Electronic Arts Inc. (0IFX.L) Q1 2010 Earnings Call Transcript
Published at 2009-08-04 17:00:00
Tricia Gugler - Vice President, Investor Relations John S. Riccitiello - Chief Executive Officer, Director Eric F. Brown - Chief Financial Officer, Executive Vice President Peter R. Moore - President, EA Sports Label
Mark Wienkes - Goldman Sachs Brian Pitz - UBS Analyst for Justin Post - Merrill Lynch Arvind Bhatia - Stern Agee Leach Daniel Ernst - Hudson Square Research Edward Williams - BMO Capital Markets Heath Terry - Friedman Billings Ramsay Atul Bagga - ThinkEquity Jeetil Patel - Deutsche Bank Ralph Schackart - William Blair Eric Handler - MKM Partners John Taylor - Arcadia Mike Hickey - Janco Partners Colin Sebastian - Lazard Capital Anthony Gikas - Piper Jaffray Benjamin Schachter - Broadpoint Capital Sean MacGowan - Needham & Company Brian Blair - Wedge Partners
Good day, everyone and welcome to the Electronic Arts first quarter fiscal year 2010 earnings conference call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the call over to Ms. Tricia Gugler, Vice President of Investor Relations. Please go ahead.
Welcome to our first quarter fiscal 2010 earnings call. Today on the call we have John Riccitiello, our Chief Executive Officer; Eric Brown, our Chief Financial Officer; and joining us from the UK is Peter Moore, President of our EA SPORTS Label. Before we begin, I’d like to remind you that you may find copies of our SEC filings, our earnings release and a replay of this webcast on our web site at investor.ea.com. Shortly after the call we will post a copy of our prepared remarks on our website. Throughout this call we will present both GAAP and non-GAAP financial measures. Our earnings release provides a reconciliation of our GAAP to non-GAAP measures. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results and we encourage investors to consider all measures before making an investment decision. All comparisons made in the course of this call are against the same period for the prior year, unless otherwise stated. Please see the supplemental information on our website for our trailing twelve month segment shares, additional GAAP to non-GAAP reconciliations, a summary of our fiscal 10 financial guidance and our Q210 slate. During the course of this call, we may make forward-looking statements regarding future events and the future financial performance of the company. We caution you that actual events and results may differ materially. We refer you to our most recent Form 10-K for a discussion of risk factors that could cause our actual results to differ materially from those discussed today. We make these statements as of August 4, 2009 and disclaim any duty to update them. Now I would like to turn the call over to John. John S. Riccitiello: Thanks, Tricia. Earlier today, we announced our Q1 FY10 results. We slightly exceeded our expectations on the top and bottom line. Our results were driven by improved execution against our four priorities. First, drive hits -- we are particularly pleased with the quality ratings of our games. Similarly, our plans for providing better marketing and longer lead times for our titles are paying dividends. The marketing campaigns behind The Sims 3 and EA SPORTS Active were particularly well planned and executed. Second, the Wii -- we are seeing success in our campaign to improve segment share on the popular Wii platform. We had a number of good launches, most notably EA SPORTS Active, which Peter will discuss shortly. Year-to-date we are the number one third party publisher on the Wii. Third, manage costs -- our restructuring is essentially complete. Eric will discuss this in more detail. And fourth, digital services -- we’re making significant steps forward in our digital initiatives; during the quarter, non-GAAP revenue was up 38% year-over-year. Overall Q1 was a good quarter and I’m pleased with our execution. Let me discuss a few points on the balance of the year. First, our outlook on the industry and retail environment -- this year through June, packaged goods software sales are down 12% in North America and we estimate minus 10% in Europe. Even though we expected tough compares in the June quarter, software sales were softer than expected due in part to fewer hardware sales. In addition, we saw significant declines in the music category, which was down 52%, with Rock Band having a particularly tough compare. As a result, for the calendar year, we now expect packaged goods software to be flat year-over-year in North America and Europe combined. We expect the packaged goods sector to grow in the back half of the year. This growth will be fueled by great titles, hardware catalysts and easier compares. It’s worth noting that the industry overall, inclusive of digital services, is up year-to-date and is expected to be up for the full year. With that context, let me talk about the remainder of our year, the positives as well as the challenges we see today. On the positives, we had a good Q1 driven by strong execution. Titles like The Sims 3 and EA SPORTS Active should continue to do well throughout the year. Our title plan is holding together, and we aren’t aware of any significant potential slips. Looking into the development organizations, we see continued strength, the teams are hitting their milestones. Our quality is tracking well. Calendar year to date we have nine 80-plus rated titles and our major titles are tracking well against our quality assessment metrics. Our marketing execution has improved, we have been effectively using our long-lead metrics to manage and monitor our pre-launch progress with the consumer and have implemented longer lead time marketing around key titles. We’ve planned our launch windows better this year. As you know, we moved The Sims 3 into Q1 to give it the best chance of success and we have reduced title count in Q3, adding to Q4, to provide select key franchises better windows. In Q4, we have four major titles launching versus just one a year ago. We also pulled forward Need for Speed to late September, giving it additional time on the shelf and a cleaner window. And finally, given some recent competitor title shifts, we believe the back half of the year is less competitive than originally expected, creating opportunity for EA. On the challenges, the industry is weaker than we originally expected and we remain cautious on the macro environment and its impact on consumers. Retail continues to be cautious on opening orders and inventory. Lastly, the marketing metrics for a few of our titles are not as strong as we would like to see at this point. In order to improve this trajectory, we’ve decided to allocate some additional marketing dollars to these titles to better position them. We are making cost cuts in other parts of the business to fund these initiatives. In summary, we are pleased with our Q1 results and the way our title slate is coming together. We remain cautious due to weaker industry packaged goods sales year to date, retailer conservatism, and some marketing metric flags on a few of our titles. We feel good about our execution and our ability to adjust quickly to changing circumstances. Based on a balanced assessment of these factors, we are reconfirming our non-GAAP guidance today. Now, I would like to turn the call over to Eric. Eric F. Brown: Good afternoon. For Q1, we delivered non-GAAP revenue of $816 million, non-GAAP gross profit margin of 61.2% and non-GAAP diluted loss per share of $0.02. We came in slightly better than we expected on the top and bottom line, with costs and phasing driving most of the upside. Our Q1 non-GAAP revenue was driven by The Sims 3, EA SPORTS Active and Fight Night Round 4, also resulting in higher non-GAAP gross profit margins. This performance was offset by lower distribution revenue. We continue to manage expenses, both in absolute terms and timing, yielding a positive impact in Q1. On a GAAP basis, revenue was $644 million and GAAP diluted loss per share was $0.72. Key titles in the quarter were The Sims 3, selling 3.7 million copies, with 59% of sales internationally. We estimate the sell thru at retail of The Sims 3 is outpacing The Sims 2 by over 25%. EA SPORTS Active, our new fitness platform, sold over 1.8 million copies on the Wii. It was the number one third party title on the Wii for the quarter in both North America and Europe. Fight Night Round 4, the winner of the best sports game category at E3, sold over 1.7 million copies shipping in the last two weeks of the quarter. It is our highest rated title so far this year. In addition, Tiger Woods PGA TOUR 10, Godfather 2 and Harry Potter Half Blood Prince each sold over one million copies in the quarter. On segment share, we had 19% share in North America and we estimate 18% in Europe, up five and eight points year-over-year, respectively. Excluding distribution in North America, we picked up seven points of share year-over-year. On the Wii, we had record share of 21% in North America and 13% in Europe, up 10 and nine points, respectively, with our revenue more than doubling year-over-year. In our digital service businesses, we generated $124 million in non-GAAP revenue, up 38% year-over-year, driven by, digital content -- full game downloads and micro-transactions -- was $31 million in the quarter, up more than 2x from last year primarily due to our FIFA Ultimate Team service offering. Subscription revenue was $36 million, up 33% year-over-year due to Warhammer Online. Wireless revenue was $50 million, up 14% from a year ago primarily due to revenue generated on the iPhone. During the quarter we launched 12 games for this platform, including The Sims 3 which quickly became the number one paid game. EA Mobile continues to be the number one publisher of wireless games. We executed on our cost reduction plans and are largely done with our announced restructuring as of the end of Q1. Approximately 92% of the headcount reductions were completed and we ended the quarter with 8,948 employees, versus 9,106 last quarter. In addition, 20% of our employees are located in low cost locations. I would now like to discuss Q1 in more detail. Please note that all of the following references to first quarter results are non-GAAP, unless otherwise stated. Non-GAAP revenue was $816 million, up 34% from a year ago. At constant currency rates, revenue increased 45%. Frontline non-GAAP revenue was $480 million, up 158% year-over-year, driven by a broader slate and more revenue generated per title. This increase was partially offset by declines in distribution. During the quarter, catalog non-GAAP revenue was 18% of total non-GAAP revenue versus 28% a year ago. Moving to the rest of the income statement -- non-GAAP gross profit margin was 61.2% versus 52.1% a year ago, up nine points year-over-year. The increase is attributable to a higher mix of revenue from owned IP and less overall distribution revenue. Operating expenses -- non-GAAP operating expenses were $510 million, down $9 million year-over-year as a result of our lower bonus expense and our cost reduction program, partially offset by higher variable marketing for key releases during the quarter and EA Partner R&D advances. As expected, during the quarter, we recorded no bonus expense for FY10 performance versus approximately $24 million a year ago. Excluding costs like variable marketing that tie to title launches and the timing of bonus and advances for EAP titles, our expenses are down approximately 10% year-over-year on a like-to-like basis. During the quarter we recorded $14 million of total restructuring expense. Below the operating income line, non-GAAP other income and expense was $3 million as compared with $15 million a year ago, due to a decline in interest income as a result of lower interest rates. On income taxes, on a GAAP basis, we recorded a tax benefit of $24 million, primarily due to the release of certain tax reserves in connection with an audit settlement. We have not recorded any net benefits for U.S. deferred tax benefits due to the valuation allowance. On a non-GAAP basis, we reported taxes at 28%. GAAP diluted loss per share was $0.72 versus a diluted loss per share of $0.30 a year ago. Non-GAAP diluted loss per share was $0.02 versus a diluted loss per share of $0.42 a year ago. Our trailing twelve month cash flow used in operations was $25 million versus cash generated of $239 million for the prior period. Turning to the balance sheet -- cash and short term investments were approximately $1.8 billion at quarter end, down approximately $300 million from last quarter primarily due to cash used in operations. Marketable equity securities were $440 million, up $75 million from last quarter. During the quarter, we recognized a pre-tax loss of $16 million in the P&L related to our investment in The9. At quarter end, we had a net unrealized gain of $282 million on our Ubisoft and Neowiz investments. Gross accounts receivable were $565 million, up $110 million from last year, or 24%. Reserves against outstanding receivables totaled $190 million, up $4 million from a year ago. Reserve levels were 13% of trailing six month non-GAAP revenue, up one point from last year. As a percentage of trailing nine month non-GAAP revenue, reserves were 6%, consistent with last year. Inventory was $215 million, down $8 million from a year ago. Ending deferred net revenue from packaged goods and digital content was $433 million, up $241 million from a year ago due to the additional deferral for all console and PC on-line enabled games. Now for our FY10 guidance -- we are re-confirming our non-GAAP guidance for revenue and EPS. Revenue -- on a GAAP basis we expect revenue of $3.7 billion to $3.85 billion, consistent with our prior guidance. On a non-GAAP basis, we are re-confirming $4.3 billion of revenue, up 5% year-over-year. From a revenue mix standpoint, we’re continuing to plan our frontline and digital services revenue to be up year-over-year and our catalog and distribution revenue to be down year-over-year. In FY10, we expect to ship FIFA 10 in Europe and Need for Speed SHIFT at the end of Q2 versus Q3 in the prior year. Gross margins -- we expect GAAP gross profit margins of approximately 51% to 53% and non-GAAP gross profit margins of approximately 58% to 59%. We expect our non-GAAP gross profit margins to expand 9 to 10 percentage points year-over-year due to a higher mix of revenue from wholly owned IP, a lower mix of distribution revenue and lower SRA. Keep in mind our non-GAAP gross profit margins will fluctuate quarter to quarter depending on the mix of revenue. For Q2, we expect our non-GAAP gross profit margins to be down year-over-year, due to a higher percentage of our revenue coming from distribution, most notably The Beatles: Rock Band. In addition, we expect a lower percentage of our revenue to come from owned IP, due to the lack of a frontline PC title to comp the SPORE launch in the prior year period. In the second half of the year we expect non-GAAP gross profit margins to expand by at least 10 percentage points year-over-year due to a higher mix of owned IP and a comparison to a period when SRA was particularly high. Operating expenses -- we expect GAAP operating expenses to be approximately $2.4 billion and non-GAAP operating expenses of approximately $2.1 billion. Below the line, we expect GAAP loss per share of $0.85 to $1.35, adjusted from our previous estimate of $0.85 to $1.45. We are reconfirming our non-GAAP EPS guidance of $1.00. We expect that non-GAAP other income and expense will be roughly $15 million, down from what we estimated last quarter as a result of declines in interest rates. On taxes, we expect our GAAP tax rate to continue to be volatile but on an absolute dollar basis, and subject to changes in the business or the tax laws, we expect a tax benefit of approximately $25 million. Keep in mind, we continue to expect GAAP losses in FY10, creating additional valuation allowances on U.S. deferred tax assets. On a non-GAAP basis, we expect to report taxes at 28%. For share count, please use 323 million shares to compute the GAAP loss per share and 325 million shares to compute non-GAAP EPS. Foreign exchange -- as compared to our original guidance assumptions for FX, rates have fluctuated modestly, but not enough to cause us to change our overall guidance. This concludes our guidance and outlook commentary. With that, I’ll turn the call over to Peter. Peter R. Moore: Thanks, Eric. Good afternoon, everyone. I’m happy to join you from the U.K. to talk about our progress at the EA Sports Label. We’re pleased with our performance in Q1, in particular, EA SPORTS Active and Fight Night Round 4. Congrats to our teams in Vancouver who developed both of these titles. Today, I would like to discuss our focus on the Wii platform, titles coming soon on core platforms, and some groundbreaking digital services initiatives. Let me start with the Wii. We have successfully launched a brand new IP for this platform, EA SPORTS Active. We are thrilled with the consumer response to this new interactive fitness product. EA SPORTS Active is EA’s best-selling Wii title ever and it continues to perform well week-after-week. EA SPORTS Active has captured a whole new segment of consumers, expanding our SPORTS brand beyond our traditional audience. We’ve done this with an unconventional marketing campaign, Active has been featured on the Ellen Show, on QVC and in other media outlets popular to this consumer. In addition, we expanded our distribution beyond our traditional retail outlets, including Dick’s Sporting Goods, Costco, and Sam’s Club. Given the success of EA SPORTS Active, we’ve decided to launch an expansion pack this holiday. We are using development resources from our tennis team on our EA SPORTS Active franchise. As a result, we are delaying the 360 and PS3 Tennis SKUs. We believe this is a good swap and expect this decision to yield positive results. Also in the quarter, we launched Tiger Woods PGA TOUR and EA SPORTS Grand Slam Tennis bundled with the Wii Motion Plus, both doing well on the Wii charts. Tiger charted at number three and Tennis at number 11 in North America. In Europe, Tennis was number four and Tiger will be picked up in the July data. Later this quarter, we have Madden and FIFA on the Wii. Both titles are designed specifically for the Wii platform, and this is our best effort yet to deliver a unique experience with exclusive controls, modes, presentation and packaging. Now on to games for the core platforms. We came out of the gate strong with Fight Night Round 4, which launched in late June with an 89 Metacritic rating, putting it at the top of the quality charts, thanks to the new fighting engine and jaw-dropping graphics. NCAA Football 10 launched in mid-July and is again a strong product, with a Metacritic rating of 83. Our first two weeks of sell thru is weaker than expected. However, as you all know it’s still early, college football season has not started yet, and we will continue to monitor the situation. We think our web-based innovation, Team Builder, will drive more engagement in our NCAA title as we approach the start of college football season. On NBA Live, last week I was in Vancouver and got my hands on the latest build of the game. The team knew they had to step up the quality, and boy have they delivered. And most importantly, we have our two cornerstone products, FIFA and Madden. FIFA streets on October 2 in Europe, which is in our fiscal Q2, and on October 20 in North America. FIFA 10 will feature more realistic shooting, passing and control mechanics, as well as improved goalkeeper intelligence. A new 360 degree dribbling system gives players finer touch on the ball, enabling them to find more space between defenders. FIFA 09 earned 25 international gaming awards, and the talented team at EAC is making all the right moves to build upon that and even further enhance the most complete and intelligent soccer simulation game. Madden NFL 10 will launch on August 14. This year, you will have unprecedented control over the outcome of every play, fighting for fumbles, steering gang-tackles, and driving receivers for first downs with the new Pro-Tak animation technology. Also new this year is a groundbreaking digital service feature, Madden Online Franchise, featuring real NFL scheduling, live drafts, player transactions and real-time NFL stats, all manageable via the console, a web browser, or even an Apple mobile app. Our commitment to core gameplay, online innovation and authentic broadcast presentation make us very confident that Madden will significantly raise the quality bar as we enter the 21st year of this franchise. Now shifting gears to digital services, we’re working on some exciting initiatives, building on the successes we enjoyed last year. In March, we launched FIFA Ultimate Team, which has been a big success, generating $12 million from consumers. For those that don’t know, it allows you to create your own virtual teams, trade players and compete head to head. This is a feature that is applicable to other games in our portfolio. Earlier this year, we took the award-winning NHL game engine and developed NHL 3-on-3 Arcade, it was simple to pick up and play and launch as a fully downloadable game to the console months after NHL 09 had launched. We’ll follow this approach with Madden Arcade later this year. In Q3 we are launching Tiger Online, taking a whole new approach to our PC sports offering. The game is browser based, and requires no installation, no disc and no additional peripherals and will be monetized by subscriptions and micro-transactions. We’ve got other franchises in development, more to come on this. In Asia, FIFA Online 2 continues to expand. Today, it is running in seven countries with over 10 million registered users. NBA Street is live in Korea and is in beta in China. All in all, I couldn’t be more pleased with how our teams are executing. We came out of the gate fast this year, and we’re seeing great momentum in our core games, the Wii and on our digital service initiatives. And I’m especially excited for next week’s launch of Madden. Now let me turn it back to John. John S. Riccitiello: Thanks, Peter. A few closing thoughts -- first, I’m very happy with how the EA team has stepped up execution. Second, we continue to believe this will be an extended hardware cycle and that we will continue to see robust growth in digital service businesses. Both trends are positive for publishers positioned to exploit them. Third, we have the right priorities: drive hits in the core, focus on the Wii, expand our digital services, and control costs. This will allow us to grow margins in FY10 and beyond. With that, we would be happy to take your questions.
(Operator Instructions) The first question comes from Mark Wienkes with Goldman Sachs. Mark Wienkes - Goldman Sachs: Thank you. I’m just wondering, have you seen the same slow down at retail for catalog titles as that have been cited by a couple of the other publishers? Is it fair to say that the tight inventory management at retail will continue through this holiday season? Are you seeing that already, I guess, and then how does that shape your strategy to sell more catalog in this holiday year? John S. Riccitiello: Well, a couple of thoughts -- first off, catalog came in pretty much spot on our expectations in Q1, so we’re not seeing a different or a more negative trend than we’ve seen previously. In terms of retailer sentiment in general, our experience so far in the last quarter has been that retailers are more cautious on opening orders and then quick to reorder, basically choosing not to take risks where they don’t have to. But the quick to reorder is a positive sign for titles -- for example, we have good experience with the Sims 3 and EA SPORTS ACTIVE in the last quarter. So its not really shaping a shift in our thinking, given that it’s performing almost exactly as we had anticipated so far this year. Mark Wienkes - Goldman Sachs: Thank you.
Your next question comes from Brian Pitz with UBS. Brian Pitz - UBS: Great, thanks. Can you talk about your views on console price cuts and how they particularly play into your guidance for the back half of the year? Thanks. John S. Riccitiello: Brian, we try not to comment too much on plans that others get to decide and implement. It’s our view that we’re at a pretty particularly interesting point in the cycle. We’ve got approximately 75 million consolidated installed base against the major platforms in western markets where the total installed base on last gen is about 125 -- in other words, we sold a lot more at high prices than we did in the last cycle. And we think pricing will move hardware and anticipate price cuts at some point and we’d like to see price cuts later in the year but we can’t really speculate beyond just thinking that it would be something that would be welcomed in the marketplace. In terms of our own guidance, we take knowledge that we glean under NDA and bake that into our guidance but we can’t disclose it on the call. Brian Pitz - UBS: Okay, great. Thanks.
Your next question comes from Justin Post with Merrill Lynch. Analyst for Justin Post - Merrill Lynch: This is Ryan Ji filling in for Justin Post. Looking out to your holiday quarter, you have four big new IP titles, mainly Brutal Legend and Dragon’s Age and Dante’s Inferno. I am sure the economics for each title are different but I am wondering if you can help us think about what type of unit sales you would need to really break even on each of those titles? And maybe if not a unit figure then how would those titles maybe track versus last year’s Mirror’s Edge and Dead Space? Thank you. John S. Riccitiello: A couple of thoughts for your -- first off, Dante’s was previously announced to be in our Q4, not Q3, so I just want to clarify that fact. The second thing is on lifetime units, both Dead Space and Mirror’s Edge are solid businesses for us. They just didn’t meet the expectations we had in fiscal ’09, sort of on the upside given their strong Metacritic review. And on the call when we were describing the Christmas quarter last year, we basically explained how there was a very difficult retail environment and how we had managed to put these right on top of some very strong competitive launches and we were less than pleased with our marketing execution. So we are addressing all of those issues with each of these titles this year, in particularly with Brutal and Dante’s, and I would -- actually Brutal and Dragon’s Age. With regard to Dragon’s Age, it’s a title coming from Bioware. It’s got a built-in audience given the strong reputation of Bioware and Brutal Legend is one of the most unique franchises I’ve seen in a very, very, very long time. So we are stepping up marketing, we’re going at it aggressive, I can't tell you what the break even units are for these because we don’t disclose that information and we will certainly be talking more about these titles on our next call because we are right in front of the launches. Analyst for Justin Post - Merrill Lynch: Great. Thank you.
Your next question comes from Arvind Bhatia at Stern Agee Leach. Arvind Bhatia - Stern Agee Leach: Thank you. I was wondering if you can talk about your longer term operating margin goal now that a lot of the cost cuts are behind you. Maybe some time in the next 12 to 24 months, where could you see the margins going? And my quick second question is somewhat related -- you said 20% of your employees are in low-cost countries. Is there a near-term or medium term goal that you might have on where that percentage might go? Eric F. Brown: I’ll take the first portion of that question. So we’re not in a position to give guidance beyond the current fiscal year in terms of our operating margins. We are focused on getting to the dollar for the full year and the 10% non-GAAP operating margin associated with that. Clearly we aim to do better than 10% over the long-term. In terms of the low cost employee composition, it’s at 20% as of the end of the quarter. We are looking to increase that a bit over time. We’re finding that for certain areas of our business, for example, mobile, lends itself well to having headcounts at lower cost locations, given the diversity of platforms, so that’s worked out extremely well for us in that business and it’s success we’d look to replicate further. John S. Riccitiello: The one insight I might add to Eric’s answer, we’re specifically not trying to provide guidance for F11 and beyond today. We’ll tell you that the management team is exceptionally strongly focused on margin expansion and on the opportunity to sort of grab our business ahead aggressively. We are already into F11 planning so that we can affect both the cost and revenue lines with sort of early decisive moves, so it’s something that we spent a lot of time on and we are ambitious. Arvind Bhatia - Stern Agee Leach: Thank you and good luck.
Your next question comes from Daniel Ernst with Hudson Square Research. Daniel Ernst - Hudson Square Research: Good evening. Thanks for taking my call. On the sports franchise, Peter, can you talk about the year-over-year performance on a comparable period basis for Tiger -- did you see growth in that franchise? And then while there’s not a lot of data, what are you seeing on NCAA so far and how do you think that impacts your view for Madden? Are you still expecting that to be still down year over year? Do you have any comments on the relationship between NCAA and Madden launching next month? Thanks. Peter R. Moore: On your first question, I think the real excitement right now around Tiger is obviously the Wii version with the Wii motion plus. We’ve seen tremendous growth year-on-year versions. As you know, and as I said in my prepared remarks, we have bundled it with the Wii motion plus here in the U.S. as well as in Europe and have had very strong sell-throughs in the early going here. And we expect with the Wii motion plus peripheral now selling very well for Nintendo themselves to be able to take advantage of that with Tiger. As regards to NCAA, we’re monitoring that and again, as I said in the prepared remarks, it’s still early days. One of the things that we are looking at is whether the real excitement, which is very strong now around Madden is actually in some way negatively impacting NCAA but I think the key here is that we are still two to three weeks away from the college football season starting. We’ve got King Builder, we’ve got now over 250,000 teams have been created. It’s a web-based application that allows you to create your own team and then import it into the game itself, as well as season showdown, which is allowing students from each of their colleges to use NCAA as a competitive tool against their competitive colleges. And so a lot still to come with NCAA and a tremendous amount of excitement with Madden, as much as I’ve seen here in the few years that I’ve been here. So fingers crossed on Madden. Great optimism that we can start seeing some improved numbers on NCAA and very proud of what’s going on with Tiger. Daniel Ernst - Hudson Square Research: Great, thanks for the answer.
Your next question comes from Edward Williams with BMO Capital Markets. Edward Williams - BMO Capital Markets: Good afternoon. A couple of quick questions on downloadable content -- how do you see it trending in the North American market at this point and how is that performance relative to what your thoughts were? And what’s sort of stumbling blocks do you see in getting that category to grow a little bit faster at this point, looking at the Asian market as a proxy? John S. Riccitiello: A couple of thoughts, and Eric may jump in here, because I can see he is looking at something but starting point, we’ve had a great success recently with Battlefield 1943 on the Xbox Live system. It’s generated greater sales than any title we’ve seen on the platform and I am hopeful that it will end up being one of the best-performing titles on Xbox Live in the history of the platform. So that feels really good on the downloads, $15 price point, a lot of content for your money. We’ve seen some really interesting aspects of our business develop inside of The Sims 3. It’s something I hadn’t expected to pick up in a strong way initially because there’s so much content that is shipped on disc with the game but we’ve seen approximately two-thirds of the users of the game register in order to be able to purchase additional content, and while initial purchases are still relatively modest, the fact that it’s already exceeded our relatively modest internal plans makes us feel good. I think a broader point would be this -- is that at this point in time, most consumers in the west that participate in how we describe it as direct-to-consumer content get it one of two ways, subscription off the PC and titles like Warhammer, World of Warcraft, in prior years, you know Ultima Online and others, had the lion’s share of that. And then mobile. So those are the two models the consumer is used to. And beyond that, there’s casual PC in the -- in our case of Pogo. Asia, it dominates the landscape. It is the way consumers buy products out there and we expect to see it take continued steady progress. A lot of people want to believe that micro transactions is going to be the lead business model in the west. I’m not so certain of that. We’re prepared, whether it turns out to be micro-transaction subscription or some combination. We are seeing good micro transaction results on Pogo but I do think there’s a difference between the way consumers buy and consume content in Asia versus they way they buy and consumer content in the U.S. And for reasons that would be too long to get into for this call, I am probably more bullish on subscription than some might otherwise be and just on balance, I think it would be a combination of all of the above. Eric F. Brown: The other point I would add is that if you look at downloads extra content for console and other titles, I mean, that portion of our business within digital, it basically tripled year-over-year this quarter, so the take rate has been good. We called out FIFA Ultimate Team, great innovation for the franchise. It’s a concept that we’re exploring for other franchises as well. And we’ve had a chance as we take a look at our SKU planning to make sure that we are building dev time plans for more digital content into everything that we do, so it takes some time to get that additional content built into the dev plan to roll it out but we are encouraged by some of our early success in this area. Edward Williams - BMO Capital Markets: Thank you.
Your next question comes from Heath Terry with Friedman Billings Ramsay. Heath Terry - Friedman Billings Ramsay: Great, thanks. With all the product delays that we’ve seen from your competitors, how would you gauge the environment this holiday season at retail versus what we’ve seen in previous years? And to what extent is that impacting your expectations for the individual titles that you are launching? John S. Riccitiello: We have seen a number of announcements about delays and we are very pleased that our slate seems to be holding together well. I am proud of our own development teams. Q3 looks a little less crowded than we originally anticipated, the holiday quarter, and Q4 looks a little bit more crowded than we initially anticipated. If anything, that’s on balance probably an opportunity for us but it’s very hard to measure or define. One point I would make in addition to that is when we wrote our FY10 plan, one of the learnings we had from FY09 is we bunched up too much into the Q3 quarter. Not only were some of our titles crowded out by competition, they were crowded out by other EA titles, and so we purposefully if you will created a four quarter plan. We have Need for Speed and FIFA, at least parts of them really because they ship in September, in Q2. A year ago when we had one major release in Q4, we had four major releases in Q4, and so we really, if you will, put together a plan that’s designed to take advantage of the fact that there are in fact 12 months of the year and we think we can actually do better with our key titles by spacing them out and we’ve done so on our plans. Heath Terry - Friedman Billings Ramsay: Great. Thank you.
Your next question comes from Atul Bagga with ThinkEquity. Atul Bagga - ThinkEquity: Thanks for taking my call. Can you talk a little bit about your online strategy? It seems like this is one area where you guys are putting a lot of weight behind. Can you talk about how big this opportunity could be for you guys? What is your current market share and internally, where do you target in terms of your market share, where you guys would be let’s say two or three years down the line? Thank you. John S. Riccitiello: Well, first off, a couple of thoughts -- in terms of online and we’d more broadly define it as direct to consumer, we have yet to put out to analysts or any other public audience our definition of what’s included. It’s a big definition though, including micro transaction games, subscription games, et cetera. And by our own internal measures, it’s high single digits or low double-digits market share. Depends on what we include or exclude but it’s a big and fast-growing industry, and we have high ambitions to be the clear leader in this space. One of the reasons that we brought John Chappert in, our Chief Operating Officer, is he has great credentials and operating skills that will be brought to bear to help focus our strategies and focus our execution against the broad opportunities that we see. Beyond that, I think that it would be premature to give you too much specifics around market share goals until I’ve defined the market for you, so we’ll place some added commentary on this in future calls. Eric F. Brown: The other point I would add is we set out at the beginning of the year the goal of growing our total digital services portfolio at about 25% or so year over year. We can report growth of 38% in the first quarter, so we seem to be trending well thus far in the fiscal year. John S. Riccitiello: Part of that’s timing. We’re not guiding to an upside there.
Your next question comes from Jeetil Patel with Deutsche Bank. Jeetil Patel - Deutsche Bank: Great, a couple of questions -- can you talk about first of all on the dollar and EPS guidance for the year, I guess what does your free cash flow target look like against that? And I guess what does the general quarterly trending look on cash flow by quarter, just directionally? And then second, can you break out what the affiliate revenues were on the quarter? And I guess which titles are you stepping up marketing on as we look at kind of thinking through the plan for the next several quarters? Eric F. Brown: I’ll take the first portion of that question. We didn’t provide specific cash flow guidance but what we are expecting in terms of full year GAAP operating cash flow is approximately $400 million for the full fiscal year. We are obviously cash flow negative here in the first quarter, given the strong front line is going to fluctuate. We’ll probably have a negative working capital impact in fiscal Q3 as we had historically with very strong cash collections in fiscal Q4. Regards to your question about affiliate titles, I’ll pass that to John. John S. Riccitiello: By affiliate, I assume you mean what we include under the heading of EAP -- you know, that business is relatively modest for us in Q1 -- no major releases. Big release in the coming quarter, or the current quarter, with The Beatles titles that we are putting out jointly with Harmonix and MTV, so we are expecting a lot there, big marketing. It’s funded by MTV Harmonix however, not us. So each quarter moves up and down depending on the specifics. A big title that we have slated for Q3 is Left for Dead, which is coming out in partnership with Valve, a title that we have high expectations for. One thought that I would bring back to you though is when we set up the guidance for fiscal year ’10 and we outlined our track, the $4.3 billion, we had specifically outlined how this business was going to be down approximately $400 million versus prior year and so as confident or as positive as I am about the specific releases here, we’re still expecting that outcome. So we are still -- we’re not adjusting our guidance on the strength of these titles, although they are very strong.
Your next question comes from Ralph Schackart with William Blair. Ralph Schackart - William Blair: Good afternoon. Can you talk a little bit more broadly on industry pricing trends, both for new and catalog titles and how you think that will play out for the holiday season? And then more specifically on the G.I. Joe pricing, sort of $50 across the platforms, is that what you were always planning on or is that in response to the competitive environment? Thanks. John S. Riccitiello: So in terms of pricing, I think you are going to hear from me pretty much what I think you heard from the folks at THQ recently, which is that great titles hold price well and it’s something that I think we’ve been saying on the last several calls. We’re not in a position to give you any sort of guidance as to our expectations on price in the future. There’s a lot of reasons why we can't get into that but primarily price is a subject between us and our retailers and not something that we are broadcasting beyond that more limited audience. In terms of G.I. Joe, the pricing that’s out there, the game was released yesterday, the pricing that we put it out on is exactly as we had it planned.
Your next question comes from Eric Handler with MKM Partners. Eric Handler - MKM Partners: Thanks for taking my questions. Just curious, are you still being able to bundle Tiger Woods Wii SKU with additional motion sensors? And can you also give, along those lines, give a breakdown of maybe what the percentage of Tiger Woods unit sales were by Wii and maybe some, you know, versus the other SKUs? Peter R. Moore: As to the first question, no, that was a one-time arrangement with Nintendo to bundle to help them get going. And of course, they have more recently bundled with Wii Sports Resort and now the Wii motion plus has -- it now is pretty much available for sale as a freestanding peripheral just about everywhere in the world now. I tend not to be able to break down off the top of my head the individual platforms. I can tell you that certainly as I previously said that the Wii version has done incredibly well, particularly on a year-on-year basis. But the next gen versions of PS3 and Xbox 360 are also holding up well and I will point as well to the fall when we go with Tiger on a brand new platform, which is Tiger Online, which I spoke of in the prepared remarks but we think allows us to be able to expand the Tiger franchise on yet another platform and of course, that’s the PC. Eric Handler - MKM Partners: Thank you.
Your next question comes from John Taylor with Arcadia. John Taylor - Arcadia: I’ve got two if I can -- one, you’ve had great success with EA Action, the active sports and with Tiger on Wii. On the other hand, it doesn’t seem like Potter has done that well and I just wonder if that observation is correct and -- or however you want to put it, but kind of what you are learning about the Wii customer based on the reception for those two things. And the second one is I wonder if you could compare and contrast sort of the presales for Need for Speed and Madden as of today versus about the same time last year. Thanks. John S. Riccitiello: Peter is in the U.K. so it will be a little hard to coordinate -- do you want to take the Tiger, Madden? Peter R. Moore: Yeah, I think the key we’ve learned is two things here -- first of all, certainly EA Sports Active franchise has been a great success for us and continues to sell well. What we’ve learned is there’s a consumer out there that’s very, very open to the concept of interactive fitness. Certainly Nintendo has done a great job obviously with Wii Fit and with our authentic sports credentials and having a very unique interface with the Wii with the leg strap, and of course having the quality of software we’ve been able to put out, very optimistic that we continue to see a very strong sales trend there but building it as always from the ground up, which we’ve talked about for the last few years has been key. Secondly with Tiger, the concept of authentic sports motion that’s been captured not only with Tiger but also with Tennis, when you are actually replicating the natural movement of the sport with the Wii motion control, that has been the key and I will let John talk about Harry Potter but certainly from our perspective, the three titles that we shipped that are really dominating the Wii charts right now of Active, Tennis, and Tiger all have the basics of being built from the ground up and in the case of Tiger and Tennis, have this authentic one-to-one natural sports motion, which we think we can continue to capitalize on going forward. John S. Riccitiello: So a couple of thoughts on Harry Potter -- first off, it’s a very good title. I finished it with my daughter on Saturday and pretty compelling software. In terms of its sales trends, we always anticipated the title doing well at the launch of the movie but probably more importantly, Harry Potter always enjoys a very important holiday period, so sort of mid-November to December is probably the most important buying season for it, so it’s a little bit early to call. We did release it before the movie so that which is reported and is publicly available data both in Europe and the U.S., you know, tend to show at pre the launch of movie and consequently, you get a little bit of less sell-through at that point in time and then it picked up strongly with the launch of the movie. In terms of Need for Speed, I think it’s misleading to talk about pre-sales, given that we’ve moved the title forward and so -- I don’t want to be in a pre-sale brag rights program but I would point out that we tracked a number of metrics, pre-sale is one of many, [inaudible] metrics, awareness, conversion to purchase, et cetera that we use to shape our marketing programs. And we are feeling very bullish about Need for Speed. The recognition the title got at E3 and in subsequent shows where people have come to play the game, get hands on with it, and see how much better it was than our prior entry, that’s been very positive. Peter, before we sign off on this question, you might want to touch briefly on Madden pre-sales. Peter R. Moore: Back to your question, in fact about an hour ago, I got the latest pre-sale numbers from Madden from the weekend and we are now marginally ahead year-on-year with about 10 days to go. You’ll recall this call last year the Q1 call last year we had an in-depth conversation about pre-sales and whether they were really a key indicator anymore of what the strength of the title was going to be out of the blocks but I can tell you that we are marginally ahead and obviously the buzz that we are now starting to feel for the title is starting to build. We are 10 days away. Interestingly, we are shipping on a Friday. We are capitalizing on a pre-season game on Thursday night between the Steelers and the Cards, which of course is a recap of the Super Bowl and will be a tremendous amount of marketing both at half-time and around the game on that and hopefully we will have a very strong launch at 12:01 a.m. on August 14th. But all the metrics are very, very positive right now for Madden.
Your next question comes from Mike Hickey with Janco Partners. Mike Hickey - Janco Partners: John and Peter, I was curious if you could update us on your thoughts on Microsoft’s Natal technology? And maybe your game development philosophy for this potentially new platform next year? And then Eric, I was hoping that maybe you could give us a little bit of insight into the sales mix for the quarter and I think John, you said no changes for the year but is there any sort of changes within the label mix? And then Eric, did you touch on Q2 sales, if you are comfortable with street consensus? If you could clarify that. John S. Riccitiello: I think that was more than one question but we’ll try to tackle it. First off, thanks for the comment on the quarter. On Natal, I think for this point in time, I would rather lump that up with what’s going on with Sony with their new motion-based controller. And the answer is we are really positive on both. Our view is that motion-based gaming is something that is both going to drive installed base, drive interest, and drive growth. So we are positive overall and yes we are planning to support both, and we haven’t yet announced our plans to do so but we shall do so at the right time frame for that, which is likely to be early to mid 2010, so you are sort of jumping the gun on that. Eric, do you want to pick up the next piece? Eric F. Brown: Sure. In regard to the Q2 comments about mix, as you’ll recall, when we gave the initial guidance for this year, we said $200 million net increase in revenue, plus 6 in the labels, ex any distribution and minus 400 on distribution so that overall math still holds today with the distribution of the 600 being still roughly 200 in games, 300 in play and 100 in sports. So no significant change there as far as that goes. Other things to keep in mind for Q2, we called this out on the opening remarks, is that the gross profit margin for Q2, we’re expecting on a non-GAAP basis to be down a bit versus Q2 last year. We have a strong -- our strongest distribution title launch, Rock Band Beatles in the quarter. And we are also comping against Q2 last year where we had the Spore PC launch and that’s a 90%-plus gross profit margin product. We don’t have that same type of product recurring, so I look at the assumptions out there and I think it’s important that the gross profit margin be revisited very, very carefully in light of what we believe. Mike Hickey - Janco Partners: Thank you.
Your next question comes from Colin Sebastian with Lazard Capital. Colin Sebastian - Lazard Capital: Thanks for taking my question. Peter, I think this would be for you -- you mentioned quite a few digital products and services coming down the line and I’m wondering if you also foresee full console game downloads as part of those initiatives. Peter R. Moore: Not right now -- I mean, we certainly have a tremendous slate on different services and offerings, particularly in sports. I mean, we are starting looking obviously as you know subscription models, micro transactions, ultimate team modes, all of these things have helped us in the last quarter and the last previous fiscal year even. We look going forward at downloads of games along the lines of arcade style games. You’ll recall last year we did NHL 3-versus-3 and we are going to have a version of Madden available this year as well for a download but certainly not a full game. Obviously this is a decision that is primarily gated by the platform holders but we’re not building that into our plans for this fiscal year at least, anyway. Colin Sebastian - Lazard Capital: Okay, thanks, Peter.
Your next question comes from Anthony Gikas with Piper Jaffray. Anthony Gikas - Piper Jaffray: Could you describe the need for and the specific incremental marketing efforts for some products that you mentioned earlier in the call, and maybe the timing of those efforts? And then second question, if you don’t mind, last year hardware sales were about $35 million units here in the U.S. Was that the peak year? And I’m sorry if I missed it on the call but did you give your hardware estimate for 2009? John S. Riccitiello: We’ve stopped providing specific guidance on hardware in terms of numbers by platform and overall, so I think I would continue to shy away from that. I think that the determination of whether it’s a peak year or not is going to depend entirely on pricing this year. Sharp pricing action could yield upside -- a lack of it, we probably won't lap last year in a positive way. I think good knowledge of that is baked into our forecast. Coming to your question on marketing, we’ve identified an opportunity for us to invest a little bit more on marketing in both Q3 and Q4 and have allocated the dollars to do so. And we have found offsetting savings in other parts of the business, the majority of that being in R&D. Anthony Gikas - Piper Jaffray: Okay. Thanks, guys. Good luck.
Your next question comes from Benjamin Schachter from Broadpoint Amtech. Benjamin Schachter - Broadpoint Capital: John, in the past you’ve talked about the EA Games label leading to have a good number of sequel-able multi-million unit selling franchises. I was wondering, do you still feel that that’s a core focus area for you and do you have those this year? And then separately, do you see any meaningful change in the importance of online retailers, not digital distribution but just online retailers selling packaged products? Thanks. John S. Riccitiello: Yes, I continue to believe that our games label having multi-million unit sequel-able franchises is critical for us. And I believe when I mentioned that the first time, I highlighted titles like Need for Speed being one of those, which is why we invested so heavily to bring in back, how Battlefield was rapidly becoming that and did so subsequent to that with our Bad Company release and we’ve got Bad Company 2 coming later this year. We described how Army of Two could be in that list and we have Army of Two coming out this winter, so there’s a number that we already have. In our Q4, we have Mass Effect 2, which is a title we feel strongly in and can do very, very well. And of course, there’s a number of other titles that have that potential, whether it be Dragon Age or Dead Space or others in our portfolio. And somewhere out there is Medal of Honor, which we are not yet in a position to describe specific plans but we will do so in due course. Online retailers, you know, I would tell you that there’s a couple of categories of online retail. One is sort of packaging it up and mailing it to the consumer and the other is downloads. The mail it to the consumer category would include a number of our current retailers but also Amazon and others, and that business is growing. We are seeing growth across that pretty much globally. Download basis, we are also seeing growth. Partnerships with certain online retailers, our own website are seeing sharp growth. So overall I think in particular the PC consumer is very used to using their home PC to buy software. Benjamin Schachter - Broadpoint Capital: Thank you.
Your next question comes from Sean MacGowan with Needham & Company. Sean MacGowan - Needham & Company: Thank you. I was just wondering if you’ve seen in terms of retail feedback any difference in the rate of sell-through according to genres, specifically are casual games holding up any better or any worse in the current economic climate than some of the higher priced or more hardcore games? John S. Riccitiello: Well, as a starting point, music did not get out of the gate strong this year and as I mentioned in an earlier comment, in particular our own business with Rock Band had a particularly tough compare for the first half of calendar ’09 over calendar ’08. One of the things that I tend to caution against though is sort of genre analysis. The sports business does particularly well in Q2 and I’ve often gotten the question about why that is and the answer is because that’s when Madden ships. One of the issues that I think pushes our industry around a lot are the specific releases. The shooter business was up, open world action adventure was up last year. Reasons for that -- you know, titles like GTA shipped. We saw a sports category come out of nowhere and it established a very strong presence on the Wii last year. That wasn’t a category movement as much as it was the release of Wii Fit and we took advantage of that new genre. We created EA Sports Active and brought it out. So I tend to be more cautious about describing sort of micro moves between say first person shooter versus action adventure versus sports. But having given you that caveat, I would bring up a couple of thoughts -- music down, casual sports up. We have definitely seen a sharp positive move in around casual in general and that started to leak and go negative, particularly in things that are not sort of fully priced rich games, titles that were originally launched in the $19 and $29 range have performed less well over the last four to six months. I think those are probably the best drive trends I can give you. Sean MacGowan - Needham & Company: Thank you.
Operator, we’ll take one more question.
Certainly, and that question comes from Brian Blair with Wedge Partners. Brian Blair - Wedge Partners: Thank you. Can you just finish by talking about what your expectations are for the mobile side, maybe for the balance of the year? You know, we’ve obviously seen strong unit growth for the iPhone and you guys have had some great properties there but can you talk about how you see that business trending for the back half of the year? John S. Riccitiello: Sure, and Eric may pipe in on this a little bit too -- we had a strong first quarter. It’s a business that in many ways is hitting on as many cylinders as we might hope for. We are seeing some really interesting innovation there. Cross play between social networks and iPhones, cross play between smartphones in general and the PC. And we’ve got a number of great products out there. We find that we saw Apple broke their new TV ad today featuring Scrabble and the business popped immediately, so we see that it’s ad sensitive in ways that we might not otherwise see. We’ve seen sequential growth where our competitors haven’t. We continue to believe that will be the case going forward, and we are lapping last year very well. Eric, anything to add? Eric F. Brown: No, I would just say that mobile is part of our overall digital strategy and we talked about growing that composite book of business by 25% overall in the year. Mobile is tracking well year-to-date and the iPhone has been a bit of a platform opportunity for us and this business, you know, we have scale and we operate highly efficiently in this business. We’ve noted how mobile has the best mix of low cost off-shore R&D and labor for EA and operates at a margin better than our composite margins, so we feel quite good about our mobile business. Peter R. Moore: -- mobile but certainly from an EA Sports perspective, from our normal business of course with things like Tiger and Madden on the platform itself, we are also seeing in particular the Apple mobile platform as great extensions with applications from our core games. Most notable will be next week when Madden Online franchise goes live and you’ll be able to check your franchise from your Apple mobile apps as an extension of the core console game, so it’s becoming a big part of our business as well in EA Sports. Brian Blair - Wedge Partners: Great, I’ll look forward to seeing that app high up in the application store on the iPhone. Great. Thank you again.
Okay, thanks, all. It looks like we are out of time. Thank you for joining us today.
And that does conclude today’s conference. Thank you for your participation.