美商藝電 (EA) 2001 Q4 法說會逐字稿

ELECTRONIC ARTS FOURTH QUARTER EARNINGS RELEASE CONFERENCE CALL

Good day everyone, and welcome to the Electronic Arts fourth quarter earnings release conference call. Today's call is being recorded. For opening remarks, I would like to turn the call over to the Executive Vice-President and Chief Financial Officer, Mr. Stanton Mckee. Please go ahead sir.

Hello and thank-you for joining our call for the year-end conference call. I am here with Larry Probst, John Riccitiello, Dave Carbone and Karen Sansot. Before I start, once again, will read our customary statement that during the course of this conference call we may make forward-looking statements regarding future events and the future financial performance of the company. We wish to caution you that these statements are only predictions made as of today, and that actual events or results may differ materially. We refer you to the company's Form 10-Q for the period ended December 30th, 2000, and follow the SEC for discussion of important factors that could cause the actual results to differ materially from those discussed today. Those risk factors include among others, delays by Nintendo and Microsoft of the launch of their next-generation platforms, and delivery and subscriber acceptance of the company's online products. We make these statements as of May 10th, and disclaim any duty to update them. Moving to the content here, we're happy to announce the results for Q4. Revenues came in at $307 million compared to 294 last year, the net loss, we reported without onetime charges associated with acquisitions, goodwill and non-cash comp items, was $11.8 million compared to a profit last year on the same basis of 10.9. Earnings per share or loss per share came in again without all these charges at negative ¢9, and compared to last year positive 8. On an as reported basis, we had net loss of $17.9 million compared to 3.4 last year income, earnings per share came in at a loss of ¢13 per share compared to ¢3 last year.

It reminds you that IP R&D included $2.7 million charge associated with the acquisition of pogo.com in the quarter, and we had additional goodwill and non-cash charges of $6.1 million. The core business, again excluding these items onetime charges, goodwill, and non-cash revenues were $295 million compared to 288 last year, and we had net income of $21 million compared to 24 last year. EA.com, excluding onetime charges, goodwill and non-cash, revenues were $12.8 million compared to 6.8 last year, net loss was $32.9 million, compared to a net loss last year of $13 million. For the full fiscal year, we had revenues on a consolidated basis of $1.322 billion compared to last year of $1.420 billion. Net income for the full year without onetime charges and goodwill non-cash items were $6 million compared to $130 million last year. And earnings per share were ¢4 compared to last year ¢98. In all, the amounts that were excluded, included IP R&D of $2.7 million and goodwill of 19.3 for a total of $22 million. On an as reported basis, we had a net loss for the year of $11.1 million compared to $116.8 million profit last year. Earnings per share was at loss of ¢8 compared to earnings per share of ¢88 last year. The core business - we had, excluding the items that I have mentioned, revenues were $1.283 billion compared to $1.4 billion last year, net income was $105 million compared to net income last year of 164.

And for EA.com excluding onetime goodwill, non-cash revenues were $42 million for the year compared to $21 million last year, and the net loss was $99 million compared to a net loss last year of $34 million. So during the quarter, we had a number of highlights to talk about. First, we shipped all the skews that we listed in the call last time including all the ones that were on the cusp, i.e., shipping at the end of the quarter. In Q4 we shipped 5 more PlayStation 2 skews bringing our total up to 15. In terms of market performance, we continue to dominate the charts. We had the top 2 products in the quarter for the full quarter with Madden and NBA LIVE. We ended up with 3 of the top 4, 5 of the top 10, and 9 of the top 15, that's for the whole quarter. We had 40% market share in North America and a 36% share in Europe. In Europe, the #1 title was SSX, and we also had 5 out of the top 10 in all of Europe. Our PC performance continues in Q4, the Sims continues to be the #1 title. Livin' Large the expansion pact that we had, that we shipped in September was #2. The Sims now through March for lifetime, and that is a little over a year, has now sold over 4 million units, which is the biggest selling single skew that we have ever had. We had also on the PC charts in the quarter we had 3 of the top 6.

So the, with Red Alert 2 being the #6, and actually in March, we ended up with the top 3 titles, which included Black And White, which we shipped right at the end of the quarter, has a great start in the US and Europe and, we well on our way, we believe, by the end of this quarter to ship a million units of that product. In Europe we ended up with 4 of the top 6 on the charts for the quarter, and all the same ones that I mentioned in the US, in addition to that we had FIFA as a #4 title. Our market share in Europe also went up to about 23% compared to just under 22% a year ago. We had an acquisition in the quarter; we acquired pogo.com in our EA.com division. It was the #1 site, the game site in terms of minutes spent online on game sites combined with EA.com in the March media matrix data. The total time spent on this site was 1.7 billion minutes, and that is about 50% market share for all game sites in terms of minutes spent. Also media matrix named this site in the month of March the stickiest site on the Internet, and that is in terms of minutes spent per user per day. In addition to that, we just, actually this is kind of post quarter here, but we had announced that we have a new co-publishing agreement with Fox Interactive, and if you recall talking about, we had Fox distribution deals in Europe over the past, and those are that caused some slips during the current year and still have, but we have now signed a multi-skew [cope-up] deal with them which we think will be better than the situation we were in before even.

We also announced supportive GameCube and that we have about 10 titles in development, and I think another interesting point is 'Bond', 'The World Is Not Enough' on N64 is the first title that we have ever had on N64 that has not gone over million units in total. So a quick update on the market. Biggest issue of course last quarter and even this quarter has been the availability of PlayStation 2 hardware units. It continued to be in short supply until late in Q4. The sell through in the US according to independent data was about 2.1 million through March. Sony, they have announced, they shipped through March, 3 million, so presumably those are all getting to the market sometime after the quarter. The sell through in Europe, we estimated Lifetime through March was 1.3 to 1.4 million units, and that is compared to Sony's claim of shipping 2.9 million. Sony also announced about a month ago that they have all the production problems that caused the shortages fixed, and that the flow was now running at about 1.5 billion units per month on a worldwide basis. Where as we can't really verify that number until we see several months of data, both here and Europe, there is no question that the hardware flow picked up in the last few weeks of March. And if you look at the sell through data, again from [________________], the month of March showed 550,000 hardware units selling through, and that compared to January-February numbers in the low 200's. So, it appears that the flow is there and moving, and they are on track to meet their numbers next year, which I will talk about little later.

Year-to-date, PlayStation software market again through March according to [________________], Software dollars were down 33%, N64 was down 30%. We think those are indicative and the battle actually as we go through the year, those numbers will probably be declining further. PC, according to the PC data, software units were up slightly and software dollars were flat compared to same quarter last year. So our total revenues for the quarter were up about 4.5% driven primarily by PlayStation 2 where we had over $100 million in revenue, which accounted for about a third of our worldwide revenues. And that is in spite of the shortfall of hardware reaching the market. PlayStation was off about over 70%, and accounted for about 10% of our revenues. The market was down of course, but we really shipped only one title compared to 10 that we shipped last year. And basically as we are looking at the decline in that market coming, lowering number of skews and focusing on next generation skews. On a combined basis in the quarter; however, PlayStation 2 and PlayStation 1 revenues were up 16%. So that's a turn the corner kind of number on PlayStation. PC, worldwide the business was off 6%. We had very strong sell through overall, but we did ship fewer titles than we did last year, and last year included the ship and the initial ship in of the Sims which was obviously a huge title that we didn't replicate this year with a ship. In spite of that, we are actually up in the US and down slightly in Europe.

Our AL business was down as well, mostly that was in Europe, mostly those were slips coming from Fox deal that I talked about, but with the renewed Fox deal on a [cope up], as they have restructured their business, we think the outlook for next year is much better on our AL business. And we see growth. EA.com revenues were up a total of 88%, the biggest increase was in advertising where we had our first full quarter of advertising, in addition to that with the Pogo acquisition, we picked up some of their advertising revenue in the month it was in 800,000 to 900,000 category, adding to the number. The subscriptions business also was up about 800,000. If you recall, last time we had a preliminary launch of a sports subscription site, where we had only 3 titles, and so we turned it on quietly and are working there, but that contributed some additional subs revenue, as did our turn on of a subscription service on the Worlds product with a couple of products on that. Geographically, North America was up 25%, up in all platforms and categories except for PlayStation. The big driver again was PlayStation 2, accounted for actually 38% of the revenues in the US. And that's with hardware sales again they were about $2.1 million on sell through, on a like-to-date basis, and that was compared to the numbers that we have been looking for and earlier in the year it was about 3 million. PlayStation was down significantly combined though in the US, with PlayStation 2 that revenue number was up 33% from last year. PC business was up, driven by the Sims, continuing strong sales on top of the chart and the initial sell in of only weeks worth of Black And White.

N64, although the numbers are relatively small, was actually up 12%, and that's with no new titles, and that is with the strong sales of Bond that I mentioned earlier. And finally our AL business in North America was up primarily because of Square EA, which is our joint venture partner, and they shipped two PlayStation 2 skews on the quarter including Bouncer which was among the top of the charts. Our Europe business was up 20%, couple of key differences from the US, PlayStation 2 sales were strong, it accounted for almost a quarter of our revenues, but they weren't enough to offset the PlayStation decline. The primary reason for that is that the hardware shortages were a lot more pronounced in Europe than in North America. We think about $1.5 million or so reached the market of hardware units. And in addition to that, many of the PlayStation 2 titles that we sold during the quarter, and actually carrying over from the prior quarter that drove US sales, were US focused or centric titles, and ones like NBA, Madden, Triple Play, and NASCAR. So Europe gets very little benefit from those titles. The market share is back actually on both of these platforms, both PlayStation and PlayStation 2 were up, so in Europe they were up to about 36 compared to 35 actually last quarter, and PlayStation compared to year ago, our market share was actually up Europe wide at about 17% compared to 14% last year. And another key difference with the US is exchange rates were kind of the euro-dollar exchange rate and the pound, the average was about 8% below the level of last year.

So that was directly out of the translated sales. In our Asia-Pacific Group, PlayStation was way down, only one title - shipping. PlayStation 2 very small, so didn't make up for much, it was about 5% of revenues, with just very few hardware units that have reached that market yet. So even though the total revenues were down 12%, we also had a currency hit that averaged in that territory about 15%. So actually, in local currencies our revenues in those territories were up on the aggregate. Japan was up 4%, PlayStation 2 accounted for almost half of the revenues in Japan, and PlayStation 1 being down very significantly. Gross profit percent for the quarter - this is on a consolidated basis, was 52.2% compared to 51.4% in the fourth quarter last year. So, overall, breaking it down, the positives and the negatives, again it's a mix issue. PlayStation 2 has a higher average margin than that, and it accounted for a third of the revenues. PC revenues were actually slightly below as a percent than last year, average margin was slightly lower than last year as well, and that's primarily because of Black And White which has got a lower margin, high royalty. Also PlayStation 1, average margins are lower as they were last quarter, and that's due to lower average prices in the market. So all those things together combined to have us to be up slightly on the margin line. On the operating expense side - Q4 consolidated, this excludes the onetime charges and goodwill.

Operating expenses were 183 million compared to 139 last year, that's up 31%. When break that down between core and EA.com. The core expenses were 126 million compared to 116 last year, that's up about 9%, and EA.com at $56 million compared to 24 last year was up about 2.2 times. Most of the increase again is from the dotcom business. Sales and marketing combined was actually up 13% or $5 million roughly. The core business was mostly down and most of that came from advertising, it was down I should say by about $3 million. Out of that number, most of that was advertising. The increase came from EA.com, half of that increase, a little over half, 54% came from the carriage fee that we paid to AOL, which I talked about last quater, which I kicked in when the site went live. So we had it recorded for the first time in Q3 then in Q4. And that's included in the marketing line. We also just had higher headcount, including the addition of Pogo with the ad sales group from Pogo joining. General and administrative expenses were up 2.8 million, about 11%. This time it was not in the dotcom where that came from, it was mostly in the core business, and just higher general expenses across the company and in those areas increased depreciation from certain Information Technology assets, and then we had a higher accrual in bad debts in Europe which accounted for a little less than half of that. It wasn't an extraordinary accrual, it was just a lower, combination of slightly higher compared to a lower accrual last year, but a small number.

R&D line expenses were consolidated at $110 million compared to 74, up about 49% or $36 million. About a third of that came from the core business. And that's mostly due to more next generation products under development. EA.com represented the other two thirds. They are broken out in the financials that we have sent between product development, network development, and support and customer relations, customer support. The product development side was up about 10 million, out of the 24 increase in total for dotcom. Again last year, we were just beginning to ramp up spending in some of the headcount in product development with the big Persistent State World. We also have some additional numbers in there from Pogo, and some of the integration and cost associated with that. The other line - network development support also accounted for about $11 million of the increase, reminding you that that's the headcount in operations engineering that's building the network infrastructure. They were just ramping last year. Last year, we had both Kesmai and WorldPlay in there. They were only partially in last Q4. They are at 100% now. We also have Pogo numbers in there and some restructuring costs, and then depreciation makes up a big chunk of that increase which is the number, the site going live in October and beginning of depreciation. And then finally, we have begun to increase the customer support group as we were adding products and anticipating adding more with the coming of Majestic later in the quarter. IP R&D 2.7 million, that's from the Pogo acquisition compared to last year's number which included Kesmai and Dreamworks Interactive, which we acquired in the fourth quarter.

Goodwill was 5.3, so it includes a full quarter for Kesmai and Dreamworks Interactive compared to a partial quarter last year. And we have a month in there for Pogo goodwill. The new run rate on goodwill going forward consolidated as about 6.5 million per quarter. Other income was up 1.9 million, primarily higher interest income on higher cash balances. And then we had our minority interest on our Square EA joint venture, and the profits were higher. So we had a pick up there. On the other line minority interest, that is the SquareSoft, that is the joint venture in Japan, minority interest, and so that is their share of the profits from our subsidiary in Japan. Tax rate - no change in 31%. Few balance sheet comments - we are in great shape, cash is 466 million. That's a seasonal peak, normally in March as we always have. It's up 126 since March, 171 since December. And that is after making the cash purchase of Pogo, where we expended over $40 million, in cash in the quarter. Accounts receivable - net accounts receivable were 174, down since March on a similar sales rate, and that is primarily due to the distribution of the revenues in the quarter. They weren't as back loaded as last year, our DSO's outstanding were 51, compared to 72. Accounts receivable reserves - 89.8 million in March, that's up from a year ago, it's up slightly from December.

Represents about 34% of accounts receivables compared to 22 last March, partly due to lower receivables, also as we are looking towards the summer months and we are in transition period, they are slightly higher anticipating that. Day sales outstanding 51, as I said compared to 52. Inventories are also in great shape. We are 15.7 million, we are down from December, we are down from last March, we are actually the lowest we have been at least in the last 5 quarters, and probably going back much farther. I didn't go back past that to look. Inventory days are 28 compared to 33 last March. Other current assets - 152 million, its up since last March, its 250 million in total, it is up 44 since last March, 30 of that is deferred income tax, and 20 is some prepaid taxes. Buildings - 337, and that's furniture and fixtures and equipment, it's up 52 since last March, that is mostly the build of a network for EA.com, its actually down 3 million since March and that's just from amortization. Intangibles and other assets - 195 million, 70% of that is goodwill, its up 25 since last march, that is entirely due to the acquisition of Pogo, net of some amortization that has taken place during the year. So moving now to the market outlook, we talked last time about the total market in calendar 2000 was down. We thought 3% to 5%, with the console market being down 10% to 12%. And PC market being up slightly on a worldwide base in the 5 to 10 range, lower in some territories.

For calendar year '01, I mentioned earlier the year-to-date numbers in the US markets where PlayStation is down 33, N64 down 30, and PC down flat for the year-to-date. The hardware ships unit sell through as we talked about with Sony's numbers have been short for the year, the overall PlayStation 2 software dollars through March was a 166 million and that is with a unit sell through of hardware of about a million in the quarter. Interestingly that represents about 60% of the total PlayStation number for the quarter. So we expect overall for the year for PlayStation, N64 markets in general to decline 50% to 60%, we think PC will be flat to maybe plus 5%. The single big driver in the year is going to be the PlayStation 2. Secondarily, as we get later into the year, we will have some pickup from the new platforms, Xbox and GameCube that come into the market. But PlayStation 2, to put that in perspective, at the end of the calendar year, our estimate in the US and Europe was that we had a installed base of about 1.8 million. At the end of fiscal year 2001, which we just finished, we think the installed base was around 3.4 million in those two markets, 2.1 in the US, about 1.3 to 1.4 in Europe. So Sony has announced that they expect to ship 20 million hardware units in fiscal 2002. And they broke that down as 7 million in North America, 7 in Europe, and 6 in Japan. If this happens, and assuming that the units that Sony has shipped through March 1, are reaching the market, the installed base by the end of the fiscal year would be approximately 31 million worldwide, if all that happens.

And that would be, the US would have about 10, Europe would have about 10, and Japan would have roughly 11. When you look at the calendar year, trying to extrapolate that would suggest that the US would end up with a calendar year number of somewhere between 7 and 8 million compared to 1.1 at the end of calendar '00, Europe would end up with around 7 to 8 million compared to a calendar year number of '00 of about 700,000. So however you cut that and even if you back off those numbers, there is a huge increase coming in, in installed base. Sony claims that its production problems are solved as I mentioned. They say their run rate is about 1.5 million units per month with plans to ramp to 2 million a month by the fall. In order to reach that 20 million number, they only have to average 1.7 million units roughly for the year to get there. And again, we can't verify those numbers, but clearly the flow is up. So Xbox has announced they are shipping in the fall in the US, and Japan, and March in Europe. They have not given any specific dates, or price or expected number of units per ship. So there is some variability here, depending on the answers to those questions. We expect more information from them next week at E3. Same with GameCube, they have announced to ship in Japan in September, in US for fall, and Europe for spring, no specific dates or price or units. Again variability depending on the answers to those. And, we expect more information from them as well next week. So overall, we expect the market growth to be in single digits to possibly low double digits, but heavily back loaded in the year.

We expect the holiday season to really be very big and very loud. When all these hardware manufacturers come to the market trying to outspend each other on advertising and with consumer awareness, we think that everyone will benefit from that. Our focus continues to be strengthening our leadership position on the next-generation consoles. So, we accomplished our initial goals on PlayStation 2, with 15 titles in the year and over 40% market share. We don't expect to maintain that market share number, but we're way ahead of where we were on PlayStation 1, which had a single-digit market share. We had a single-digit market share in the comparable period, and as we go forward, we think that our total market share will increase from what it was in PlayStation 1 days. We will continue to focus on this in fiscal '02, we have roughly 25 titles coming on PlayStation 2. We have announced support of both Xbox and GameCube. On Xbox, we said we would have 10 titles in the Xbox within the first 6 months or so after launch. We expect to have 2 or 3 at launch. We just announced that we have 10 titles under development on GameCube, and we'll be shipping that over the next 6 to 12 months after the ship date of the hardware. We continue to drive the leadership on PC. We don't expect to have the same growth as we had last year, given the extraordinary success of the Sims last year, and the increase in our market share points, which was about 5 percentage points. But having said that, our market share is already higher in the first quarter than it was in the first quarter of last year. Online - we are driving to be the leader in online gaming.

I think we can probably already make that claim, but really the focus is going to be on getting to breakeven and profitability. The traffic is increasing very nicely, the Pogo acquisition really put our popular channel ahead of where we were by at least a year. We've had significant increase in time spent in visitors, which I had talked about earlier. We're also driving to launch the EA Worlds subscription products, which will drive our subscription business. We have first big one coming, which is Majestic, and scheduled to ship next month, followed by Motor City Online, Earth and Beyond, and the Sims Online, those we expect to ship over the next year or so. The Sims Online, we're expecting to ship, we actually have scheduled in our plan to ship it in the fourth quarter now or the fiscal year, but in terms of revenues and recognition, we've actually taken that out of our plan to be conservative. But we're still driving that to Q4 from an internal point of view. So, we're now initiating our guidance of fiscal '02, and as we do every time on this conference call starting with the core business, we expect topline growth in the mid-teen range. We expect gross margin to be about the same percentage as last year, maybe slightly higher. We expect our operating expenses to be flat relative to fiscal '01, with sales and marketing up slightly, and G&A development kind of flat-to-down. The end result is, operating income, we expect to be up in the 75% to 90% range. By quarter, when we look at it, it will be a very back half loaded year.

Once again, that's because of PlayStation 2, kind of surging in the fall, that's when we're launching most of our products, you'll see on our skew plan we talked. We're also going to see the launch of Xbox and GameCube in the second half of the year, and in Europe, at least one of those expected not until Q4, and maybe just one, maybe both. So, Q1 and Q2, kind of flat to small growth in the topline, improvement on the bottom line. The biggest growth on, sort of, year-over-year quarter is going to be Q4, and that's primarily because we got the new platforms that are coming later in the year. So, when you look at it by platform, we expect our PlayStation 2 to be the big growth driver, growth in the triple digits, ending up within the mid 30s percent of our revenue. We expect PlayStation 1 to be down 60% to 70%, far fewer skews, probably ending up as a percentage of our revenues in the 7% to 8% combined, we expect the two of those to be up at least 15% to 16%. PC - we expect to be flat, maybe even slightly down, that's entirely because of the Sims mega hit in the past year, and representing a percentage of our revenues in the low 20s. Xbox and GameCube combined we think will come in kind of a single-digit percent, 7% to 8% combined for those through the year. And finally, our Affiliated Label business, we expect to be back to growth, high single-digit growth, and coming at 15% to 16% of our revenues. For EA.com, on fiscal '01, as you know, we started and launched the site about a quarter late. So, we've talked about and kind of moved everything out of quarter.

So, the revenues came in below our original plan, but we actually achieved our original bottom-line forecast even with adding in the acquisition charges in Q4. Traffic time spent, and all those things are meeting or exceeding our expectations now. So, we expect strong advertising growth somewhere in the range of 5 to 6 times what it was in fiscal '01, obviously that's growing on a quarterly basis through the quarters. The big subscription drivers are the Persistent State World I talked about, because of the complexity of those products and the longer testing cycle, we are planning the business conservatively, I mentioned that before. So, we expect low double-digit or low triple-digit growth on the topline in that business. Overall, revenue expectations for the dotcom business then, we expect to be in the range of 2.5 to 2.7 times our revenues in fiscal '01, and growing quarterly through the year. On a spending level, the full fiscal year spending will be up, but on a run rate basis, it'll actually be flat-to-down, that's on a quarterly run rate basis. On the last conference call, I said we expect that spending to be flat on a quarterly basis relative to Q3 and Q4 that we just finished, but you can expect the run rate to actually be lower than that on a run rate basis by about 8% to 10% below the Q3, Q4 numbers. So, overall, we expect to have a net loss for the year excluding goodwill to come in, in the low 80 million range,

but steadily improving on a quarterly basis with the spending being flat-to -down and revenue increasing, with fourth quarter getting close to single-digit million loss, and if you take out the depreciation part, which of course is the depreciation number I talked about from the cycling live, we're looking at Q4 as a potential, the cash loss in Q4 being in single digits. So, a big improvement coming over the next year and then we expect breakeven to be in Q1 or Q2 of the following year. As I mentioned in the last call, we've been targeting to try to get this to breakeven in Q4, but I said I expect it would probably be in a quarter or two later than that, and that's where we think it will be. Looking at FY '02 skew plan, we got 65 to 70 skews, and they are rated more or less, as I have been talking about PlayStation 2, in the 25 range. PC - we expect 15 to 16. PlayStation - we've cut back to about 5 or 6 skews. We have combined on Xbox and GameCube somewhere in the range of 10 to 12. Online - we expect 3 to 4 skews coming, those are the ones I talked about earlier, and then we have 2 to 3 on GameBoy Advance that we expect as well. For the first quarter, we have a very light skew release as we typically do in the first quarter. A couple of good ones though on PlayStation 2, Rumble Racing is already shipped. We have NBA Street coming at the end of the quarter. On the PC, we have another Shogun, another Shogun product coming, and then Dune Emperor which has been a hit in prior series. This is a sequel to a long popular series coming out of our Westwood Studios. Looking at, you will be able see all these next week at E3. We expect a great showing.

We have over 25 products on the floor, including 15 PlayStation 2 skews, and some of the new hot ones that we expect to be coming like Bond and our Pirates product. We have several Xbox and GameCube titles be showing, 7 or 8 PC titles including Harry Potter for the first time which is also going to be on PlayStation 1 and Command & Conquer Renegade would be showing as well. Above the floor in the meeting room area, we have our EA.com showing, where we will have Persistent State World, you will be able to see Majestic, Motor City Earth and Beyond, and the Sims Online. So I encourage everybody to go, we are expecting a great show as usual. So with that I conclude my remarks. I know they were a little bit long, but we had a lot to talk about and I will now open it up for Q&A.

Thank-you Sir. The question and answer session will be conducted electronically. If you would like to ask a question, please press the '*' key followed by the digit '1' on your touch-tone telephone at this time. We will proceed in the order that you signal us, and we will take as many questions as time permits. And our first question comes from Felicia Kantor of Lehman Brothers.

Hi! there. Good afternoon, and good quarter.

Thank-you.

I just have a quick question. Does it mean that this cycle was similar to the last one in terms of length then fiscal '03 should be sensibly the largest year in terms of revenues. So just wondering, just kind of looking at even beyond '02, what kind of growth in general do you expect for '03? And then also how much faster do you expect to grow than the industry in general? And then I just have another question on EA.com, just when it's up and running at full force. I was wondering if you expect to see any kind of seasonality to that business because I would think it would be much less seasonal than the core business.

Okay, we have a lot of questions in there. I'll see if I can remember them all. Fiscal '03, actually the peak numbers would be coming not in fiscal '03, but most likely beyond that, fiscal '04 if you look back at previous cycles, so '04 and '05 really. So rather than project out what we think ours is going to be, I think the market growth, there are projections out there for market growth that suggest that it can grow at a compounded rate of 20% to 25%. I have actually seen numbers higher than that. But and that is through the cycle, it doesn't mean evenly because this coming year would be a slower growth year than fiscal '03 will be than fiscal '04, we believe. So, I think if you attach those kind of growth numbers over the period of the cycle that you can, those are the kind of numbers that we think will happen. Second,...

Oh!, just and relative to that in terms of how much faster, if you believe that you are going to grow faster than the industry as a whole?

Well, let me just say that we expect our overall, as we talked about, we think our market share will be higher on PlayStation 2 through the cycle than it has been on PlayStation 1. To put that in perspective, our market share ranged on an annual basis, and this is a US number, but they are similar for overseas. Our market share ranged from about 19% to 24% on an annual basis through the PlayStation 1 cycle. We are right now running at over 40%, we don't expect to continue that, but we do expect that our position will be pretty significantly enhanced compared to what it was in the prior cycle. So, we think that that average 19% to 24% will be at least 5, maybe as high in some year's points higher than that. So you can run the numbers yourself. I am not prepared to give our expected growth numbers out for the next 2 or 3 years.

This is John Riccitiello, to the question about dotcom seasonality? I want to remind you that our primary revenue source intended to be subscription. We intend to provide a broad range of subscription products between both the sports and entertainment categories. And in that we are seeking a subscription service for some of the scripts subscribed for multiple months and not multiple years. I would expect it to be lacking in significant seasonality. Now at this point in time, we are growing from quarter to quarter. So we are not showing that, we are showing quarter-to-quarter growth. So its masking the overall consistency that we see quarter to quarter. One area that would be different than that is in most advertising businesses we see the strongest numbers in their Q3. Again, we are expecting to see as we ramp up to the next 2 years, quarter-to-quarter increases. So, by and large to your question about long term, expect very minor fluctuations in seasonality, subscription will probably dip a little in the summer, but aside from that it should be pretty consistent, and advertising will have a slight positive in the Q3 for us, but the dominant portion of revenue should be subscription. So much less seasonal than our packaged goods business.

Great thanks.

Mike Wallace with UBS Warburg has our next question.

Hi! Couple of questions, just a couple of clarifications first. You say operating income would be up 75% to 90% from the 123 or so on the core business from '01?

Correct.

Okay. So, opex will be flat on a dollar basis relative to '01 also?

Correct.

Okay, good, thanks. Could you talk about what you are hearing from retailers in terms of buying patterns. I know this transition is a little different from the ones in the past because the releases are kind of scattered. Are they changing buying patterns here, slower on PlayStation 1, focusing more on GameBoy Advance in front of PlayStation 2 now because of supply issues, maybe if you could just address what kind off feedback you are getting from retailers and are you hopeful that with all the hardware companies going in the fall, you are going to see better deals at retail which is going to benefit on all the software publishers?

What do you mean by better deals than retail Mike?

Well, maybe more concessions to retailers from the hardware guys, in terms of advertising co-op dollars that sort of thing?

Well, I think what you are going to see is some very aggressive behavior by all 3 companies. Certainly, Sony is off to a good strong head start, I think they are going to try to continue to maintain their market leadership position. I think you are going to see Microsoft and Nintendo coming to the market very aggressively, battling for shelf space and market share. So, I think that is probably a good thing for retailers, and it is certainly good thing for companies like Electronic Arts. With regard to buying patterns, I don't think anything in specific has developed at this point in the year. I think most retailers are going to go to E3, look around, see what they see, and decide how they are going to plan out the back half of the year. But I would expect that are going to very aggressively support GameBoy Advance because it shows up in June, and Nintendo has talked about trying to sell 5 million units in North America between launch date and the end of the calendar year. So, I think you are going to see strong retail support for GameBoy Advance, continued strong support for PlayStation 2. You are right that new releases if any consequence have been rolling out at an uneven pace. I think you are going to see few in the next couple of months and then the balance of really strong releases are going to start showing up in September through December on PlayStation 2. And then retailers are going to be there waiting with open arms for Nintendo and Microsoft when they launch the Xbox. So I think they are going to start to finalize those plans as to how they address each category coming out of E3, but my sense is strong support for GameBoy Advance, strong support for PlayStation 2 throughout the year and that will be all over Xbox and GameCube, when it launches.

One thing I add, this is John Riccitiello. We are seeing a little bit of a polarization around the biggest titles. So Madden for example, sold well, even past SuperBowl, which is relatively unusual. So what we are seeing on PlayStation 2 when we are saying that's is really in Japan, Europe, and North America. The bigger stuff, the bigger titles, the more impactful titles are tending to get a higher share of the platform sales that might otherwise be the case, that is very true in Japan. And in Japan and Europe, they are little shy in inventory of retail. So what we are seeing a little more of is, ship it not with the same huge orders you might otherwise like to see followed with strong titles, strong reorders. And that allows you to weed out not held inventory on lesser titles. Thankfully for EA, we haven't been shipping the lesser titles.

If I could ask just one more question, regarding the market share on the PlayStation, I think excluding Square, you are close to 20%, when the PS 1 first came out somebody beat you with a bunch of sports titles sold in the market and they did pretty well. This time around they have really screwed up. They haven't had any product. The product that has gotten out there has been pretty lousy. So you think you could do another 5 or 10 points in market share and really try and squash those guys. It seems to be what's happening right now.

Well, we are not really careful about

I know it is a loony question.

We are going to be careful about making any disparaging remarks about our partners at Sony. Having said that, yes, we believe that we can achieve a higher market share on PlayStation 2 throughout the cycle than we did on PlayStation 1. We are off to a tremendous start, if you look at the end of the calendar year 2000; we had about 10 times the market share than Sony had on their own platform. Now they have started to narrow the gap a little bit, I think we have 5 or 6 times their share at the end of the March quarter. So its going to take a pretty significant effort for any company, including Sony to catch up and pass us on PlayStation 2, given the strength that we have currently, and the strength of our lineup that we have scheduled for FY '02. I think if you visit the Sony booth at E3 next week, you will be shocked and amazed at the presentation of EA Sports products relative to other sports products from other companies in the industry including Sony.

You will see Gran Turismo be something that comes in and starts stacking some numbers up to Sony.

Yeah, there will be, we've said this before, Sony will ship some hit products and they have got a Gran Turismo coming and when that ships, we expect that it will go to the top of the charts, and be there at least a few months. So the monthly data, monthly types of market share are not really where the answer is here, but when we go through the rest of the year as Larry said it is hard to concede that they would catch up. If you look at the market share that we had throughout the PlayStation 1 days, Sony was always #1, we were always #2, we were usually about 5 to 6 or 7 market share points behind them, and combined we had market share that was about 50%, plus or minus, throughout the cycle. So, we think that the share that we don't see ourselves being #2 on the PlayStation 2 cycle as we were #2 to Sony on the PlayStation 1 cycle. So, they have been our #1 competitor, and we think that we will be the leader overall on this platform.

Michael, also just to add to that. I hope Sony brings some spectacular titles to the market because that will help sell hardware and ultimately that helps Electronic Arts. The more Hardware units that they can develop as part of their installed base. Clearly with the most focus on PlayStation 2 and we will benefit from rendering great software, which helps sell hardware, which in turn helps us sell more software.

Do you think the fact that they have been relaxed in coming out with their own good first party stuff, opens the door for Microsoft and maybe even Nintendo to surprise them?

If you look, Stan talked about this a little in his opening remarks. If you look out 12 months from now, I think on a worldwide basis, if Sony achieves their goal of 30 million units as an installed base this time next year, they are going to have about, I would say probably 4 to 5 times the installed base of GameCube and probably 5 to 6 times the install base of Xbox on a worldwide basis, that's a big head start. So, I think it is going to be tough for the other two companies to catch up to them very quickly, and I think you are going to see plenty of great titles not only from Sony, but other third party companies in the second half of the this year, which will cause consumers to buy a lot of PlayStation 2 hardware.

Okay. Thanks.

Once again if you would like to ask a question please press '*' '1'. Also if your question has been answered you may remove yourself from the queue by pressing the '#' sign, and our next question comes from Edward Williams of Gerald Klauer Mattison.

Hi! guys, just a couple of question for you. Could you comment on how you see your revenue breaking down next year on a geographic basis? And then, kind of, expanding upon that, what you are seeing out of the European in general?

Europe in general. This past year was a tougher year than most in Europe. I will start with history and take a little bit of glance at the future. The challenge this past year was punctuated or really driven by the fact that more than anything else, Sony under delivered hardware in Europe. They had very little hardware pre-Christmas, as Stanton commented earlier about 1.4 million, it is a million units of hardware through the March quarter. The result of that is while we had very high market share, we did not see much in the way revenue as a consequence of that. So Europe was tough for us this past year. We had record shares across all the platforms, but the place where we were expecting to see a big punch in revenue didn't happen for us. So challenging for us. The coming year we are expecting to see the same kind of trends that Stanton outlined, his combination of comments on worldwide and for North America, very much applied to Europe. Low single-digit growth overall, dramatic declines on PS 1 and on N64, and dramatic triple-digit growth on the PS 2. Within that environment, I think Stan's comments on the overall topline business, where he had said mid-teens; we were expecting to see in the core business the mid-teens grow. We are particularly interested in our FIFA title later in the year. Interestingly enough, I think we will do very, very well in Europe with our PC and PlayStation on Harry Potter, and we haven't mentioned in this meeting, but that's got to be very strong. So following a weak F '01 in Europe, we would expect it to trend pretty much as we've top lined it for the global business. I think the other differentiating factor in Europe that's worth commenting on, is they should see percentage wise stronger PS 2 performance notably because they were weak in F '01, and I do not expect any material influence of either Xbox or Nintendo GameCube in the fiscal year.

If either of them hit, they will hit late in March, and as a consequence I don't think that will affect our business much or the industry much. So this is going to be the year where they push PS 2, see some strength on PC, and the decline in the N64 and PS 1 and we are ready for that.

In terms of breakdown of the business, the core business is roughly 60% in North America next year, we think somewhere in that range. Europe roughly 30, and Asia-Pacific and Japan being approximately 5 each, Japan being slightly on the higher side.

Okay, great, and then couple of other questions. What are you expecting for the timing of your GameCube releases. Are you going to try and get anything to be out at the launch or near the launch?

I would say that if we end up shipping 5 to 6 in the fiscal year, I would say 1 to 2 in the launch period and I am describing the launch period as sort of in November-December timeframe, so 1 or 2 in that timeframe, and probably 3 or 4 in our Q4.

Okay, great, and then just one last question. John, this part is for you, on the dotcom side of things, what was your number of Ultima subscribers and your sports related subscribers?

The Ultima subscribers are 208, and which is up slightly from the prior quarter. So we are feeling good about that. We chose not to market the Sports subscription because it was my judgment that we hadn't gotten the tournaments letters and league stuff around it nor the quality. So it was a low number, mostly the beta testers conversion. Frankly, it is something that we are about 6 months behind on the quality implementation we want, something that I wasn't pleased with, but it was rather than put the marketing campaign out, we had a set up of both the AOL and an internal program, we've pulled both. So you pretty much have to search on the website to find it and that's purposeful. Our expectation and plan is for late summer for us to put the package together with full screen, full leagues, full competition for the major sports and that's where we are kind of work up our muscle for that.

Okay, great and thank-you.

Our next question John Taylor of Arcadia Investment Corporation.

Hi!, I have a couple of questions. John, do you know off hand on the, I didn't see the media matrix number for unique users in March or any of that kind of data, but could you give us that number? And do you know what percentage of them have broadband capability of one kind or another?

I do not have, I have got the media matrix data for you, what I don't have is a cross broadband users or those visiting our site on the basis of the media matrix sample. So I can't give you a cross on that. I can give you unique visitors, it was about 9 million, and what other statistics were you looking for?

The 9 million, and then what was the usage and the average time spent? Yeah, you gave us the minute, how about the average time spent?

I can like to tell you, actually the average time spent, this is on the combined sites, was 55 minutes per session.

Uh-uh, okay, and how about per month? Do you have it per month?

And that was #1, by the way. That was the #1 of all Internet sites.

Total minutes per month for EA.com, one of the challenges here is that there was a shift in reporting where they consolidated Pogo. So in last several months as the media matrix's report is gone, we were running 300 to 400 million minutes and with the 1.8 billion with the March number as we consolidated our reports. So if you've got the report in front of you you'll see a shift in reporting, so you'll have to go back and recalculate. So that would be one thing you might notice is an inconsistency because of when we managed the consolidation. I'm not sure what else you are asking for. Sticky minutes per visitor per month, I can try to give you that per month but I've got that switch in Pogo.

I think the bottom line is the numbers that we are talking about here, we're getting media matrix is kind of moving around and making changes, but the real gist of this is, I talked about 1.7 billion, I guess, I rounded one way, John rounded the other to 1.8 billion, but the point is that number is the most minutes by far of any other game site. It has got about a 50% share according to media matrix, and it ends up being the fifth most minutes spent of any site on the Internet.

Okay, just say you've got them, if you want them, I've got them for you. We were trending minutes per user per month. If I go back to say January 58, 42, then 194, and that just reflects the way the data got combined and recombined, and Stan's point in terms of the topside yahoo.com was #1; MSN.com #2; Hotmail #3; EBAY, #4; and EA Online combined #5. If even AOL is not listed in there, it is not listed in a web service, it just a proprietary client product within the media matrix report. They would be the only product above us in terms of time spent if you were listed in that order, but again media matrix pieces are those apart in two separate reports.

Okay, and I guess the other thing is that there has been a lot of coverage in the press about eroding advertising rates and stuff like that, any change in your thinking, now that Pogo is on board about how you are going to approach that, and drive that number as high as you can?

In the coming year we're going to see two things as a consequence of Pogo. Pogo gets a lot of advertising at relatively low rates. AOL generates through advertising at high rates, AOL is amazing in terms of the CPM's and their yielding with their customer base. So what we're going to see I believe is the sell through on pogo will go down in the minutes and the CPM's will go dramatically up as we combine the efforts of our sales organization, and I still believe what Stan had talked about, in the order of a 5 to 6 fold increase in the topline associated with advertising generated by and large about half from the field sales organization from Pogo which is on a website inventory and about half net half from the AOL sales organization.

JT, one other point to make, I've said this before, but the advertising that we're doing, the kind of advertising is pretty different than what the typical sites have been doing. What you're hearing revenues come down on a lot of these Internet sites, whether strictly banner-type advertising in their own sites that don't sort of revoke people to go and click on advertises. So we've got a lot of full-screen rich-media types of offerings where we can put these in games, in between games, and in game banners, and sponsorships, where we can get much higher CPM's for those and the advertisers like those kinds of ads better because you get better responses. You get good brand impression, you get better click throughs. So we're finding that the interest among the advertisers in our kind of advertising and our site given the target demographic and the traffic and the stickiness is really good. I am actually encouraged by the advertising prospects because of those things in spite of the downturn in Internet advertising.

Another factor that I didn't mention is also the content. If you were talking General Motors or Coke or Proctor & Gamble for that matter, the interest in our inventory which is the NBA, NFL, Major League Baseball, Need For Speed, it is Majestic, it is very, very high concept positive brand value which agencies, this is what advertisers are seeking going forward. In fact Pogo bring to EA great minutes, and great strong field sales organization, we bring them the IP to help drive their CPM's up materially. So their generic version of Golf at some point in the coming months will carry PGA and/or Tiger Wood's branding which makes that exact property a lot more interesting to an advertiser.

Could I ask, what would be kind of a range or what would be a realistic CPM goal for you guys?

I'd had to tell you this. I don't want to back off the question. I think looking at a gross revenue target of about 5 to 6 folds there is a vastly more useful statistic.

Okay.

The reason I say that is that it doesn't matter to me if I get a million dollars for a sponsorship of our Need for Speed Hi-Q browser game, if I get it with a large [________________] but seen less often, that gets me a higher CPM or I get by bannering 8 different pages and those would yield an 800% difference in the CPM. The same deal, just depending upon how I show the advertising on the site.

Uh-uh.

So, it doesn't boil down to the same exact matrix that we're used to in television or print. Where they've got vast limitations on what they can present. So having said that, we don't want to be doing any of the $2, $3, $5, $7 CPM deals that are typical on the net today, and we are cutting most of that out.

Okay, last question. If you guys had to sit down and develop a title like Madden or Bond or Medal of Honor or something, and assign 3 separate teams to it for the 3 major new platforms, can you give us a sense of what the variability and development cost might be because both GameCube and Xbox are supposedly a lot easier to program for, does that show up in the development budgets?

Let me think. I've heard the theory that its easier to program for GameCube and Xbox. I don't think that's a proven theory. I think that will have to play off over time, obviously we have much more experience on PlayStation 2 at this point than we have on the other two platforms. So we'll see how that turns out in the long run. What's the percentage number? JT a couple of comments. First of all, clearly the initial development on something like Xbox is easier than it was on PlayStation 2 because with PlayStation 2, we had a situation where we had a brand new architecture with no development kits and no documentation. And we when finally got the initial documentation, it was in Japanese, so we were struggling in root forcing of the initial development. With the Xbox of course it is very PC like on the inside. There are lots of tools available to develop for; we still need to get the development systems to finalize, but its just a lot easier starting off. So now that we've gone through the learning curve of PlayStation 2, the sense is on going, but there is not going to be any significant difference in development difficulty from platform to platform, but it certainly is easier to get up on Xbox the first time.

Okay.

In terms of moving the multiples, if you do the same skew, same title on multiple platforms and their similar kinds of characteristics, you're still going to spend anywhere from 60% to 80%, maybe even higher on the development of the same title on the next platform assuming they are similar in performance characteristics.

Okay, that's what I was looking for, thank-you.

Our next question comes from Heath Terry of CS First Boston.

Great, thank-you. I was wondering if you could kind of talk to us a little bit about what your seeing in terms, not just EA inventory but in terms of the amount of inventory in the channel for each of the main platform, specifically the PlayStation and the PlayStation 2. Also if you could talk to us a little bit about, you talked about the pricing pressure that your seeing on PlayStation product, I mean just the numbers that were reported by [________________]. Are you seeing that across titles or is it primarily just product already in the channel, and their releases are relatively unaffected? And then just kind of last question, different angle, you mentioned the kind of retail thirst that there is for the GameBoy Advance. With the recent announcement about the support for GameCube, should we expect to see more EA product for the GameBoy Advance in the future, next couple of years?

Starting with the GameBoy Advance question, I would expect to see us have something on the order of 3 to 5 titles this fiscal year. Going forward, we will have to gauge how successful that platform is in the marketplace, but I don't think that you are going to ever see us do 10, 12, or 15, titles on that platform because the economics just aren't that compelling.

Okay.

It's a carded base system and it is just going to be very difficult for third parties to make a lot of money. I expect that to be more of a first party business the way the GameBoy and color GameBoy has been historically. On the retail inventory front, let me just talk about our inventory in general. Stan mentioned in his opening remarks that our inventory is in great shape, much lower than what it was in December, and even lower than it was last March. So, I would say our channel inventories are in very good condition. My sense is that retails have done a reasonable job managing the PlayStation 1 and N64 inventories. I think whatever inventories there are on PlayStation 2 are going work itself out as more hardware is sold; the install base grows as we go through the year. So my sense is that overall, retail inventories are in good shape certainly EA inventories are in very good condition. I don't think that's going to be a big huge problem for anybody as we go through this year. I mean there is just going to be so much momentum and energy in the marketplace, so I think inventory issues are going to go away pretty readily.

On the pricing pressure issue you have read the [_______________], I just want you back with interest I think its pretty much answers the question. PlayStation revenues according to [________________], North America only. We are clearly on the downward trend but here is the track, software under $30 declined by 9%, from 141, this is the Q4-to-Q4, from 141 million down to 129. In PlayStation, software priced over $30 declined from 270 to 146. So what that means for us is getting a slam on the top-level, high-level priced products, and we are seeing a lot of essentially a hold really on what is below $30. If you wanted to get some complexion or understanding, what was happening on a title-by-title basis, huge and important titles like Final Fantasy or Madden, were able to do very well in premium priced points, and virtually everything else, needed to get down under $30 to move at all. EA Sports column in the coming year is really only the AA titles on the PSX so we're shipping couple of sports titles, and importantly we are shipping Harry Potter, and while we might interested at some point of getting Harry Potter under $30 to reach a broad audience given the nature of that content and how it might appeal to mothers with children. We've got a lot of pricing flexibility pick up, what we would consider front line pricing as was in this fall when we shipped.

Great, thank-you.

So operator, we have time for one more question.

Thank-you Sir, and our last question comes from Justin Post of Deutsche Banc.

Hi!, Stan, in last year at the height of the cycle, you had I think about 50% gross margin, and around 16% operating margins. Obviously, the operating margins fell of this year. Now that you have completed your negotiations with Nintendo, Sony, and Microsoft, do you think we can look for gross margin improvement at the height of this cycle? And where could your operating margins level out at this time? Can you give us any guidance on that?

Well, the gross margins, I think are as we are going to continue at approximately 50%, they may go up slightly, this is on the core business. What's pulling it down now of course are primarily PlayStation 1 and N64 which have a much lower margins and as we burn off the rest of the PlayStation, the old console products, I think we can see for a year or two, we might see the gross margins pick up a little bit, as they have done in the past. But I don't think you are going to see a wild swing growing up to 55%, I do not expect that, but maybe a point or two. In terms of operating margins, you are clearly seeing our operating margins grow based on the guidance we've just given in fiscal '02, and I think they could probably go up a little bit more from there in subsequent years.

Okay good, and last thing, at the E3 you are expecting Sony to be pretty vocal about some of their online games, I think PlanetSide and Sovereign, they have already started promoting a little bit. John is there is any sense of urgency to get your games out or you just want to make sure you get them right or are you worried at all about what Sony is up to?

Yes, yes, and yes. So there is an enormous urgency on our part, these games are what is going to define other than the sports offerings, define EA.com more than anything. We have enormous pressure on getting them out. We've got some of our best studio personnel at Westwood working on Earth and Beyond, our Seattle studio that produce Need for Speed, working on Motor City. We've got Maxis, the #1 PC game in world with the Sims producing the Sims Online. I think its just spectacular. And yes, there is a lot of pressure and keeping up with it is very difficult. I think we are clearly a step ahead where Sony is with their PlanetSide and another offerings. They talked about next year for the first of their launches. We have got Majestic coming out next month, and we are pretty sure that when we get Motor City out this calendar year, we are seeking to get Earth and Beyond out this calendar year, although we planned it for Q4. So, I think we are a good year ahead of where they are. Plus we've got the sports offering that they don't have, and Pogo by itself trumps jeopardy by about 500 to 1, which is their mass-market offering. So [________________] in a very good competitive position. I am also respectful of what they are doing, they are the other player in this industry that is building what I think what has to be a spectacular product and help define it. This will probably shape up something like Showtime versus HBO, I am counting on EA as being HBO.

Great, thank-you.

Okay, that concludes the call. I know there are some other questions. We will be available for calls, please bear with us. We'll try to get to everyone as soon as we can. Thank-you for attending the call, and we look forward to seeing you at E3.

And that concludes today conference. Thank-you for you participation.