Chris Evenden - Vice President, Investor Relations Andrew Wilson - Chief Executive Officer and Director Blake Jorgensen - Chief Financial Officer and Executive Vice President Frank Gibeau - Executive Vice President, EA Mobile Peter Moore - Chief Operating Officer

Colin Sebastian - Robert Baird Edward Williams - BMO Capital Arvind Bhatia - Sterne, Agee Chris Merwin - Barclays Michael Olson - Piper Jaffray Ryan Gee - Bank of America Drew Crum - Stifel Mike Hickey - Benchmark Company Sean McGowan - Needham Tim O'Shea - Jefferies

Welcome and thank you for standing by. [Operator Instructions] Now, I will turn the meeting over to Mr. Chris Evenden, Vice President of Investor Relations. You may begin.

Thank you, Gabriella. Welcome to EA's fiscal 2015 third quarter earnings call. With me on the call today are, Andrew Wilson, our CEO; and Blake Jorgensen, our CFO. Frank Gibeau, our EVP of Mobile; and Peter Moore, our COO, will be joining us for the Q&A portion of the call. Please note that our SEC filings and our earnings release are available at ir.ea.com. In addition, we have posted earnings slides to accompany our prepared remarks. Lastly, after the call, we will post our prepared remarks and audio replay of this call, and a transcript. A couple of quick notes on our calendar. We'll be presenting at the Stifel Nicolaus conference in San Francisco on Monday, February 9, and the date of our next earnings report will be Tuesday, May 5. This presentation and our comments include forward-looking statements regarding future events and the future financial performance of the company. Actual events and results may differ materially from our expectations. We refer you to our most recent Form 10-Q for a discussion of risks that could cause actual results to differ materially from those discussed today. Electronic Arts makes these statements as of today, January 27, 2015, and disclaims any duty to update them. During this call unless otherwise stated, the financial metrics will be presented on a non-GAAP basis. Our earnings release and the earnings slides provide a reconciliation of our GAAP to non-GAAP measures. These non-GAAP measures are not intended to be considered in isolation from, as a substitute for, or superior to our GAAP results. 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 in the prior year unless otherwise stated. Now, I'll return the call over to Andrew.

Thanks, Chris. Q3 was an outstanding quarter for Electronic Arts. Dragon Age: Inquisition was named to more than 200 Game of the Year lists globally. More than 6 million people on average were playing FIFA games every week across the world. Madden NFL Mobile had its biggest day in franchise history on Christmas Day, reaching number four on the top grossing charts in the U.S. Apple App Store. And we finished the calendar year as the world's leading console games publisher, a testament to the strength and breadth of EA's IP. Our excellent financial results reflect the strong player engagement and critical success of our titles. Revenue and earnings for Q3 were beyond our guidance, and we delivered another quarter of strong cash flow. At the core, we continue to focus on putting players first. As we listen, learn, and deliver for our communities with games and services that they love to play, we're experiencing new milestones in engagement. On console and PC platforms alone, more than 3.1 billion hours were spent playing EA games in Q3. Dragon Age: Inquisition captivated fans and critics worldwide, as it launched in November, and it quickly became the most successful launch in BioWare history. More than 113 million hours have already been spent exploring the depth and detail of the single-player experience in Dragon Age: Inquisition, and more players are joining each day. Named, Game of the Year, by 32 media outlets around the world, including RGN, Game Informer and the Associated Press, Dragon Age: Inquisition is a true masterpiece from the team at BioWare and a game that is sure to be played for a long time to come. FIFA 15 and Madden NFL 15 also continued to deliver for fans in our third quarter. FIFA 15 was the number one title in Europe and a top 10 title in the U.S. in 2014, with engagement growing in Q3. There were nearly 50% more users logging in each week as compared to Q3 last year. Meanwhile, Madden NFL 15 was the number two best-selling title in North America for 2014 across all genres, and gameplay hours were up 30% year-on-year in Q3. In our Ultimate Team services, engagement is deeper than ever. The total number of players entering Ultimate Team across FIFA 15, Madden NFL 15, and NHL 15 has increased nearly 45% year-over-year. Our Maxis Studio delivered three major game updates to The Sims 4 during Q3, providing fun new content and adding some of the most wanted community features. Each update has driven more players to engage with The Sims 4, and we have plans to continue delivering fresh content and gameplay to the vibrant Sims community. EA Mobile had a breakout performance over the holiday period. Our EA SPORTS titles are drawing more sports fans in the mobile games, averaging more than 45 million monthly active users during the quarter. Madden NFL Mobile and FIFA 15 Ultimate Team led the way, averaging 45% more monthly players through Q3 compared to our previous iterations in the same period last year. The newly launched SimCity BuildIt was downloaded more than 22 million times in the first month, reached the top 5 iOS game downloads in more than 100 countries, and to date players have already logged more than 1.2 billion gameplay sessions. New games like Madden NFL Mobile, FIFA 15 Ultimate Team, and SimCity BuildIt, as well as perennial fan favorites like Real Racing 3, The Sims FreePlay and The Simpsons: Tapped Out, demonstrate one of our key opportunities in mobile, leveraging our IP and specifically designing experiences from the ground up for players on mobile devices. We are listening and learning from the feedback in our mobile community, tuning the experiences based on testing and soft launch periods, then keeping players entertained with new content and challenges. Overall, the momentum that we're seeing across different platforms today gives us great reason to be excited for the future. On consoles, the install base on the Xbox One and PlayStation 4 continues to show strong growth, while new players joining on previous-generation consoles are also tapping into our amazing IP catalog. On mobile, innovative games are opening up new growth genres, like sports, with highly-engaged players. On PC, our Origin service continues to grow fiscal year-to-date and offer exciting new ways to play. Across all of these platforms, live services are extending the experience and bringing players deeper into the games they love. With the dynamic nature of this industry, platform preferences, player interests, play patterns and game experiences will constantly evolve. We are confident that through our efforts to put players first, to continue to digitally transform our business and to operate faster and more focused team, we will be in a position of strength to make these industry changes our greatest opportunity. I'll now hand the call over to Blake for a deeper look at Q3 financial performance, then I'll return with a few final thoughts.

Thanks, Andrew. EA's non-GAAP net revenue was $1.43 billion, which was $153 million or 12% above guidance. The quarter's revenue was only 9% lower than the prior year's, which included the launch of Battlefield 4. However, our focus on live services, strong title performance and expense control, drove operating margins up significantly this quarter to 36.3% from 33.8% last year, and this resulted in excellent cash generation and earnings. This extraordinary performance was led by FIFA 15, Madden NFL 15, and Dragon Age: Inquisition. In particular, Dragon Age: Inquisition had by far the most successful launch in BioWare's history, exceeding our expectations. In addition, game sales for last-generation consoles were also much stronger than we had anticipated. FX negatively impacted revenue by about $20 million this quarter, but our hedging program offset about half of this, and combined with the natural hedging from our international operations, largely neutralized its impact on earnings. Our non-GAAP digital net revenue for the quarter increased 34% year-over-year to $693 million, 49% of this quarter's revenue and a new high. The trailing 12-month digital net revenue was also a record, up 17% to $2.18 billion. This is the first time digital sales have generated more than half our revenue in a 12-month period. Breaking down our digital revenue into its key components highlights the performances of each of these businesses this quarter. Extra content and freemium contributed $314 million, up 47% over the prior year, with Ultimate Team continuing its strong performance across our FIFA, Madden NFL and NHL franchises, up 82% year-over-year in total. FIFA Online 3 in Korea continues to grow year-over-year, and the early indications from our partner in China, Tencent, are that it is already performing extremely well. Star Wars: The Old Republic, also contributed to the segment with the expansion, Shadow of Revan, attracting many more people into the game with its epic new storyline. Star Wars fans remain deeply engaged in The Old Republic universe, and we're more excited to see how that will build, as we get closer to the launch of the Star Wars movie this December. Mobile generated a record $139 million in the quarter, up 13% over the prior year. A $125 million or 90% of this was from digital extra content and advertising. This was up 28% versus the prior year and continues to more than offset the decline in the premium business. Premium full game download revenue was just $14 million, down 44% compared to the prior year. Mobile had a strong December in particular, driven by the success of SimCity BuildIt, Madden NFL Mobile and FIFA 15 Ultimate Team Mobile as well as continued strength in the rest of our mobile portfolio. Leveraging proven IP like this reduces the cost of player acquisition and drives the long-term profitability of our mobile business. SimCity BuildIt has proven to be a highly engaging title that has been a top-10 grossing one on iPhones in 85 countries and on iPad in more than 100. Full game PC and console downloads generated $140 million in revenue, up 22% over the prior year, driven by growth in the installed base of PS4 and Xbox One consoles. Although, the percentage varies considerably by title, platform and geography, the trend towards full game downloads continues. Subscriptions, advertising and other digital revenue contributed $100 million, up 52% over the same period last year. The primary growth driver was Battlefield 4 Premium revenues. EA Access, our subscription service for Xbox One, continues to grow and we're seeing subscribers play more games, engaging more broadly with EA's offerings. Moving on to gross margin. Our non-GAAP gross margin for the quarter was 72.8%, an increase from last year's 68.1% and better than our guidance of 70.5%. The increase over the prior year was primarily due to growth in our digital business, strength in current-generation consoles and a one-time benefit from NHL revenue deferred from the second quarter. This was partly offset by the higher proportion of sales from royalty-bearing titles in this quarter compared to last year's Q3. Outperformance versus our outlook was driven by the record-breaking Dragon Age: Inquisition performance. In addition, sell-through was extremely healthy across the market, enabling us to maintain margins above our expectations, while keeping channel inventory clean. Our non-GAAP operating expenses for the quarter were $521 million, down 4% year-on-year, $19 million below prior year, but $6 million above our guidance. Compared to last year, we were able to continue to reduce advertising spend by focusing on fewer frontline titles and increasing the efficiency of the way we advertise. This was partially offset by an increase in the accruals we made for variable compensation and legal expenses, which were not in our guidance. The resulting non-GAAP diluted EPS was $1.22 per share, $0.32 better than guidance due to strong revenue, higher gross margin and continued cost control. Our cash and short-term investments at the end of the quarter were $2.94 billion or approximately $9.48 per share. 66% of this cash and short-term investment balance is held onshore. Net cash provided by operating activities for the quarter was $682 million. On a trailing 12-month basis, operating cash flow was $1.15 billion, a record for this period. During Q3, we repurchased 2.5 million shares at a cost of $97 million. As a reminder, our $750 million stock buyback program was initiated in May 2014 and has a two year timeframe. The current rate of purchase keeps us on track to complete the full $750 million in that time. Turning to guidance, we're increasing our full year guidance. For fiscal year 2015, our non-GAAP guidance for revenue will increase by $78 million to $4.253 billion and our non-GAAP EPS will be increased by $0.30 to $2.35 per share. This results in an expected operating margin of nearly 24%. Although this guidance passes through essentially all of the Q3 earnings outperformance to the full year, it does not pass through all the revenue. The reduction in our Q4 revenue expectation is based on uncertainty around future currency movements and the decision to move EA SPORTS PGA TOUR and the first Sims 4 expansion pack into fiscal '16. In addition, there is uncertainty, as to when we will start to recognize revenue from FIFA Online 3 in China. However, gross margin improvements and continued expense control offset this conservatism in revenue, allowing us to substantially reaffirm our Q4 earnings expectations. The GAAP guidance becomes $4.485 billion in revenue and $2.57 in fully diluted EPS. Regarding cash flow for the full fiscal year, we are increasing our operating cash flow guidance to approximately $1.05 billion, which would be the largest fiscal year cash flow in the company's history. Our capital expense forecast remains approximately $100 million, resulting in a new free cash flow forecast of approximately $950 million. Guidance for our fourth quarter is now non-GAAP net revenue to be $830 million, a 9% decrease compared to last year's $914 million. The year-on-year difference is largely driven by Battlefield 4 catalog sales, which were very strong in Q4 fiscal '14, the quarter immediately after we shipped Battlefield. Our next major launch title, Battlefield Hardline, will start to ship in the third week of March, so its impact on the quarter will be limited, even though we expect it to build into a significant title through next fiscal year. Non-GAAP gross margin is forecasted to be 74%. We expect our Q4 operating expenses to be $515 million on a non-GAAP basis. This results in a non-GAAP diluted EPS of $0.22 per share as compared to $0.48 last year. Our Q4 guidance for GAAP net revenue is expected to be $1.16 billion as compared to $1.12 billion in the prior year. GAAP earnings per share is expected to be $1.07 as compared to $1.15 per share in the prior year. We're pleased with our third quarter results, and most importantly, with the consistent growth of cash flow and earnings. We're well ahead of where we expected to be at this stage of our transformation, largely as a result of the strength of our digital live services strategy, our ability to control costs and the continued great commitment of our employees to drive performance, but there is plenty more opportunities ahead of us. We expect these factors will continue to drive growth in cash flow and earnings, and to be augmented by a growing mobile business, as we continue to apply our core IP to this platform. Now, I'll turn the call back to Andrew.

Thanks, Blake. It was a great Q3, and there's more to be excited about as we look to Q4 and beyond. The launch of Battlefield Hardline will be the culmination of efforts by the team at Visceral and across EA, to engage our players and deliver a rich and innovative new experience. Battlefield Hardline is a fresh combination of speed, story and strategy, a mix of an engaging single-player campaign inspired by popular TV dramas, new speed-based multiplayer experiences and classic Battlefield multiplayer modes. We are getting great response to the game in recent playtests, and we look forward to opening it up to the community with the upcoming multiplayer beta. This is a fast, fun and intense new experience, and we think players are going to love it. We look forward to launching this new take on Battlefield beginning on March 17. Our slate for the coming year demonstrates EA's commitment to exciting players through brand-new experiences as well as our live services. Players in our current experiences, including Dragon Age: Inquisition, The Sims 4, the EA SPORTS portfolio and Battlefield 4 will continue to see updates and new content in the future. We will now launch PGA TOUR in Q1 FY '16, in line with some of golf's biggest tournaments, and it will be joined by our line-up of annual EA SPORTS titles next year. Our Need for Speed franchise will return in FY '16 with a game that is already looking spectacular. And, of course, the new blockbuster Star Wars Battlefront is set to release in the holiday quarter this year. We'll share our full FY '16 calendar, including a slate of new mobile games, during our next quarterly call. I said earlier in the call that the very nature of the games industry is that it is dynamic and constantly evolving. That plays to the strengths of Electronic Arts. Change is one of the constants in the history of this company, and we continue to challenge ourselves to listen, learn and lead an exciting new future for gaming and our players. You will see us focus on our player relationships, to engage and understand what inspires each gamer to play. You will see us investing in new IP and innovation, from ground-up new experiences to cutting-edge digital services. And you will see us focus on quality at every turn, stability in our services and delivery of long-lasting fun with games that are played for months and years, not just days or weeks. Throughout FY '15, EA has focused on putting our players first and strengthening the foundation of our business. We now look forward to a strong finish in Q4, and carrying momentum from FY '15 into FY '16. Now, Blake, Peter, Frank and I are here for your questions.

Gabriella, if we could open up Q&A now please.

[Operator Instructions] Our first question will come from Colin Sebastian, Robert Baird.

I guess, first off following up on the commentary regarding the full-game downloads, console games, I wonder if you could quantify the mix of digital versus physical? And then how much of the downloads are driven by promotions and bundles? And then secondly, regarding the market for last-gen games, you mentioned this segment exceeded your expectations, I wonder if we can now say that that portion of the market has stabilized or is that specific to what you're doing over the holiday period?

So 100% of full-game downloads are digital from a mix perspective. As I've said on previous calls, we're seeing about 15% of our sales come from full-game downloads via primarily the Sony and Microsoft platforms, of course, as well as our Origin platform. I will say in the last couple of weeks to your question that we've seen an interesting and encouraging pickup in our sport titles in particular where we're seeing this significant increase above that number for full-game downloads on the console and PC platforms. As regards, current-gen or Xbox 360, PS3 platforms, we saw about $100 million in incremental revenue in Q3 on those platforms, I think driven by a number of factors. I think it's been great value for consumers to pick those consoles up at this stage in their lifecycle, I think Sony and Microsoft continue to support them well. There is a great portfolio of titles. And in particular what Electronic Arts brings is blockbuster IP that gamers are very familiar with, and there're relatively easy purchases. We are also seeing strong digital pick up on those platforms as well.

Just to follow-up on Peter's point on full-game downloads, I think you'd asked – trying to get a sense of how much of that was coming through bundling. We did have some bundles in the quarter, but not substantially more than we would normally have. So the real full-game download trend is being driven primarily by full-game downloads on the new generation consoles. One phenomenon, though, we do see in the Christmas holidays is that people like to give physical gifts that fit under the tree or wherever you do your gift giving. And so oftentimes, we don't see the pickup in full-game downloads until after people have played their first round of games they've gotten for Christmas presents, and Peter's point was we have seen a just most recent pickup in the last couple of weeks of full-game downloads, which would tie back to the notion that people are now starting to really understand the power of their new consoles and starting to pick that up.

And this is the convenience factor, I think, kicks in there.

So the 15% that's digital that you mentioned, Peter, that's specific over the holiday period, and you'd expect it to be higher than that.

Colin, that's been our rate for the last two or three quarters, but as I said, we are starting to see a pickup in that. To Blake's point, I think what we are seeing is consumers finding the convenience of full-game digital downloads from Xbox Live and PlayStation network, as they buy their next games after they consumed their games, they got their physical games for the holidays.

Our next question will come from Edward Williams with BMO Capital.

A couple of questions. Can you give us a little bit more detail about how EA Access is performing? And Blake, if you can elaborate a little bit more on what sort of an FX impact we're seeing in your operating expenses?

So on EA Access, I'll let Peter address that first and then I'll talk about the FX.

Yes. EA Access continues to perform extremely well, Edward. Not giving numbers yet, but as you know, it's Xbox One exclusively, but we are seeing significant increase. We're seeing better positioning on the Xbox Live Dashboard for the product. I think gamers are seeing great value for money and the three legs of the stool that is EA Access. Obviously, the early trial, the discounted elements of what we do in particular and the ability to access a vault now, which continues to grow with its titles. And we're seeing significant playtime on EA Access as well as what we believe now is consumers buying games, as they become available and launches are being, in particular our iterative titles. So I think we're optimistic that that will continue to grow as we go into FY '16 in particular, but a great start for EA Access.

On FX, we have a hedging program in place, where the objective is to reduce the impact of currency moves on operating income and cash flow. And in addition, we actually get a natural hedge based on the fact that we have substantial number of employees and offices in Europe as well as in Canada. And we tend to focus on four core currencies, the euro, British pound, the Canadian dollar, and the Swedish krona, which are really the four core centers of where we have employees as well as where our core revenue exists. We're exposed to other currencies beyond that because they're not as large in the overall mix. The reality is that we're able to hedge our revenue, but rarely can we hedge a 100% of that. We're able to hedge partially because of actual hedges and partially because of natural hedges, more of our operating income swing. So we tend to see a larger swing on the topline that we do on the bottomline. This quarter, we saw virtually no impact on the bottom line, and as I said about a $20 million impact on the topline. The real unknown for us going forward is exactly what we think the euro is going to look like six to nine months out, where our hedges are less impactful going forward. We'll know more when we give guidance in May for the full year. We see a little risk in the fourth quarter, if you see continued decline in the euro. But I think the big unknown for us is what does the euro look like all through our next fiscal year and does that present a risk, and we'll give you an update and we're doing our best to try to hedge out as much of that risk as possible.

Our next question will come from Arvind Bhatia with Sterne, Agee.

I wanted to see if you guys could maybe talk about how you are viewing the market for next year in light of the success you've had with the next gen. But also the stability that seems to be happening on the old gen just as that mix changes, how do you view the market growth? And then you guys have been exceeding your margin goals consistently and that's been great. Just wondering if, Blake, you would take a shot at maybe a medium-term operating margin goal going forward, in light of all the cost savings you've already realized and how sort of the gross margin benefit you've gotten from the mix?

Let Andrew start and then I'll come back to the operating margins question.

As we look at the year ahead, we are very confident. We're seeing continued uptake of PlayStation 4 and Xbox One. The new boost that we had through this quarter on what was Xbox 316 and PlayStation 3 is also a very good for us. Again, we have a very, very strong portfolio of titles. And we would expect that we will continue to benefit as both generations of consoles continue to show strength and growth, albeit for different markets, given the breadth and the strength of our portfolio. In addition to that, we're seeing continued engagement with our live services, and players playing longer and engaging deeper with those live services across both generations of console. And as we've talked about, we had a very strong quarter with respect to mobile and we're starting to see that value of our IP combined with the learning experiences that we've had over the past couple of years with respect to mobile. So all-in-all, when we think about two console generations of strength, we think about ongoing engagement with our live services, and we start to see the benefits of the learning and the strength of our portfolio in mobile, we feel very good about the year ahead.

When it comes to the operating margin, we're not yet ready to give sort of next year's guidance or even a longer-term guidance on our operating model. But we will in May talk a little bit about multiple year potential here. I'll use the time though to remind people that we, about two-and-a-half years ago, we were in the single-digit area and through focus of the entire organization and the whole management team, we've really pushed to change how we operate, both from a consumer perspective very focused on a gamer first mentality and second on a financial perspective. And that's allowed us to move into what looks like now roughly 24% operating margin for the year with obviously this quarter showing operating margin well under the mid-30. We do believe that we've got potential continued upside on the gross margin side of the business as we push our digital business, and as we add more and more revenue via either digital live services or mobile, we think that will continue to benefit us through some operating leverage and give us more operating upside. We kind of view the first stage of this change as the turnaround. We feel that that's been done and now it's really time to focus on the transition and transformation that we believe as a potential here, driving much higher operating margins and cash flows overtime.

Our next question comes from Chris Merwin with Barclays.

First question is just, as it relates to your cash flow guidance, it looks like that came up by about $200 million for the full year. I think it was about $100 million more than net income. So maybe, Blake, if you could just talk about what's improving free cash flow conversion? And if that's something we should expect to continue going forward? And then, just secondly, I was hoping if you could just please provide some more color around how FIFA Online 3 is doing in China? How is that compared to the launch in South Korea, just in terms of the user growth and monetization?

So I'll start on the cash flow, and then Andrew or Peter can weigh in on FIFA in China. Cash flow there's a couple of benefits, one, is just obviously the strength in the business across the board and the strength in our physical retail partners, I think helps people pay faster when they're in a stronger position. And then, second, our digital business obviously fuels a much faster cash collection cycle. There is relatively little inventory in the channel. That's a very good positive for us. And all that comes together and try to drive significantly upside on our cash flow. We've been continuing to manage our CapEx aggressively, and that's helping on the free cash flow side of the business. But I'd say the bulk of it is really just a flow-through from the real strength in the operating earnings that are coming out of the business, as we're really hitting on all cylinders.

Our FIFA Online 3 in China, as you know, being published by our partner Tencent there, we're still yet to get to the official launch, but we're in a very strong soft launch period right now. Tencent themselves announced in December that they have reached 500,000 peak concurrent users, which was a new record for a sports title in that marketplace. So all of the key indicators are very, very positive. We expect at some point in this quarter to go fully live. And as we mentioned in our prepared remarks, we're yet to determine when to recognize revenue against this title. But all key indications are that this is record breaking stuff. We're very optimistic, but more primarily an impact on FY '16 at this point.

Our next question comes from Michael Olson with Piper Jaffray.

You're talking about higher engagement in live services and moving from a transition phase to kind of a transformation phase. Can you give us a sense for how you envision EA's business model will evolve maybe over the next three to five years? I realize that's light years away from now. But how should we think about EA's mix of revenue from newer business models, like subscription or free-to-play or other digital models, and maybe kind of compared to traditional retail physical disc sales, et cetera?

As Blake has talked about and as Peter has talked about, we are definitely seeing a greater trend towards digital revenue and over this quarter certainly that trend continued. As we look to the future and we think about the various opportunities inside of digital revenue, we look a lot at our adjacent media companies that provide music and television and movies, and recognize that an opportunity for us is to capture the greatest possible share through the offering of multiple consumption models. So as we've talked about on calls in the past, we have been investing for some years now in a digital platform that will facilitate transactions in any number of ways, either through a free-to-play micro transactions-driven model, a premium download model or a subscription model or some combination of those things. So as we think about our digital future, we are really looking at various platforms, various markets and various business models in that digital realm and looking to offer that in a way that any particular player might want to consume the great games that we make.

Next question please, Gabriella.

The next question comes from Justin Post with Bank of America.

This is Ryan Gee calling in for Justin Post. Just two quick questions on the digital business. First, it's encouraging to see the growth of Ultimate Team, both players and sales. I was wondering if you could talk about some of the drivers last quarter. Was there anything in particular about this year or last year we need to keep in mind and whether this growth trend that you are seeing there is sustainable? And then second, the growth in Ultimate Team compares to the mobile business, which around 13% is tracking below the digital average. Can you talk about your plan to either reaccelerate that business or as feature phones or there is still a headwind that we should be looking at going forward?

Why don't I start and then I can toss it to Frank. The one reminder is underlying growth in mobile is really 28%, if you pull that premium business out, which it's a legacy for us. It's down to about $40 million a year and declining year-over-year. We can't force that any faster than we are already doing, because it's embedded in a lot of way people play games still. But Frank can talk about the exciting growth idea as well as growth that we're seeing in the mobile business. First, just on the Ultimate Team side of the equation, the key for us in Ultimate Team right now has been discovery, making sure people understand what it is and how exciting and fun it is. Still a smaller portion than -- of all the people that buy the game, less than half of people actually enter into Ultimate Team, and a small fraction of those people actually get heavily involved in Ultimate Team and ultimately monetize. And so part of our goal is increasing visibility of Ultimate Team and making sure that people understand how to play it and how fun it is. So you see, when you load up the Madden disk for the first time, you see Ultimate Team come up on your screen. We're trying to make sure people understand, get into the funnel essentially and understand how passionate and powerful it is, as you start to play it. And we are trying to encourage people to play with their friends, and so you'll see more and more of that drive Ultimate Team. Clearly, it's of a scale today, that you question how much larger can I get, but we're surprised every quarter about continued growth. And we do know particularly how much people love it, particularly how much opportunity there could still be going forward. So exciting times ahead and we're looking at ways that we can leverage an Ultimate Team mechanic and more games than we currently have, even non-sport style games.

The question on mobile, really what I'd draw your attention to is the new releases that we put out with Madden, FIFA and SimCity BuildIt, which were built from the ground up as freemium services. We've spent the first part of this year taking the best and brightest from inside Electronic Arts as well as from outside, bringing in from the industry, to build a world-class mobile team. And those three products really represent what we believe the future potential of big brands with natural organic acquisition advantages coupled with great quality, great technology and a focus on engagement and live service represents. So in the quarter, if you strip away the headwind from the premium download business, we're growing around 28%. But that growth actually accelerated as we stepped into December and we picked up share there, with the release of SimCity. And our next product up Need for Speed BuildIt, another huge brand that will acquire very well. We have to build from the ground up freemium service layer. We're really bullish on how the slate will unfold going forward and really drive that growth rate that's currently in the high-20s to something that we're pretty proud of.

And then one follow-up quick question, if I may. We saw in the NPD, the retail data in December, that there was some weakness in the average selling prices, particularly on the new-gen consoles. Is that something that you guys have seen in early January continue? And is that something we should be concerned about maybe in '15, just faster price cutting by retailers?

No. I don't believe so. I think Ryan what you were seeing was maybe some promotional short-term promotional as retailers, particularly here in North America, we're trying to gain market share over the holiday period. I think things then revert to normal. I haven't seen that. My teams in the field haven't seen it. I think what you saw was a short-term blip.

And you guys have heard me say this before, but I'll say it again, and that is, be really careful using NPD data, it's becoming less and less valuable, as more and more of the business is going digital. And there is obviously not a digital comparison to it. But both in volume and in pricing, it can be sometimes a very large distraction, and then when you add in that there is no international piece to it. It really underestimates the strength of our business, I think as you can see in this quarter.

Next question comes from Drew Crum with Stifel.

I wonder if you could comment further around Battlefield Hardline. I think you suggested that it would not be material to fiscal fourth quarter numbers. Is that from a revenue perspective or is that apply to profit as well? And should we expect most of it to shift to the first quarter of fiscal 2016? And then on gross margin, I have two questions. Can you pull out the NHL benefit you saw in the quarter? And then, Blake, just thinking kind of longer-term, your gross margin guidance for fiscal '15 is now above 70%, but digital is a little more than 50% of total non-GAAP revenue. Any thoughts on longer-term gross margin upside for the business?

Don't take my comment on Hardline to be in any way negative. It was simply to say that we don't ship it until the third week of March, and so it's primarily a sell-in only and we'll see a very large impact as we roll into next year with that title. As an example, right now the levels of people playing Battlefield 4 are some of the highest we've seen in the last year. And so people play and buy Battlefield products for a long time and in the future. And so we think the selling will be very strong for Hardline, it will be important for the quarter, but I think it's a strong indicator going forward.

Yes, Drew, just want to add to Blake's comments there. It's a great window for us and our retailers around the world see this late March window, to Blake's point, not hugely material for the quarter, because it will be what we call an initial purchase quantity or a one-day load, and then a little bit of replenishment. Huge opportunity I think for FY '16, but retailers like GameStop here in North America in particular, always see this as a go-big title are really getting behind it. And we're seeing the same across the rest of the world. I think it's a huge opportunity for us to be able to reestablish a new offshoot for the franchise that is Battlefield. As Blake said, it's one shot on the quarter but FY '16 looks very strong, when we look at our forecast for this title.

As Andrew mentioned, the speed and the excitement of the game exceeds almost anything we've done in the Battlefield franchise. And I think that's going to really catch people by surprise and you're going to see a lot of people -- the momentum is going to build on it as more and more people start to play it and want their friends to be able to come in and play it. The things you're able to do is vehicles, with weapons in the urban centers, it is jut almost unbelievable and you will start to see more and more screen, more and more live game play of that over the next few weeks as we start to crank up the marketing activity. And then obviously, the beta that Andrew mentioned. So more to come there, it's pretty exciting though. On the gross margin side NHL it was $150 million in terms of revenue that was deferred end of the quarter, and so that really probably took gross margins up by about a point, relative to the overall over delivery of gross margin. And so it obviously helped, that's why we wanted to call it out, we did that because we had more to deliver on NHL, when we did during the quarter and that's why we deferred some of NHL revenue. I think longer-term gross margin, more to come when we give guidance next year, but we do believe that we could operate in the 70% to 74% gross margin longer term. This year, we're in that 70% to 71% and in couple of quarters bouncing higher than that. But we do believe there is potential particularly as we continue to ship that digital business and the live services moving forward, so more to come on them.

Our next question will come from Mike Hickey with Benchmark Company.

Two questions. The first one relates to your fiscal '16. And I realize, Blake that you are not providing guidance, but perhaps as a broad stroke how you guys are thinking about your title count growth for frontline console releases in the year? And then your headcount assumption what sort of headcount growth you are thinking about in fiscal '16? Then I have a follow-up.

So first on the title, you should assume all the sports titled obviously will be in their regular rotation. I would assume that we're going to continue to try to double-down as we mentioned on our Ultimate Team and try to expand that business. We have Need for Speed back in the rotation, next year which is the positive. As Frank mentioned, there is Need for Speed coming on mobile, but also we're going to have another couple of unannounced very exciting mobile titles as well in the quarter or in the year. And then, last but far from least, we've got a Battlefront, Star Wars title coming in before Christmas next year, aligned with the Star Wars movie rollout. We're extremely excited about that and we think there is huge potential for that title. More to come in the next couple of months on that as more about the movie comes out as well as more about our titles comes out, but you should consider that a very large activity for us next year and very large focus, similar to how we thought about Battlefields in the past.

And maybe you can talk on headcount, Blake.

I'm sorry, yes. And in terms of headcount, I think our focus on margin and on cost discipline will not stop. We're very focused on that. We're focused on what that means for headcount around the world as well as marketing spent around the world, and that focus is going to stay. So you shouldn't see a dramatic change in headcount, probably think about it roughly as flat. And really our challenge is how do we offset some of the natural increases in compensation cost during the year and we've got everybody trying to drive efficiencies through their business to try to offset some of that. We were remaking some of the headcounts, so we're moving towards more live services, that means more customer service, more live service management, and that will have to be offset by reductions in another places where we can balance that headcount or remix headcount amongst what people do in their day-to-day job.

And the last question for me is I'm sort of curious how do you think about free-to-play becoming a more viable business model for consoles over the medium term, particularly for sort of multiplayer-only experiences that are starting to pop up a little bit more than prior cycle?

On free-to-play with consoles, we think about this much to everything about free-to-play overall. And there is a couple of different vectors to this. The first is, as we look to the future, we believe a very big part of that player base will expect a free-to-start experience. When we look at film, television, music, books very often there is this free trial notion that actually on boards new players, new listeners, new readers or new viewers into a service. We're actively looking at how we could offer that type of experience to our players, console and across other platforms. From there, it really comes down to, do they make their next step in terms of a premium download, a micro-transaction in a free-to-play type environment or a broader relationship through a subscription. And our expectation is that we will be offering all three of those options to players, both console and across other platforms.

Our next question comes from Sean McGowan with Needham.

I have a couple of follow-up questions from earlier ones. Blake, on the hedging, I just want to be clear. Are you actively engaged in trying to hedge more than just the transactions that you have and extend that into translation?

So we had both balance sheet cash flow as well as earnings, and we're hedging essentially the core currency that where we operate around the world. So think about it as effectively trying to minimize the swings and exchange rate, the impacts of the swings and exchange rates on our P&L and on our balance sheet. We don't try to place bets to try to make money on hedges. We simply are trying to offset swings that occur. So ideally for us it would be we're constantly neutral to any currency moves. Now, obviously, that's hard to do and it gets expensive. And so when you see rapid changes in FX like we've seen in the last six weeks, it's harder to be able to protect against that over a long-term period of time, because it just gets very expensive to do. So we have rolling hedges that we add overtime to smooth our hedging and we try to make sure that we're protecting both, revenue line, but most importantly the cash flow and the earnings lines.

But is it safe to say that the driving assumption as you enter those hedged transactions is that the current rate persists or you're making some bet about the direction?

We'll make some bet about the direction, but we're not trying to make a bet about the direction to make money per se. It's just simply to protect where our cash flows are coming from.

And I'm not sure who should take the next questions, it refers back to the stability that we're now seeing in the old gen, previous generation sales. We've seen some zigging and zagging in recent quarters about that. So is the stability more a function of your expectations getting better honed or is there really a change in the marketplace going on?

I don't think there is a change. We're entering the ninth year of the cycle here. So I think we're seeing the strong tail. I think both Sony and Microsoft to their credit are providing support behind their current gen, between both Xbox 360 and PlayStation 3. It's having been in that side of the business, as you will remember it's a strong opportunity for both of these to continue to leverage the power, that very large installed base. There is a great portfolio of title that stretches back nine years. The hardware is great value for money for consumers that haven't jumped in yet for a console hardware. We were concerned and we were called probably two or three quarters ago that all of the actions was in Xbox One and some PS 4s. But I think what's happened is that that consumers moved on and there is plenty of consumers they are still looking to get involved in games. Great deals for retailers around the world in Q3 and holiday period, and our job obviously is to be able to take full advantage of that, and nobody in the industry has more recognizable blockbusters than Electronic Arts. And I think it's as simple as that our teams are well-positioned with our content, with both our retail partners as well as full game downloads of those titles. And this is where great brands of great IP shines, with consumer that maybe coming in a little late and looking for recognizable content. So I think you can characterize it, as a stable situation. I think as we look at our FY '16 numbers, we expect that to continue and to take full advantage of it.

During the year, there were roughly 3 million old generation console sold here in the U.S. And half of that came in the last two months of the year. So obviously, Christmas discounting probably drove a lot of that sales. And if you're buying a console for the first time, as Peter said, there is a high probability you're going to buy FIFA or Madden or Need for Speed or one of the titles, Battlefield titles that people really know are the great title to play.

Our next question comes from Tim O'Shea with Jefferies.

Another question on the balance sheet. You guys ended the calendar year with over $2.9 billion in cash and equivalents, and by my math, I think that's up from about $2.1 billion last year. Just given the elevated levels, I thought it made sense to revisit your current thinking with respect to things like how much cash you need on the balance sheet, about share repurchases and maybe even those 0.75% convertible notes that are due 2016. Just wondering if you are thinking has evolved that as the balance continue to rise? And then I have a quick follow-up.

So clearly, we have flexibility that as we get more and more cash on the balance sheet. We're very focused on making sure that that cash goes back to shareholders in the most efficient way. As we're thinking about our cash needs, obviously the first we think about just the general operating needs, and we always are weighing on the notion that now 60% of that cash is sitting onshore, but that's a benefit from the repatriation that we did a-year-and-a-half ago or a year ago. There is a natural cash build that occurs internationally and so that will start to deplete over time and will go back to probably a greater cash balance internationally than domestically. Also weighing on our thinking is the current converts that are due in August of next, August calendar year '16. And we're thinking through ways in which we either can refinance those or pay those off, but that clearly weighs on how much cash we hold at least in the interim. And then last but not least, we're very committed to continuing to buyback stock. We are on track to be able to complete the $750 million two-year buyback, and as we generate more cash we'll consider greater buybacks over time. It's not complicated. I think we just have a simple model, which is saying how do we get that back to shareholders.

And then just looking at guidance, it does appear you only drew a portion of the beat to full year. Just curious, is there anything out there in the March quarter that maybe you're a bit more cautious, perhaps around FX or is this just reflects some general conservatism on your behalf?

Yes. Well, unfortunately, I guess I'm just starting to think that we're conservative all the time, which I guess we are, which is a good thing. I do remind people, we started the year with guidance of $4.1 billion and $1.85 in EPS and some the original conversations I had with people thought we were crazy to guide that high. And obviously, now we're at $4.253 billion and $2.35. As I said in the call, I think the major driver not flowing through all $150 million of the revenue fee was: first, we decided to move two titles out of the quarter, small titles, but titles nonetheless, PGA Golf and the first Sims expansion pack will both fall into Q1 now. Those are originally in our thinking for Q4. Second, we don't know where FX is going to go. I don't think it's going to go in a lot more, but I said that when the euro was $1.30. So there is some uncertainty there. And then third, we are waiting to see when we'll be able to recognize our revenue on the FIFA Online 3 in China with our partner Tencent. There are some contractual obligations that need to be met and we don't know if those will get met in the fourth quarter or in the first quarter. And so those uncertainties stopped us from flowing all $150 million through, but what we did is flow through essentially the operating income benefits to really flow through the entire EPS in the quarter.

All right. One last question.

Our final question will come from Neil Doshi with CRT Capital.

This is Rob on the call for Neil. I just wanted to quickly ask on the nice marketing efficiency that you showed in the quarter. I think if you could just maybe give us a little bit of color on how much of that is due to -- or how are you thinking about and how much of that is due to improvements in game quality versus structural shift to live services versus changes in marketing tactics?

I'll let Peter answer that. The one just simple thing to remember is we didn't have Battlefield this year in the quarter, we had last year in the quarter and Battlefield was scale of a product and going to spend a little bit more money. So that's really just a simple fact, but there are a lot of efficiencies that we're also focused on.

I think, Rob, to answer to your question all of the above, I think it's obviously great to have a title with the quality of Dragon Age: Inquisition, that's not only our great marketing, but then organically grew with the quality of the title and the ability for it to be able to get picked up virally by games who then passed on their recommendations to fellow gamers is something that we see. Secondarily, yes, we've been talking for two, three years now about increased systems and efficiencies that we're applying as a company to watch the way that we communicate with our games. And you're seeing that, you're seeing that in every single quarter, obviously we would continue to ratchet down our expenses without revenues dropping and without our efficiency actually increasing in the way that we communicate directly with our gamers. We track metrics that are based on demand and tend to purchase aided awareness. Those continue to grow across all of our franchises. And our ability to track our consumers on a day-to-day basis rather than simply launch with big TV campaigns, which may have been what we've done many years ago, you are seeing the resulting efficiencies as a result in our marketing spend as a percentage in that revenue and that will continue.

There is one more dynamic, I will just add to that and Peter is right on all fronts. The other dynamic, of course, that's happening is by virtue of our life services and the ongoing engagement with our players, we are now more connected with our player base for much, much longer. And so the need to go out and kind of re-recruit players who we may have had a disconnect with or a disengagement with is something that we are not having to encounter at the same rate that we maybe did two, three years ago. So there's ongoing shift to a life services philosophy, it's not just helping it in terms of the ability to deliver amazing experiences to our players, but also it's keeping us connected with them, so that we can ensure that they know about the latest, greatest experiences that we have. End of Q&A

Thanks, everyone. Appreciate the time today. We'll talk to you next quarter.

And with that, we conclude today's conference. Thank you for participating. You may disconnect your lines at this time.