Good day, and welcome to the Activision Blizzard Quarter 1 2015 Earnings Conference 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. Please go ahead, ma'am.

Good afternoon, and thank you for joining us today for Activision Blizzard's First Quarter 2015 Conference Call. Speaking on the call today will be Bobby Kotick, CEO of Activision Blizzard; Dennis Durkin, CFO of Activision Blizzard; Eric Hirshberg, CEO of Activision Publishing; Mike Morhaime, CEO of Blizzard Entertainment; and Thomas Tippl, COO of Activision Blizzard. 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 risks 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 the Risk Factors sections of our SEC filings, including our 2014 Annual Report on Form 10-K, which is on file with the SEC, and those indicated on the slide that is showing. The forward-looking statements in this presentation are based on information available to the company as of the date of this presentation, and while we believe them to be true, they ultimately may prove to be incorrect. The company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after today, May 6, 2015, or to reflect the occurrence of unanticipated events. I would like to note that certain numbers we will be presenting today will be made on a non-GAAP basis, excluding the impact of the change in deferred net revenues and related cost of sales with respect to certain of our online-enabled games; expenses related to stock-based compensation; the amortization of intangible assets; expenses including legal fees, costs, expenses and accruals related to the purchase transaction and 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'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 financial overview highlighting both GAAP and non-GAAP results and a 1-page summary sheet. And now I'd like to introduce our CEO, Bobby Kotick.

Thank you, Amrita. Usually, I end my remarks by thanking our incredibly talented, extraordinarily committed employees around the world. But today, I'm leading with it because they are in fact the reason we remain one of the world's most successful game companies. And also during this quarter, for the first time, we were recognized by Fortune as one of the 100 Best Companies to Work For. Inclusion on this list is largely determined by employee survey results, and to be recognized as a great place to work by a respected institution like Fortune is gratifying and rewarding. But being acknowledged as a great institution by our own people means more to me than just about anything. And I'd like to thank our wildly talented, inspired, driven and hard-working teams for everything they do to capture the imagination of tens of millions of people day after day. Our talented teams around the world continue to create experiences that inspire our players, drive deeper levels of engagement in our games by our massive and growing global communities of fans. In the last 12 months, we had over 150 million active users around the world playing our games for more than 12 billion hours and spectators watching over 1 billion hours of linear content based on our games. In the hour we'll spend on this conference call, we expect over 1 million people to interact with Activision Blizzard franchises alone. And in the past year, our communities grew by more than 25%. This deepening level of engagement with a widening base of players across our franchises is what drove another successful quarter. We delivered better-than-expected Q1 results, increased our 2015 non-GAAP revenue outlook to $4.425 billion and our earnings per share outlook to $1.20 per share. On a non-GAAP basis, we delivered record higher margin digital revenues of over $0.5 billion, a first quarter record on an absolute basis and an all-time high on a percentage basis. As we celebrate our 35th anniversary, we continue to create extraordinary entertainment for our fans. We couldn't be more excited to continue to do so for another 35 years. Our greatest achievement continues to be our ability to attract and retain the most talented employees around the world and because of that, I have never been more excited or confident about our future. And now I'll turn the call over to Dennis.

Thanks, Bobby. Good afternoon, everyone. Today, I will review our better-than-expected Q1 financial results, our outlook for Q2 and our increased outlook for 2015. Q1 was a great quarter that displayed strong trends on our year-round monetizing franchises. We overperformed our non-GAAP February guidance by over $60 million on revenue, $100 million on operating income and $0.11 on EPS. Even though we had a relatively lighter slate in Q1 this year, non-GAAP revenue and EPS were flat to Q1 last year on a constant FX basis given strong digital trends. Non-GAAP digital revenues comprised a record percentage of overall revenues, up 800 basis points year-over-year. Turning to our financial results. Please refer to our earnings release for full non-GAAP to GAAP reconciliations. Also, the numbers I'll be quoting are compared to the prior year unless otherwise noted. For the quarter on a GAAP basis, we generated revenues of $1.3 billion, up 15% year-over-year; an operating margin of 43%, up from 37% last year; and a record quarterly GAAP EPS of $0.53, up 33% year-over-year and up $0.16 versus our February guidance. For the quarter on a non-GAAP basis, we generated revenues of $703 million, an operating margin of 29% and EPS of $0.16. Of the $0.11 in non-GAAP EPS over performance versus guidance, about $0.05 was related to timing for costs that shifted out of the quarter and about $0.06 was related to strong franchise momentum, including digital sales and engagement trends with our large community of fans. Activision Publishing had a strong Season Pass, downloadable content and expansion attach rates on both Call of Duty and Destiny. Console full game downloads represent a high-teens share of total units and continued to increase year-over-year. Blizzard Entertainment had a steady and strong performance on Hearthstone with ongoing engagement on the Q4…

Thanks, Dennis. Activision Publishing is off to a great start and in Q1, we significantly outperformed last year's results with revenues up 28% year-on-year. We have 2 of the top 5 video game franchises globally year-to-date. We continue to have 3 of the top 5 next-gen games life-to-date with Call of Duty: Advanced Warfare remaining the #1 title on next gen as it has since its launch 6 months ago. Including toys, Skylanders is also the #1 console franchise and title globally in Q1, outsold the #1 action figure line globally and of course, was the #1 kids console franchise and title globally. Over the past few years, we have methodically and effectively expanded our portfolio, which now includes 3 industry leading franchises, each one of which keeps players engaged all year round. This engagement creates a virtuous cycle: great content leading to large engaged communities, leading to our ability to monetize those communities by providing more great content. This is why we have the biggest Q1 online player community in our history, up double-digit percentages year-over-year. And it is also why based on our current trajectory, Activision Publishing will likely deliver our biggest year yet of digital revenues. So let me share a few more specifics by franchise, starting with Call of Duty. In the first quarter, revenue was up by double-digit percentage year-over-year due to the strong sell-through of Advanced Warfare and growing online revenues per user across our recent Call of Duty titles. Sales of Season Pass and Map Packs were up significantly, and we introduced a new consumable digital mechanic in Advanced Warfare, which drove engagement and allowed our players to invest more deeply in their online experience. We recently revealed Call of Duty: Black Ops III from our award-winning studio Treyarch. Nearly 100 million players…

Thanks, Eric. Compared to last year's launch of Hearthstone, Diablo III: Reaper of Souls and presales for Warlords of Draenor, this year's Q1 was relatively quiet for Blizzard Entertainment. Despite this, we continue to have strong performance in terms of engagement. Without any major launches, Battle.net still ended the quarter with the largest Q1 player community in our history, up double-digits percentage-wise year-over-year. This reflects ongoing strength across our portfolio of games. On the World of Warcraft front, we launched the first Warlords of Draenor update in Q1, adding new content, Twitter integration and more. This update increased stability in the last few weeks of the quarter. Warlords of Draenor brought more players back than any previous expansion and showed that even long time lapsed players will return when the right content is offered. On that note, we recently revealed the next major update for the game, which will add a ton of new content that will appeal to players across a range of play styles. That's currently on our public test realm, and we're looking forward to getting it into players hands as quickly as possible. We also announced the WoW Token System. Players who purchase a WoW token priced at $20 can exchange that token with another player for gold. The player who received the token can then redeem it for 1 month's game time or a set amount of play time in China. This provides 2 benefits. It enables players to pay for their subscriptions with their gold, and it provides players with a secure method for purchasing gold in-game. We just launched World of Warcraft Tokens in April so it's too early to see the long-term impact, but many players welcome this service and have been using it actively. This was also a big quarter for…

Thanks, Mike. Before we open the call to Q&A, I'll take a moment to summarize the key takeaways from today's call. First, 2015 is off to a great start. We over-delivered the plan for Q1 and raised our full year guidance, which now projects year-over-year EPS growth from operations. And even more important for the long-term prospects of our business, we saw a 25% increase in the size of the player community that engages with our games. That leads me to the second key takeaway from today's call. We are successfully transitioning our business to a digital year-round engagement model where our community can play and invest in their experiences not just at launch but throughout the year. This is important because it allows us to improve the player experience by delivering fresh content on a frequent basis, while at the same time creating value for our shareholders through deeper and higher margin monetization of the audiences we serve. Lastly, our strategic investments in new franchises, platforms and geographies continued to pay off and along with growing engagement and better monetization, sets the stage for growth ahead. We are well on the way to expanding our franchise portfolio from 5 to over 10 with 4 new intellectual properties already in market. The 2 IPs we launched last year, Destiny and Hearthstone combined, now have over 50 million registered players and nearly $1 billion in non-GAAP revenues life-to-date. We have 2 new free-to-play franchises in beta, Call of Duty Online and Heroes of the Storm. We also recently announced that this fall, the beloved Guitar Hero franchise will return with product innovation that we couldn't be more excited about, and Overwatch is on the horizon with a beta this fall. We have an increasing focus on mobile and tablet with Hearthstone's release on iOS and Android smartphones and Guitar Hero Live's planned released to also include mobile and tablet at launch. Finally, we are positioned for growth in new geographies and in particular, in the large and fast-growing China market. We now have 6 franchises in market in China: World of Warcraft, StarCraft, Hearthstone, Heroes of the Storm, Diablo and Call of Duty Online, up from 2 at the end of last year -- sorry, at the beginning of last year rather. So now let's take a few questions.

[Operator Instructions] And we will take our first question from Eric Handler at MKM Partners.

First, for Mike. With regards to Hearthstone, I think you touched on this briefly. But with the addition of the smartphone SKUs, how has that increased player engagement as well as impacted monetization? And then I wonder if you have the data about how many players are actually playing on multiple devices?

Okay. Thanks for the question. The response to the phone version has really been very positive globally. We've seen an increase in new players. As I said, it's pushed us past the 30 million player mark. We're very excited about that. Overall, engagement and revenue levels have increased meaningfully with the release of the phone version, and they continue to be strong. So we're not breaking down usage across platforms, but I think it is important to note that Hearthstone is a little bit unique, and that is a shared ecosystem. So many of our players do choose to play across multiple platforms, and they have access to the same cards regardless which platform they're playing on.

And we'll go next to Colin Sebastian at Robert Baird.

Sounds like the initial reception for Black Ops III has been quite positive, and wonder if you could add a little more specific color on how the 3-year development cycle is benefiting the game and then how it will be differentiated from prior versions of Black Ops and even from Advanced Warfare. I think in the surface at least, there appear to be some similarities between the titles.

Thanks, Colin. Well, the first and I think most obvious advantage of the 3-year cycle is just pure creative quality. That third year allows us more time to innovate and iterate and more time to polish, and this is Treyarch's first Call of Duty game with that time period to develop. So the first answer is it's just going to be a great game. Secondly, you've heard a lot of talk today about driving engagement being key to our business strategy and as I mentioned, Black Ops is the most played series in Call of Duty's history. But beyond just that pedigree of both Treyarch and the Black Ops series, the 3-year cycle has also allowed us to put a deeper offering on the disk. The MP, the multiplayer game, is going to be the deepest and we think the stickiest we've ever made. The Zombies is going to be deeper than ever, and it's going to have our first XP progression system, which we think will also drive engagement. And of course, the campaign has big innovations in it as well. As I mentioned, you can play it as a single player game or as a co-op game with up to 4 friends. So that drives not only increased engagement but replayability because there's more variability in the experience. In terms of the differences with past Black Ops games and Advanced Warfare, the answer is honestly we're building on successes of all of those games, but we're also bringing a lot of fresh ideas. I understand what you mean when you say you see similarities with Advanced Warfare. I think the movement system in Black Ops III picks up where Advanced Warfare's left off, but improves it and makes it more athletic and intuitive and smoother than ever before. And that's been a big theme we've heard from the press who got hands on with the game at reveal, which we've never been able to do before, which is another good advantage of the 3-year cycle. So I think anyone who gets their hands on the game is going to agree, which is why we're doing hands-on at E3 for the first time, in MP in a long while as well as our first beta in years. So we're really bullish on the content and think it's going to be a great experience.

We'll go next to Arvind Bhatia at Sterne Agee.

Quick question on Heroes of the Storm. Just wondering, we appreciate all the commentary, Mike. Just wondering if you could maybe talk about the monetization opportunity here, this year and then just the ramp you're expecting over the coming years and maybe how you differentiate versus your competition.

Thanks. Well, first, we're really excited that the launch is just a few weeks away, occurring on June 2. The team has really worked hard in fine-tuning the experience to make it fast, fun and easy to get into. And I do think that relative to some of the other options in the genre, it is easier to get into Heroes. And I think judging by the response that we've gotten from our recent Heroes of the Dorm tournament, I think it's easier to watch as well. The feedback that we've been getting from the closed beta test has been very positive. There's a lot of great buzz around the game. We've had, like I said, over 11 million people signing up for the beta test, so there's a lot of anticipation there. As you know, it's a very popular genre. I think the fact that this is a digital game with long-term content opportunities, we're very optimistic about Heroes of the Storm and how it can grow to become another key game in our portfolio. And I think in terms of how the monetization curve will look, we expect to get started strong on June 2, and we are hoping that, that will grow over time.

And we'll go next to Doug Creutz at Cowen and Company.

You guys only invest in projects if you believe there's a meaningful needle-moving opportunity, and obviously Guitar Hero was a property that moved the needle for you several years ago. But since then, the market has changed a lot particularly relating to what casual gamers are doing these days. So what do you see in the market now that leads you to believe that this can be a profitable investment for you?

Thanks, Doug. Well, yes, a lot has changed in the market in that time and we think for the better in terms of our prospects with Guitar Hero. The first thing is that we think we have a great game innovation and that the franchise needs that. And we said when we put it on ice 5 years ago that we wouldn't bring it back unless we really had a breakthrough creative way to bring it back, and we think that we have that. In terms of the way the market itself has changed, first of all, online social play has transformed gaming over the past 5 years, and GHTV is going to be constantly updated with new content to keep the game fresh and to keep people engaged, and it also allows people to compete online with their friends in a highly social way. We think this has the potential to have the kind of sticky long-tail engagement that defines the rest of our portfolio and our major franchises. Second, the game's been on the market for 5 years and during that time, we've had a console transition. We now have powerful new consoles in the marketplace that give us the opportunity to deliver that rockstar fantasy in a more vivid and visceral way with (sic) [than] ever before. It's just what the Live mode is really going to do. Third is mobile has had explosive growth over the last 5 years with casual players. And one of the breakthrough innovations is that you'll be able to have the entire experience on mobile, and this is a great experience both on the go, on the glass or with the full experience with the guitar in your big screen TV. So we think that's a big innovation for us and a big opportunity for us as well. And finally, as I mentioned at the reveal, we've improved and innovated on the guitar itself, managing to make it both easier and more accessible to a casual player, while also managing to make it more challenging than ever for an advanced player. So we think we're going to widen the appeal of the game in that score as well. And also, we mentioned we're -- that guitar is going to be forward compatible with any additional games that come out. That's going to be a better consumer experience we think this time around. It's going to focus us on innovating on the software and keeping the game more engaging as opposed to the hardware like last time around.

And we'll go next to Drew Crum with Stifel.

So as it relates to Destiny, Eric, can you talk about in more detail the plans around the more expansive DLC coming in the fall that you alluded to? And to the extent you're willing to discuss, any updates on future console titles for this franchise?

Yes, of course, I would love to, Drew, but we don't have any new announcements today. But obviously, a constant stream of robust content is integral to our plans on Destiny. And I would say both the expansiveness of the universe as well as the innovation that Bungie's established with bringing together the best of both first-person action games with MMORPG has led Destiny to become already, I think, one of the most engaging games ever. As I said, the active Destiny players are still playing for about 3 hours a day, which is just remarkable amounts of engagement from a large and passionate player base. So this points to exactly the kind of model that I spoke about for all of our games: great content, leading to large audiences, leading to our ability to monetize those communities by providing more great content. So the answer is we have a very robust content plan for Destiny starting with our second major expansion pack, House of Wolves, which has already been announced. And then you'll also see content engaging -- content being dropped throughout the summer. And then in the fall, we will have a major release, which will be the biggest addition to the Destiny universe yet across all modes of play. Unfortunately, I don't have more details than that today, but we're confident it's going to be incredibly appealing, not just to our current fans but also to people who haven't yet joined the Destiny universe. It's going to be that big of an expansion.

And we'll go next to Brian Pitz with Jefferies.

A quick question on digital. What was your mix of digital business in the quarter? And can you provide any commentary on how this is trending?

Brian, it's Dennis here. Just regards to digital mix, it's obviously the highest we've ever had on a quarterly percentage. It was at 76% for the quarter. When you look back a couple years ago, our digital mix was in the mid-30s and then for the full year 2013 -- in full year 2014, it got into the mid-40s. Obviously, we're out of the blocks really strong in the beginning of this year. It's really driven by the full game download on the console, which is obviously transitioning over time. We're now seeing it in the high teens in terms of percentage mix of revenue. And then across the business and really across all of our franchise is the add-on digital content and services that we're seeing to drive ongoing player engagement that all of the guys have talked about today. So all of this is really driving that mix up, and we'll see that continue to grow north of 50% across this year and will be a nice tailwind for the business in the coming years.

And we'll take our final question today from Michael Olson at Piper Jaffray.

This is Yung Kim in for Mike. Activision has made a significant push into eSports between Call of Duty, World of Warcraft, [indiscernible] and Heroes of the Dorm. How should we think about the opportunities there? Is it more marketing? Or is it directly monetizable?

That's a great question. This is Bobby. For starters, what we've always found is eSports has been a great way for us to celebrate our players, and that's really been the principal focus of the company's initiatives. There may be commercial opportunities in the future. In fact, we expect there will be more commercial opportunities in the future. But right now, you have so many players around the world who dedicate so much of their time and their energy and their passion playing our games that we never really want to take that for granted, and this is the way to celebrate them. You've seen a lot of value created so far with star players, and we have players who are earning over $1 million a year between endorsements and winnings. Then you've seen opportunities for shoutcasters at professional events who are also earning meaningful revenues, and then for our players themselves who are narrating their own game play and are now starting to develop millions of fans. And then we have gamers who are competing in prize events like Blizzard's Heroes of the Dorm that we just hosted last weekend. We gave away college scholarships to Berkeley, the winning team. And we recently also had the Call of Duty Championships where we paid out $1 million in prize money. So if you look at the numbers of spectators that are now watching game play, you're probably looking at, just for our content alone last year, somewhere around 1 billion hours of spectating of linear play. And so from a lot of perspectives, it's something that when we look out into the future, we are incredibly excited about both as way to really recognize our players' investment and commitment, but also from a commercial perspective.

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