toys beyond the starter pack.

[Operator:]

And moving forward, we will go with Doug Creutz with Cowen and Company.

[Douglas Creutz:]

I was wondering if you could talk a little bit about where you are in terms of your plans to expand Call of Duty to China?

[Eric Hirshberg:]

What we can say is that the development process is going exceedingly well. We already have possible versions of the game on the proper technology, and it translates beautifully to that market. We've built a micro-transaction engine, and it looks -- the game, I think, looks regulatory compared to what is currently available in the genre in the market. So development goes very, very well, and our plans are ahead of schedule.

[Operator:]

And the final question today will be from Edward Williams with BMO Capital Markets.

[Edward S. Williams:]

Just a quick question. Eric. If you can just give us a little bit more color on Call of Duty Elite. What -- how significant is that -- Thomas, maybe this is more directed for you, but how significant it is in the current quarter? And then Eric, how should we think about it going into calendar '12 where I imagine the impact is considerably larger?

[Thomas Tippl:]

Well, I think -- in the short-term I don't think it's going to move the needle significantly on our December quarter results, and that's largely driven by the fact that we are going to amortize the 12-month membership over the 12-month period. But there's just not enough time left to really move the needle dramatically into the December quarter. But obviously, we are setting up very fast [ph] to generate revenues particularly for 2012.

[Eric Hirshberg:]

And in terms of how to think about it going forward, I think a lot of depends on the adoption rate. I think at the very least, we wanted to significantly expand the value proposition around the franchise and create greater value for every player, which we've done with the free service significantly. And depending on the adoption rate, it could really fundamentally change the way the community plays the game, which is our hope because it's the best way for us to deliver continuous content throughout the year, and to do some of the innovative things we're doing like manage community-wide competitions for real prizes. The greater the adoption rate, the greater the potential it has to change the game.

[Robert A. Kotick:]

I can tell you, Ed, it is a key strategic priority for the company, and there are a lot of resources focused on it. And we're very enthusiastically supporting it.

[Kristin Mulvihill Southey:]

Okay. Well, thank you, all. And on behalf of everyone at Activision Blizzard, we thank you for your time and interest and look forward to talking to you soon.

[Operator:]

And again, this does conclude today's conference call. Thank you for your participation.