Activision Blizzard Q1 2015 Conference Call Transcript

During the Activision Blizzard Q1 2015 financial report conference call, it was announced that World of Warcraft subscriptions are down to 7.1 million.

  • Activision Publishing’s Destiny and Blizzard Entertainment’s Hearthstone®: Heroes of Warcraft™ combined now have more than 50 million registered players and nearly $1 billion in non‐GAAP revenues life‐to‐date.

  • Blizzard Entertainment had the largest Q1 online player community in its history, up a double digit percentage year over year despite no major launches in the quarter. As expected and consistent with our experience following prior expansions, we saw a decline in the World of Warcraft subscriber number. Subscribers ended the quarter at 7.1 million. World of Warcraft’s revenue performance at constant FX has been more stable, driven by continued strong uptake on value added services, and price increases in select regions, which partially offset subscriber declines, particularly in the East. World of Warcraft remains the No. 1 subscription‐based MMORPG in the world.

  • Blizzard Entertainment’s Heroes of the Storm™, which has had over 11 million beta sign‐ups, entered closed beta in January. The Founder’s Pack, released in the quarter for $39.99, granted immediate access to the beta, along with a selection of heroes, skins and more.

  • Blizzard Entertainment’s Hearthstone: Heroes of Warcraft had steady engagement and revenues quarter over quarter, despite no new content releases this quarter. This was driven by sustained pickup of the Goblins vs Gnomes™ expansion content, which was released in the previous quarter.

  • On March 31, 2015, Blizzard Entertainment kicked off closed beta testing for StarCraft® II: Legacy of the Void™, the third installment of the company’s real‐time strategy sequel. Legacy of the Void will be a standalone product that doesn’t require any prior releases, so it will be easier than ever for players to get into the game and experience all of the latest content.

  • On April 2, 2015, Blizzard Entertainment released Blackrock Mountain, the second Hearthstone: Heroes of Warcraft Adventure. Additionally, on April 14, the game was released on iOS® and Android™ mobile phones. The smartphone release helped propel the franchise to over 30 million registered players and the #1 download spot for mobile games in more than 25 countries.

  • On April 7, 2015, Blizzard Entertainment launched the WoW Token System, which enables World of Warcraft players to exchange game‐time Tokens, purchased at $20, to other players for in‐game gold. This serves the dual purpose of enabling players to pay for their subscriptions with their gold and providing players with a secure method for purchasing gold in‐game.

  • On April 23, 2015, Blizzard Entertainment and NetEase, Inc. announced that Sanctuary’s gates have been thrown open to all Chinese heroes, as open beta testing for Blizzard Entertainmentʹs award‐winning action role‐playing game Diablo® III: Reaper of Souls™ has gone live in China. Approximately 3 million people signed up to play the beta in China, and the game has already sold 1 million units across two offerings: the Premium Package for approximately $32 (RMB198) and the Digital Deluxe Package for approximately $64 (RMB388).
  • On June 2, 2015, Blizzard Entertainment expects to launch Heroes of the Storm after an open beta testing period commencing May 19. The release follows on the heels of the epic finale of the Heroes of the Dorm™ collegiate eSports tournament, which was aired live during primetime on April 26 on ESPN2, the network’s first‐ever live telecast of a collegiate eSports event. Students from more than 460 schools across the U.S. and Canada competed for hundreds of thousands of dollars in tuition and other prizes.

  • Blizzard Entertainment expects to begin beta testing for Overwatch™ in fall 2015.

  • Blizzard Entertainment announced that its ninth BlizzCon® will be returning to the Anaheim Convention Center on Friday, November 6 and Saturday, November 7. Tickets went on sale in two batches in April and quickly sold out.

This is a partial transcript of the conference focusing on the Blizzard Entertainment portion. Some of the speakers in this portion are: Dennis M. Durkin (Chief Financial Officer), Mike Morhaime (Blizzard CEO), Bob Kotick (Activision Blizzard CEO), and Thomas Tippl (Chief Operating Officer).

Activision Blizzard Q1 2015 Conference Call Transcript

Activision Blizzard Q1 2015 Conference Call Transcript

Durkin: Blizzard Entertainment had steady and strong performance on Hearthstone with ongoing engagement on the Q4 expansion Goblins vs Gnomes. As mentioned during our February earnings call and consistent with our experience following prior expansions, we saw a decline in World of Warcraft subscribers. Subscribers ended the quarter at 7.1 million.

World of Warcraft’s revenue performance at constant FX has been more stable driven by continued strong uptake on value-added services and price increases in select regions, which partially offset the subscriber declines particularly in the east. Moreover, Blizzard has successfully expanded their portfolio over the recent past and continues to do so.

Growth from franchises like Hearthstone and Diablo have boosted Blizzard’s top line and have pushed Blizzard’s non-World of Warcraft revenue stream from 30% of total revenue in 2013 to 40% of total revenue in 2014, even while the World of Warcraft revenues also increased in that period; and new franchises like Hearthstone and Heroes of the Storm are expected to further expand non-World of Warcraft revenue to more than 50% share of the Blizzard business in 2015.

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So strong recurring franchise diversification is in process inside the Blizzard portfolio, which sets us up for a bright 2016 and beyond.

Blizzard Entertainment’s Q2 slate is a robust offering across the portfolio including Hearthstone’s new adventure, Blackrock Mountain, Hearthstone’s important iOS and Android smartphone releases, Diablo III’s launch in China, StarCraft: Legacy of the Void’s closed beta, and Heroes of the Storm’s launch in June.

In Q2 we also expect to begin the ramp in sales and marketing spending for our major releases in the back half of the year.

Our expected Q3 and Q4 slate from Activision Publishing is one of the strongest we’ve ever had. Blizzard Entertainment will bring additional content and live service updates to World of Warcraft, Hearthstone and Heroes of the Storm, as well as bring Overwatch into closed beta.

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Morhaime: 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 is 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 one month’s game time, or a set amount of play time in China.

This provides two 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 is too early to see the long-term impact, but many players welcome the service and have been using it actively.

This was also a big quarter for Heroes of the Storm, our highly anticipated online team brawler. More than 11 million people have signed up for the closed beta test, which went live in January.

We’re seeing a lot of anticipation in the gaming community and we’re continuing to collect great feedback from our beta testers as we drive toward the launch on June 2.

To showcase the action and depth that the game offers, we recently sponsored a collegiate eSports tournament, which we dubbed Heroes of the Dorm. Thousands of players formed teams at over 460 schools across the U.S. and Canada. And similar to March Madness, we created a 64-team bracket after a few qualifying rounds. Those teams then battled their way to the finals, which were televised live by ESPN.

This was the network’s first ever live telecast of a collegiate eSports event. The competition was intense throughout the tournament and we saw the formation of many potential Heroes of the Storm college rivalries.

I’d like to congratulate the Cal Berkeley Golden Bears on their championship victory. We also saw widespread positive commentary across a range of online communities about the event. This is a testament to the fact that Heroes of the Storm is not only fun to play, it is fun to watch. We think it has great potential as a spectator sport.

Q1 was also an important quarter for Hearthstone. Despite no new content releases, engagement and revenues were steady quarter-over-quarter and in fact have remained relatively stable since launch. The performance for the quarter was driven by a sustained pick-up of Goblins vs Gnomes. Players have really enjoyed the mechanics of the new cards, and we’ve seen some incredibly creative deck strategies.

During the last two weeks of March, we held presales for our second adventure, Blackrock Mountain. We were pleased to see that enthusiasm for the new content was even stronger than it was with Curse of Naxxramas last August, with 40% more sales in the same timeframe. That enthusiasm continued with the launch of Blackrock Mountain in April which was followed by the iPhone and Android phone versions of Hearthstone a few weeks later.

The mobile phone versions pushed Hearthstone to the number one spot for game downloads in over 25 countries across North America, Europe and Asia, and quickly drove the game to a new milestone of more than 30 million players. Hearthstone continues to be very popular with players worldwide and we are already hard at work on our next release for the game.

We also recently started beta testing the Chinese version of Diablo III together with NetEase in March. There has been a lot of anticipation for the game in China with about 3 million players signing up for the closed beta test.

Two weeks ago we launched the open beta test, opening up the game to everyone else in China. Chinese players are able to access the base experience for free and can buy much of the content from Reaper of Souls via an add-on, which is already available for purchase across two offerings priced at $32 and $64.

In fact, we just announced with NetEase that Diablo III has already achieved over 1 million unit sales in China, which is a fantastic reception from the community. We look forward to building on that momentum as we drive towards the commercial launch.

Lastly, at the end of the quarter we kicked off the closed beta test for Legacy of the Void, the final chapter of StarCraft II. We know the StarCraft community is eager to play through the conclusion of the story and we’ve already seen great positive feedback about the game’s new multi-player features.

Archon Mode, which allows two players to team up and share control of an army has gotten a very enthusiastic response. We are excited about this feature in particular because it greatly increases accessibility for the game.

As I mentioned previously, Legacy of the Void will be a stand-alone expansion that doesn’t require either of the first two releases. So, it will be easier than ever for players to get into the game and experience all of the latest content.

On the eSports side, Season 1 of the StarCraft II World Championship Series came to an exciting conclusion with our finals event in France at the beginning of April. Season 2 is now underway and the finals are set to take place at the Metro Convention Center in Toronto at the end of June.

It is a thrill to see the top StarCraft II players in the world compete for a spot in the global finals, so I hope you will tune in online if you can’t make it in person.

To recap, we had a great start to the year. With more games in more genres and on more platforms than ever before, it doesn’t look like things will be slowing down any time soon. We announced that BlizzCon 2015 will take place at the Anaheim Convention Center on November 6 and November 7, and tickets for the event sold out quickly once again. We are going to have a lot to talk about at the show as well as in the months ahead.

Tippl: The two IPs we launched last year, Destiny and Hearthstone, combined now have over 50 million registered players and nearly $1 billion in non-GAAP revenues to life to date.

We have two new free-to-play franchises if 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.

Finally, we are positioned for growth in new geographies and in particular in the large and fast-growing China market. We now have six franchises in the market in China, World of Warcraft, StarCraft, Hearthstone, Heroes of the Storm, Diablo, and Call of Duty Online, up from two at the beginning of last year.

Q&A Session

Handler: With regards to Hearthstone, I think you touched on this briefly, but with the addition of the smartphone SKUs, how is that increased player engagement as well as impacted on monetization? And then I wonder if you have a data about how many players are actually playing on multiple devices?

Morhaime: The response to the phone version has really been very positive globally. We have seen an increase in new players. As I said, it has 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 are 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 of which platform they are playing on.

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

Morhaime: we are really excited that the launch is just a few weeks away occurring on June 2nd. 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 have gotten from our recent Heroes of the Dorm tournament, I think it is easier to watch as well. The feedback that we have been getting from the closed beta tests has been very positive. There is a lot of great buzz around the game.

We have had, like I said, over 11 million people signing up for the beta test, so there is a lot of anticipation there. As you know, it is a very popular genre. I think the fact that this is a digital game with long-term content, opportunities we are 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.

Yung Kim: Activision has made a significant push into eSports between Call of Duty, World of Warcraft, Hearthstone, and Heroes of the Dorm. How should we think about the opportunity there? Is it more marketing or is it directly monetizable?

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Kotick: For starters, what we’ve always found eSports has been a great way for us to celebrate our players, and that is 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 a way to celebrate them.

You have seen a lot of value created so far with star players. We have players who are earning over $1 million a year between endorsements and winnings. Then you have 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 dollars in prize money.

So if you look at the numbers of spectators that are now watching gameplay, you are 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 is something that when we look out into the future, we are incredibly excited about, both as a way to really recognize our player’s investment and commitment but also from a commercial perspective.

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Tomas Hernandez is owner of Blizzplanet.com since 2003. I post news about World of Warcraft, StarCraft II, Diablo III, Hearthstone, Overwatch, Heroes of the Storm, Blizzard Careers, and the Warcraft film.

Blizzplanet is a leading fansite covering news about upcoming Blizzard Entertainment licensed products. I also post previews and reviews. I have interviewed book writers and Blizzard game developers.

I was previously an employee of the OGaming Network (2003), and IncGamers (2008-2010). I was a guest newsposter for GosuGamers (World of Warcraft) a few years ago and for Diablofans.com (formerly Diablo3.com)

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