美商藝電 (EA) 2002 Q4 法說會逐字稿

This is premiere conferencing, and you're currently on hold for this Electronic Arts fourth quarter and fiscal year 2002 earnings release conference call. At this time we are awaiting additional participants and should be under way shortly. Thank you for your patience. Please continue to stand by.

This is Premiere Conferences. Please stand by. We are about to begin. Good evening everyone and welcome to the Electronic Arts fourth quarter and fiscal year 2002 earnings conference. Today's call is being recorded. For opening remarks and introductions, I would like to turn to call over to the Executive Vice President, Chief Financial and Administration Officer, Mr. Stan McKee. Please go ahead, sir.

Hi, this is Stan McKee. Thanks for joining the call. I'm here with Larry Probst, John Riccitiello, Dave

, and Karen

. Before I begin the presentation, we'll read our customary statement that during the course of this conference call we make forward-looking statements regarding future events or the future financial performance of the company.

We wish to caution you these statements are only predictions made as May 9th, 2002, that actual events or results may differ materially. We refer you to the form 10-K for the period ended March 31, 2001 and form 10-Q for the period ended December 30, 2001 on file with the FCC for discussion of important factors that could cause the actual results that differ materially from those discussed today.

Those risk factors include among others delivery and subscriber acceptance of our online products. We make these statements as of May 9th, 2002, and disclaim any duty to update them. So thanks for joining our call, and we're pleased to announce the results for the fourth quarter of the fiscal year. I hope everyone has the press release, but we'll run through financials and give guidance and then go to Q&A.

So first of all for the quarter, revenues came in about $470 million compared to 307 last year. That's up about 53 percent. Net income on a pro forma basis before the nonrecurring charges like restructuring and IP, R&D, goodwill, and non-cash comp charges. Net income was $56.4 million compare to a loss last year of 11.8 million. Earnings per share on that basis were 39 cents compared to a loss of nine cents last year.

The charges that those numbers include are the restructuring charges we took this quarter of about $6.2 million in dot-com business, and last year we had about 2.7 of IP/R&D charge from an acquisition of Pogo that we made. And then goodwill and non-cash charges total 6.9 this year compared to 6.1 last year.

So the as-reported numbers were net income of $47.3 million compared to a lost last year of 17.9.

Earnings per share were 33 cents compared to a loss last year of 13. Breaking the business down between core and dot-com.

Revs from the core business were $447 million compared to $295 last year. That's up 51 percent. Net income on a pro forma basis was $71 million compared to 21 last year. That's up 238 percent. Earnings per share came in at 49 cents compared to 16 cents last year. Up over 200 percent. The dot-com business revenues were $23.6 million for the quarter compared to 12.8 last year. That's 84 percent increase.

Pro forma net loss, 14.7 million compared to $32.9 million loss last year. So the loss is $18 million less than last year or about 55 percent lower. And earnings per share on that basis or lost per share was ten cents this quarter

last year.

For the full year, revenues were up 30 percent on a consolidated basis to a $1.725 billion compared to 1.322 billion last year. That's increase of $400 million for the year. Pro forma net income was $135 million compared to six million last year. And earnings per share were 94 cents on a pro forma basis compared to four cents last year.

The gap numbers for net income consolidated were $101 million compared to an $11 million lost last year, and earnings per share were 71 cents compared to an eight cents loss last year.

For the core business, again, for the fiscal year revenues were a $1.648 billion compared to a $1.280 billion.

That's up about 29 percent. Net income pro forma was $217 million compared to $105 last year. That's up 106 percent. And earnings per share were $1.52 compared to 76 cents last year, up 100 percent.

For EA.com, revenues were at $77.2 million up 84 percent for the year from $42 million to net income - or net loss on a pro forma basis was about $82 million compared to $99 last year. And the loss per share this year on a pro forma basis was 57 cents compared to 72 last year. So great overall financial year, kind of highlights for the quarter and year.

First with the quarter we shipped all the SKUs that we listed last call. We had great chart performance once again. Just a few data points for the quarter, we had three out of the top ten on PlayStation 2 with a 24 percent share, three of the top ten on GameCube with a 21 share. This is all North America by the way.

One out of top ten Xbox with a 16 percent share, 3 out of 10 on PlayStation with a 14 share. We have the top five products on the PC with a 24 percent share. Number one product on the charts with Metal of Honor, the new one we shipped this quarter, and it's doing great.

In Europe, we had 4 out of the top 10 on PlayStation 2, and we had 7 out of the top 10 including the top three on the PC for a market share of 26 percent. For the fiscal year, shipped a total of 65 SKUs. Out of those, we had 18 on PlayStation 2, 10 on Xbox and 5 on Game Cube. So we were, as we defined as an objective, the most prolific publisher for Next Generation platforms and the clear market leader, finishing the year overall on PlayStation 2 number one share with 28 percent share.

We were the number one third-party publishers on both Xbox and Game Cube. We have 17 percent share on Xbox for the fiscal year, 15 percent on Game Cube. We were also the number one publisher overall on PlayStation 1 with a 21 percent share. PC, we finished the year and the fiscal year with a 22 share with 5 out of the top 10.

So individual products that bear mention, The Sims was the number one product for the second year in a row. We think it's now the best selling PC product in history of the industry. It's now sold over 6.5 million units. With the expansion packs, the sales are almost 14 million units combined. Harry Potter, which we shipped on four platforms in the December quarter, we believe is the largest selling title period in history with over 9 million units and that's in slightly less than five months.

And the good news is we still have yet to ship Harry Potter product on the Next Gen platforms. Those are coming this year.

Madden Football, number one console game for the fiscal year overall with over 4.5 million units sold on eight different platforms.

We actually achieved another sort of milestone here. We have 16 titles that sold over a million units during the year. You just go back few years and there were no titles over a million units. EA.com continues to grow in traffic and the stickiness continues to grow. So we're the clear number one game site in terms of visitors with 13.3 million in March according to Media Metrix, and in terms of minutes spent, at 4.6 billion minutes, which represents 45 percent of the market share for game sites.

The average minutes per user per month are about 349 minutes in March according to Media Metrix. That's almost 6 hours, and finally in total minutes, we continue to be the number four site on the Internet after only AOL, MSN and Yahoo.

A quick note about the market. So far market's kind of unrolling about as expected in the calendar year. The North American - these are all from the

and PC data, console business overall was up about 25 percent in dollar terms in the quarter compared to last year. Next Generation is obviously driving that.

Older consoles are down over 60 percent; although, surprisingly, the PlayStation 1 was down only 32 percent in the first three months. PC market was slightly down 3 percent, and no surprise, we only expect single digit growth in the U.S. this year and overall market including handhelds is up 27 percent. Hardware, about as expected in the U.S. PlayStation 2 install base around 8.5 million, Xbox just under 2 million.

These are all at the end of March. And Game Cube, about a million and a half.

In Europe, hardware PlayStation units, the PlayStation 2 units grew pretty significantly compared to last year.

In fact, the number of units shipped were sold through over 90 percent, and last year they just had a very slow start primarily because of the price of the PlayStation 2 at the time. So that price did decline in late September is really starting to drive that business in Europe. As we all know the Xbox shipped in February in Japan, March in Europe, off to a slow start in both markets. In Europe, sold less than a couple hundred thousand units in the quarter.

The price of the platform as we all know at 479 euros at introduction was too high. They've since lowered that price to 299 to bring it in line with Sony, and I think it's too early to tell the results of that, but we definitely expect it to pick up with the lower price.

In response to that Game Cube which just shipped last week and introduced an initial price of 249 euros, actually before they shipped the product reduced that price to 199 to go that much below where Sony and Xbox are. Our initial read is they sold a half a million units into the channel, sold through 4,000,000. So that's a strong start, but still early to measure. Software in Europe, PlayStation 2 market strong total software sales are up over 100 percent.

PC market is also strong, up almost 20 percent. All the other platforms, old platforms are dropping rapidly. So total revenues for EA were up 53 percent in the quarter.

We said at the beginning of the year that Q4 would be the biggest growth quarter and that's just because new platforms that we're shipping in December quarter, Xbox, GameCube, Game Boy Advance shipped obviously in the summer, but we have been more SKUs tilted towards the backend of the year.

So in the March quarter, we actually had 50 percent more SKUs than in the March quarter of last year, and most of that increase was from the new platforms. So revenues, about half the revenue increase, a little less than half, came from the new platforms that had shipped since the quarter, this being Xbox, Game Cube and Game Boy Advance. Plus for us, Game Boy Color contributed some revenues and we didn't have any last quarter.

PC business was up strongly, 35 percent, driven by new releases of Metal of Honor, Command and Conquer, Renegade and The Sims: Vacation which shipped right at the end of the quarter and then continuing strong sales of The Sims.

Our affiliate label business was up pretty significantly in the quarter as well, and as you recall last year, if we go back two years ago, we talked about declining AL revenues and very slow growth but declining in some areas. We signed on a number of significant new affiliate label relationships and those are really beginning to pay off. Ones like

in Europe and Fox overall, Lego. We're starting to see some of the early returns on that.

Our online business was up a total of 84 percent. That was driven mostly by ad revenue which is up 250 percent, and our subs business was up about 30 percent driven both by Ultima Online, which was hired in the last year. We shipped another release of that Lord Blackthorns Revenge in the Quarter.

So that contributed there as well, increased our subscriber base, and then MCO is also - Motor City Online is also contributing revenues there.

Geographic break down. North America was up about 62 percent total major growth drivers similar to overall new platforms contributed about half of the increase in North America. PC was up just under 30 percent same products I mentioned. PlayStation 2 up 20 percent. AL business was up over 100 percent driven by Square EA, and we shipped this primarily from

which shipped at the end of December.

So we had a very strong, continuing sell in and sell through in the March quarter. It shipped much later in Q 3 than the previous version shipped the prior year. And then we also had new affiliate labels contributing in the U.S. like Fox, The Simpsons, Road Rage, et cetera.

Europe business up 34 percent. PC was very strong, up 50 percent. I mentioned the stronger market in the titles. They also had contributions from new platforms, and the affiliate label business was strong for the same reasons. In Asia Pacific, our business was up 42 percent and that's with a negative exchange affect of about 8 percent driven by PC business, which is the bulk of their market anyway.

Their business comprised about 62 percent of the revenues and all driven by the titles I mentioned. PlayStation 2 business was up actually over 200 percent, but still a fairly small percentage of revenues. And it's just kind of a late start for PlayStation 2 in general in that market. Our Japan business was up 57 percent. And that's with a negative exchange affect in the quarter of 18 percent.

It was driven by new platforms, primarily affiliate label business and online.

Moving down to P&L. Gross profit percentage, we ended up increasing margins there. For the company it was 57.4 percent compared to 52.2 percent last year. Breaking that down between core and dot-com, the core business was 56 percent compared to 51.3 last year.

And the dot-com business was 80 percent compared to 68 last year. So in the core business, the drivers there, we had a higher percentage of Next Generation consoles, which, right now, have a higher margin. We had a much lower percentage of the older generation margins, which accounted for only 6 percent of our revenues this year. And they, of course, have lower margins now, lower than the average.

We've got a higher average margin on our PC business. And that's because all the new major SKUs that were shipped were all wholly owned, intellectual property like Metal of Honor, Command and Conquer, Renegade, The Sims: Vacation. And compare that to last year, where the new one we shipped - because we only had one in that category which was The Sims: House Party. So, those wholly owned IP products really pay off in the margin line.

We also are getting higher average margins on our affiliate label business.

As we talked about before, we've been moving more and more to co-publishing business, so we're actually picking up four or five points on the margin - average margins on the affiliate label from prior periods. EA.com business was up.

I mentioned 80 percent margin. And that's primarily because advertising was such a high percentage of the business. So at 54 percent compared to 28 last year.

Operating expenses. Reported operating expenses in total were $202 million compared to $191 last year. That's up 5.5 percent.

We had the total charges in the quarter between restructuring and goodwill, non-cash comp charges were $13 million last year. Those charges were about 9. So the consolidated number without those - so the pro forma expenses - 189 million compared to 183 last year. So that's up about 3.5 percent. Breaking that down between core and dot-com, the core business was up 18 percent; dot-com business was down 19 percent - I'm sorry, 29 percent.

And that was about $16 million below last fourth quarter. So taking the core business then, up 18 percent. The majority of that increase, two-thirds of it came from marketing and sales, which were up about 42 percent. And that's on a sales increase of 51 percent in that business. So the actual marketing itself as a percent of revenues was below last year and most of it came from higher sales variable spending and higher advertising in all the territories.

Our GNA expenses were flat for the quarter, up 3 percent for the year. R&D expenses were up 11 percent for the quarter, kind of normal growth. And as we said, we're trying to get more efficient in the whole product development process and we've made a lot of progress doing that. So tight spending controls. But that's turning - still turning out products that are now doing much bigger revenues.

We're also very efficient in spending in doing ports in the Next Generation platforms as we talked about before. Goodwill, flat in the core business.

Moving to dot-com expenses, which I said were down 29 percent or about $16 million, down in all the categories,

sales and marketing and GNA slightly, but the big reduction came - in fact, almost all the reduction came in the R&D line which consist both of product development, network ops and customer relations.

And during the past two quarters, mostly in the third quarter but also in Q4, we've ripped about a total of about 270 people there, as we talked about, to make the whole infrastructure less, more efficient.

We've also taken some write-offs in some of the software tools and platform that we have developed as we mention in earlier calls and again today with the restructuring number of $6.3 million in the quarter. Basically what that is, is we had duplicate platforms in some of the areas when we acquired Pogo. We've integrated those now so we've only got one.

We've also made some of the platforms more efficient. And we've taken down a lot of the non-productive products that were running on those platforms. So that's where all that reduction is coming from and has lowered our run rate going forward by at least $15 to $16 million per quarter.

Other I&E line is 2.6 compared to 6.3 last year. We have higher cash balances but much lower interest rates. So actual interest earnings were lower than last year. We had less contribution from Square EA, which is our joint venture partner in the U.S.

the profit was a little lower this quarter than in previous year.

And we have higher costs of foreign exchange hedging. Income tax is no change. Rate remains the same. Minority interest is about the same

the share of the profits that we give to Square Soft in Japan for our joint venture there.

Moving to the balance sheet. Balance sheet continues to be in great shape, and our cash position now is just under $800 million; with marketable securities it's over $800 million. I said in the last call you could expect a big increase in this line item in Q4. In fact, we added over $300 million in cash in Q4, collecting from the December sales primarily.

And for the year, our cash position is up over $300 million - $330 million actually. And that's even with the funding of dot-com during the year. Our net accounts receivable is 190 million compared to $174 in March. It's up about 10 percent in March where they obviously had an increase in sales. It's more than that. The sales were much more back-loaded last year.

So that just means we had collected fewer of our receivables last year during the same quarter. So we had about 80 percent that occurred in the last half of the quarter compared to about 70 percent - under 70 percent this year. DSOs are 36 days compared to 51 in December, 51 last March.

Our accounts receivable reserves are about $116 million. That's down from December by 24 as expected. It's up about 29 percent from last March. That's on sales increase of 51 percent. So the actual percent of receivables is slightly higher than last year, 37.8 compared to 34 last year. But we're in great shape there. Inventory, 23.8 compared to - it's down a million from December, up about $8 million from last March.

So it's up about the same percentage as our sales were up. So roughly 50 percent from last March but still very low. And all the increase can be attributed to the new platforms: Game 2, Game Boy Advanced, Game Boy Color, Xbox. Our inventory days are 26 compared to 27 in December, 28 in March.

Other current assets which include prepaids, deferred income tax and other, down 18 since March - 18 million since March, mostly from prepaid taxes and deferred income taxes. Those are just timing of tax items. Building and FF&E, no real change, just amortization. Investments and affiliates, no real change.

Intangibles and other, it's up about 23 million since March at 219 million. Most of that's goodwill. There's amortization of that goodwill and an increase in deferred tax, long-term deferred tax, also timing issue there. It accounts for all that.

Moving to the market outlook going forward, and then to guidance. As we said the last call, we expect the market in 2002 calendar year to be up in total in excess of 20 percent. Components of that, the old platforms: PlayStation 1, N 64,

. We expect to be down 65 to 75 percent. PC market, single digit growth worldwide. It will vary by market.

The big drivers, of course, are the Next Generation platforms, PlayStation 2 - actually many of you might have been at the Sony meeting so you have more up-to-date data than I have even, but they've said before they will ship 18 million or so this fiscal year in new hardware units. That will bring their install base up into the mid-40s somewhere on a worldwide basis by the end of next fiscal year or fiscal '03, so March of '03. Obviously a big increase over the install base from fiscal '02.

We expect that 7 or 8 million of that would be in the U.S. market, so it would roughly double or slightly less than double maybe the install base in the U.S.

Expect hardware price reductions this year to help drive that. There's been a lot of speculation about when that might occur, so the first thing we'll do is wait till '03 to find out if anything happens there.

Xbox, as we know we made a successful launch in the U.S. market and install base at the end of the fiscal year was, we think, just under 2 million, but weak launches in Japan and Europe. We talked about the price reduction. Microsoft has lowered their expectations to for total worldwide shipment to 3.5 to 4 by the end of June, but that was more or less in line with our expectations.

We expect the price reduction on that platform as well in the U.S. this year sometime.

There are rumors floating around about when that might be, but again, we'll wait and see what happens as we go through E3 and see if anything happens there. That's true with all the platforms. GameCube, successful launch in the U.S. as well.

They've just launched in Europe and I mentioned numbers there. They appear to have been off to a good start there, supposedly shipping in 500,000 units. Our reports say the sell through has been around 400 so that's great. Had about 20 titles that launch so so far looks like a great start there. Moving to Electronic Arts focus and strategy. We continue to have the same overall objectives and that is to be number one company in console, number one in PC and the number one in the online business.

So to that result, first priority is strengthening our leadership position in the next generation platforms. I mention our number one market share for the year.

Next year, we'll ship over 20 new titles, including such titles as Harry Potter for the first time on PlayStation 2, Lord of the Rings on Xbox.

We're the number one third party this year. We'll ship another 10 to 12 new titles in the fiscal year, also including a new Harry Potter for the first time on that platform. GameCube, we're the number one third party with a 15 share. We'll ship 14 to 16 new titles in fiscal '03 and also including Harry Potter for the first time in conjunction with the new movie that's coming.

We'll continue to drive our leadership in PC. We increased our share in the calendar year '01 to 22 percent.

At the beginning of the year, we said we didn't think we'd increase our performance in the prior year, but we did.

I'm not predicting we're going to beat that again this year, but we are off to a faster start this year even with a 24 percent share in the quarter already compared to 22 last year. And we have a got line up coming in fiscal '03 including such titles as SimCity 4, Command and Conquer Generals and more that you'll see at E3.

We're driving our online business to profitability. We're focusing on the key subscription drivers which I'll talk about. We'll continue to drive cost down there, and then overall all of this as we're continuing to develop and cultivate new intellectual property that we can exploit across all of these platforms.

Moving to EA.com, then to guidance ea.com first, two

primary drivers in that business are ad sales and subscriptions. In the ad sale side, the Pogo channel which is our popular channel, I mention continues to grow significantly in traffic and time spent, and we're making very good progress and monetizing that in spite of the very poor market. Our ad sales for the year came in at 38 million. That's about 6X what it was last year.

The high-end of the guidance I gave at the beginning of the year. And as a stand-alone business, that business is very close to break even. The subscription business, Ultum Online continues to thrive with over 210,000 subscribers. Overall that's about a 30 million a year business. It's very profitable and remains the model for our subscription business. We are focusing on these big new subscription drivers, particularly E and B - Earth and Beyond and particularly TSO, which is expected in the third quarter.

As stated in the previous calls, we're continuing to drive down the costs and we'll continue to look at ways to reduce that. We successfully reduced expenses in FY '02.

Overall in FY '02, our revenues, in spite of coming in lower than we had hoped at the beginning of the year, they were still up 84 percent with operating expenses up only 3.5 percent.

So excluding the restructuring costs that we took, we actually achieved our bottom line plan and the guidance that we gave for that at the beginning of the year. We've also improved the operating loss every quarter since the fourth quarter of last year. So as we look farther to FY '03, we are making great progress towards delivering the new subscription products.

We're on track to ship Earth and Beyond in the second quarter, fiscal quarter, and the Sims online in the third fiscal quarter.

We expect revenue growth in that business in the 50-60 percent range with growth coming primarily in the second half and mostly from subscriptions and subscription package good sales. We are projecting a relatively modest increase in ad sales this year given the market, and now we have a much higher base to work from, but we still will expect increases.

And operating expenses for the whole year, we expect to be down somewhere in the range of 16 to 18 percent from the year last year. And again, that's excluding the restructuring charges that we took. And we expect the pro forma net loss for the year to be in the mid-30 million range compared to 82 million in FY '02.

We expect a cash breakeven in the third quarter and a P&L break even in the fourth quarter. Revenues will be back-loaded as I said. We think Q1 will actually be down from Q4 and that's primarily on - well, it's all on advertising sales. There's some seasonal factors and just some ad sales that have happened in the last quarter which won't happen this one.

And going through the year overall, we expect a growth in that business. But we still expect improving quarterly losses through the year as we go through profitability in that business.

Moving to the core business guidance for FY '03.

Top line growth we're guiding in the low to mid 20s. Should just mention that last year, we began the year with guidance saying growth in the mid-teens and finished in the high 20s. Gross margins were about the same percent. We expect to be about the same percent, maybe slightly higher.

Again, we gave the same guidance last year and we finished slightly higher.

Operating expenses, we expect to grow in the low to mid-teens percent, and we expect operating income to grow in the 40-50 percent range during the year, and reminder that last year we started off saying 75-90 percent and actually finished up over 130 percent.

By quarter, we'll have a very different pattern than we did last year. Last year as we guided and as it happened, it was very back-loaded. It was primarily because the year was heavily affected by new platform shipments which occurred in December quarter and in Europe and the fourth quarter, therefore we had a distribution of SKUs during the year that was heavily back-loaded.

We actually shipped 72 percent of our SKU plan last year in the second half. So as we move to fiscal '03 we're going to have a much more front-loaded year, kind of the reverse of last year.

We have half of our SKUs shipping now in the first half, half in the second half. So with a much more front-loaded SKU plan, we expect Q1 and Q2 to be big growth quarters. Starting off with Q1 which has more than twice the number of SKU shipping during the quarter. It also - included in that is World Cup, which is already shipping and off to a great start.

As we look at the rest of the quarters, Q2, we expect to be a strong growth quarter as well. Q3 to be a good growth quarter, and Q4, we - right now in our plan are planning about half the number of SKUs to ship compared to Q4 this year.

And we got that projected at roughly flat compared to this year. But as we go through the year, we will adjust as we go.

So the other thing about Q4 to note is with the back-loaded quarter in fiscal 'O2 and revenues up over 50 percent, that's one reason we expect a much more slower growth in the fourth quarter coming going to into next year.

Those who look at the platform overall SKU plan, we're planning to ship 65-70 SKUs. And during the year, I mentioned the distribution during the year. Of that, we have roughly 20 PlayStation 2 SKUs, 10 to 12 Xbox, 14 to 16 GameCube, 15 to 16 on the PC, three on PlayStation 1, three or four on Game Boy Advance, one Game Boy Color, and then two for online products.

Moving to the first quarter, as I mentioned we're shipping about 11 SKUs. We had five that we did last year. We have now shipped five World Cup SKUs on five different platforms. Also coming into the quarter are Formula One on PlayStation 2, PC and GameCube. We have Medal of Honor on PlayStation 2.

Freak Style on PlayStation 2, Desert Strike Advance on Game Boy Advance. All of those are solid for the quarter. None of them are on the cusp. So it's going to be a great start to the year. We expect revenues to be up over 50 percent during the quarter compared to last year.

As we look forward for the rest of the year, we just got a great new lineup of products in total. I mentioned the 65-70 SKUs. You can come to E3 in two weeks and everyone should go there. It's going to be a big show. You'll see a lot of these new products that are coming. We'll have all of our sports products showing on the floor, EA big products. In the EA Games category, we've got 14 products that will be showing, including new Harry Potter on Next Generation platforms.

You can see Lord of the Rings, Sims City 4, Command and Conquer Generals. You can also see Earth and Beyond and the Sims Online. And they're looking terrific. And then at E3 we might see some activity. If not then, then you can look forward to hardware price reductions coming in the industry during the year.

So with that I conclude the formal remarks, and I'll be happy to open it up for questions. Please try to confine your questions to one or two at the most so we can get through more. That's been a request from the group. So please adhere to that if you can. And operator, I'd like to open it up for questions.

Thank you sir,the question and answer session will be conducted electronically. In order to ask a question, simply press the star key followed by the digit one on your telephone keypad. Again, it's star one to ask a question. (Audio gap) go first. OK.

Sorry. I was wondering if you could talk just a little bit about, I mean, obviously gross margins were incredibly strong this quarter. And from looking at the history, we've got the strongest they've ever been. To what degree do you expect that that's going to continue?

I mean, obviously not at 56 percent, but what kind of leverage do you think you've got on the gross margin side as we go through this cycle relative to the last one? And how much of that should flow down to the operating margin line? And then just one quick question.

Can you talk a little bit about what plans for the cash balance is now that it's gotten up to $800 million?

OK. First on the gross margin percent, I am not projecting that we're going to have that kind of a gross profit in the fiscal years.

As I said in the guidance, I expect in the core business, it's going to be about the same as it was this year, maybe slightly higher. I don't want to guide you to higher right now. We'll see how we go through the year. It is mixed driven. You know, they're in the quarter.

I mentioned we had a very rich mix of products in terms of PC products and percent of revenue was up. So that kind of contributed to that. And as well as the higher percentage to the next generation platform. So, you know, I think we can see some increases as we go forward. But I'm not going to predict those kinds of numbers.

It does vary by quarter, as you've seen depending on the mix. We've also seen an increasing percentages.

I also mentioned in the affiliate label business, which is kind of moved more to a co-publishing business. And we've seen an increase in margins on that. So all those are contributing. But for the year, again, you know, it's flat to maybe slightly higher for the year as it was for the year this year. Comments on the cash balance.

You know, again, we look at the cash as being a strategic asset that we have. And it will as opportunities come along we will and all the elements line up to make them good opportunities, we will use the cash for those purposes. In the meantime, we expect that during the year we'll continue to generate more cash.

Thank you.

The next question comes from Jessica Kirkos with Goldman Sachs. I apologize Ms. Kirkos. Please re-signal by pressing star one.

While we wait we'll go next to Edward Williams.

Good afternoon. A couple questions for you, Stan. First of all, what are you expecting with the premium software as far as seeing as year progresses, and what do you have assumed in with your guidance?

Edward, this is Larry. I'll take that. We're assuming that the majority of our frontline releases, new releases, for this holiday season, that we'll be able to maintain premium pricing. So and that's built into our plan and for the margin assumptions that Stan talked about previously.

So I think you'll see selected titles that are retailed at $39.95 on the new consoles, but for the most part, we're planning to look for a premium price point closer to $50, at least through the holiday season.

OK. And then any comment at all about the hunt for the new CFO?

Yes, we're hunting. The search continues.

Stan continues to be fully engaged and will remain so until we find exactly the right person.

OK. Great. Thanks a lot.

Jessica

, please go ahead.

OK. Can you hear me this time?

Yes.

OK. Great. Since I'm a competitive landscape, if you could just comment a little bit on Sega and in particular how you guys feel about Sega Century, or I should say continued performance in the sports genre, and how do you think that's going to play out in terms of market share over the course of the year relative to your EA Sports Franchise?

And what percentage of your business for this year do you think EA Sports will account for? And then just follow on with regard to the cash balance, specifically about cash and what you might do with it? Can you talk a little bit about your intentions potentially to buy back shares? Thanks.

That was more than one or two questions, Jessica.

This is John Riccitiello. I'll pick up at the beginning, and I presume Stan will come back to the cash balances and reiterate his position.

Vis-à-vis Sega, they're a fairly worthy competitor. They've always been a company to produce strong titles. We've been impressed over the years with many of the titles that they produce, whether that be Sega, Virtual Fighter, many many others have been innovative in quality.

Both out of North American studios and Japan studios, so there's no doubt that they'll bring strong titles to market in the coming years.

In terms of whether we see them as a particular threat to our Sports Franchise, EA from the time I've been here and before has been challenged many times. We've been challenged by Sony. We've been challenged by Microsoft.

We've been challenged by various partners with ESPN, and the list goes on and on. And we've also been challenged by Sega.

Since the beginning we've maintained a leadership position. Typically over 50 percent of the entire industry for sports video and PC games. We did so in prior calendar and prior fiscal year. We intent to do so in our fiscal '03 and the current calendar year. We're very confident in that. Where the challenges have been strongest this past year might be basketball and baseball.

There's no question that we're redoubling efforts to drive our shares to higher levels than they've been in the past. And your last question on that was about, you know, how did it add up to part of EA's mix. It's about half our business and, you know, it comes up and down quarter to quarter depending on what we're launching, but that mix does not look, expect to change any time soon. probst:

Just to add to that I should correct an impression actually that even though I agreed with everything John said in the description in the overall sports business. I think I saw a comment in a report that indicated that the basketball, the Sega basketball product,

had been outperforming ours, and in fact, it shipped much later than ours, and we have sold significantly more units overall than that for the season. So when you come in halfway through the season and begin shipping, it's not as good as starting the season from the very beginning.

So we're actually dominant in that category as well.

To that point, by the way, we shipped two basketball games in the year, and ended up with about three quarters of the basketball business in the fiscal year. That's a pretty strong share. So while we welcome some competition, we like our lion share of three quarters.

The other question had to do with buying back shares, and we have no current plans for buying back shares.

OK. Great. Thank you.

Next from Merrill Lynch is Justin

.

Thanks very much. Just a quick follow-up to the question on EA Sports. I think last year Sega shipped both their football and their basketball titles late relative to you guys. Do you expect them to get theirs out in a more timely manner this time around, and then I've got a follow up.

The answer is yes. We expect them to show up at the beginning of each season as opposed to at some point in mid or late season, but the thing to keep in mind is that that means they've been on a very short development cycle, having shipped their basketball product just a few months ago.

That gives them only six or seven months to iterate again for next season's product. So we expect them to show up at the beginning of the season. They've had a short time to iterate on next year's products. We've had a full season to iterate. So we expect that our products are going to be very high quality, and they're going to do very well relative to Sega.

OK. Great. I think that makes sense. And just a follow up, in terms of your expectations for next year, you talk about your expectations for software pricing. What about - what about for hardware sales?

Hardware sales?

Correct.

Stan talked a little bit about this in his opening remarks. On a global basis, we think that the three platforms combined will sell about 35 million units in calendar '02, and we think that probably 20 million of those are PlayStation 2 and the balance will divide up between Xbox and GameCube.

Great. Thanks a lot.

Moving on to Jeff

with Bear Sterns.

Thanks. As a follow-up to that, given the seasonality in the business, if there's a price cut on hardware at E3, what do you think the incremental growth on those 35 million units will be? And second question is could you give us an update on how the Sims Online is progressing, what stages is it in, and when do you anticipate starting beta tests? Thanks.

I'll take the second question first and that's the Sims Online. We just actually had a product review on the Sims Online yesterday. Looks like it's in really good shape. We have a high level of confidence that it will ship in Q3 and our expectations are that that's going to be a very, very successful product.

It will improve the online subscription model. Do you want to take the other question? You want to take the other question?

And beta, by the way, is July on that, and could you repeat the second question? I was concentrating on the online.

The question is do we expect there to be - if there are price reductions at E3 and the hardware, how does that affect our 35-million unit projection, and basically the 30 - that number that Larry gave assumes price reductions are going to occur in the hardware.

The timing is not going to have that big an effect. So whether it happens in May or whether it happens in September is not that significant. It's a slow part of the year. So and the precision of a 35 million estimate is not that great anyway. You know, call that 33 to 36 or something like that as a range.

So the answer is price reductions don't increase that, they may accelerate the number coming a little sooner.

OK. Great. Thanks.

Gary Cooper of Bank of America Securities has the next question.

Thanks. A couple questions on the Sims Online. Can you talk a little bit about what some of your assumptions are getting to break even in the back half of the year in terms of number of subscribers and price point on the Sims Online, and then I'll also ask it looks like the R&D line has opposed a network development with a line where the most costs came out of the system.

Is that where the most costs comes out getting to your 18 to 20 percent decline this year? Thanks.

It is a perspective on the cost by the way. The reduction was not in content creation there, it was actually in the support services.

So we're not actually cutting back on our ability to be innovative and creative. You asked about the Sims Online and what our assumptions are there. Our assumption is to finish the fiscal year approaching 400,000 subscribers having a selling going in Q3, but the Sims Online is actually not the only subscription game that's going to be adding to our ability to get to breakeven.

A second key launch which is in our second fiscal quarter is Earth and Beyond. It's a space-based game where mass and multiplayer players can explore, they can do battle and they can trade in a real-time economy in a spaceships or in space stations. That game, as I said, is going out in the second quarter. We're very confident of that.

It's a beautiful looking game. It will be on display at E3. While our expectations for subscribers is more modest, it's a little over 100,000 paying subscribers by the fiscal year, although we're hoping for a greater number.

It has a comparable impact to our financials as the Sims Online because it starts earlier and we get more months billing in the fiscal year.

So the second question had to do with the reduction in R&D expenses in EA.com, and what we've done since the last - since a year ago was we took down a lot of products that we were working on and developing particularly for the - in two places, one in the pocketer channel that we were running before we acquired Pogo.

And as part of the cost reduction efforts we had duplication, we had products that we thought were not going to contribute significantly to that site so we took all those down, ones that were up on the site and ones that were under development.

We also changed some of the development strategy within our own studios to really focus on a few of the big subscription products. So that's what the reduction in that line item relates to.

OK. And the pricing, can you touch on that?

Oh, pricing.

I'm sorry in terms of pricing, we are going to provide a sliding scale price depending on the number of months the consumer commits to. So if you buy one month, we're looking at $14.95 a month, and if you buy as many as six months, slide down to either $10.95 a month or $11.95 a month depending on your point of access.

We've got some plans in place for special promotions to get down to $10.95 a month.

None of those are firm yet, though, by the way so it's still in process.

Is that the same for Earth and Beyond as well as Sims Online?

We can't say that. Those prices have not been announced publicly. Yes.

The concept is the same for Earth and Beyond and the Sims Online, and we're still working on the exact mechanisms for what the price points will be on multiple months, and we're in conversation with AOL for certain benefits for AOL subscribers.

Thank you.

This is

with Deutsche Bank.

Hey guys. A couple of questions. First of all, can you give us a sense of what platforms Harry Potter and Lord of the Rings will be expected on this holiday season? And secondly, if you look at the PlayStation 2 software market, you have about 28 percent market share right now, and that's been holding

.

Can you give a sense of what the competitive dynamic looks like there from, you know, in terms of Sony, given that their market share has slid considerably here, and do you expect to gain share in the PlayStation 2 market or at least hold that 28 percent share this next year?

Harry Potter, Chamber of Secrets will be released on seven platforms including all the Next Gen platforms in RQ3. Lord of the Rings will be launched on PlayStation 2 and possibly one additional platform also in Q3, but we're not willing to commit to the second platform yet on Lord of the Rings.

You also asked about our market share development on the PlayStation 2, and you quoted 28 percent. We didn't exit the fiscal year with a 28 percent market share, we exited the fiscal year with approximately a 24 percent market share. So in terms of, you know, its development, we're still planning to roughly hold our market share through the fiscal year.

Anything further, Mr. Patel?

That's it. Thanks.

Thank you. Moving on to Mike Wallace with

.

Hi. Just first a clarification. Stan, did you say the core business will have an operating income growth of 40-50 percent?

Correct.

OK. Second with what's played out so far in the hardware.

Have you guys changed or alter development plans by platform? You doing more PS2, less GameCube, Xbox, has anything change from a development standpoint?

We really haven't. We've talked consistently about 20 to 25 products on PlayStation2 and some number in the mid-teens on both Xbox and GameCube, and I think that's the way it will play out as we go through the year. We'll make some fine-tuning adjustments, but no significant swings from those ranges that I just cited.

OK. And have you or can you talk about any of the other online games, Earth and Beyond and Sims for this year, is there anything T'd up for calendar '03?

Yeah. There's a few things we're working on most notably, and we're not yet ready to commit a date to this specifically, but we are working on Harry Potter in the subscription business there. There's a couple other things we're working on. Some through our business development organization that we can't commit to.

OK. Thanks.

(Inaudible) Smith Barney has the next question.

Thank you very much. Can you elaborate a little bit more on the price cuts on the hardware side, perhaps give us a sense of the sensitivity of your business to that perhaps if price cuts were $100 or $150, if there's a real incremental to your business, and secondly,

if you could maybe elaborate more on your movie licensing business, sort of what is the strategy there in terms of striking a balance and what can we expect to see going forward in terms of that as a proportion of your

.

Thank you.

The question to the sensitivity to hardware pricing, I addressed this earlier and basically we have - we believed that the hardware prices on the new platforms will be down this year and the speculation has been that it will either come at E3 or in the fall and in the fall means probably in September.

It doesn't change our projections whether it happens in May or whether it happens in the fall, and the reason for that is that we're going through, you know, a typically slow summer period. Now, we're going to have a great quarter.

That's because we're shipping a lot of SKUs and we've got World Cup coming, but the fact is lowering the hardware price will have probably have an earlier affect on goosing the hardware numbers a little bit, but the real benefit is going to come in the fall. So the timing of it doesn't matter that much, and we factored in the assumption that there's a price decrease that occurs sometime during the year.

Right. I guess I'm just trying to get to if the price cut is let's say a $100 versus a $150. If that incremental differential in the price cut is very meaningful to your business?

First of all, I don't think that's going to happen. But it's kind of hard to answer that. We don't model the business that way and look at - try to assess the dollar amounts. We think we look at where the price is going to go, and then try to assume a forecast from that. And I think the chances of it coming down, say PlayStation 2, coming down to a $150 this year is pretty slim.

OK.

With regard to our movie licensing strategy, I think it remains the same as it's always been. We've always taken a very selective approach to movie licenses.

We've zeroed in on ones that we think that we can exploit across multiple platforms for multiple years, and typically, we like to get those licenses exclusively or as exclusive as we can get them. So there are three significant ones we're working on now, that's Potter, Bonds, and Lord of the Rings.

There may be some additions in the next year or so, but again, those will be selectively done, and I'm sure that you can count them on one hand or just a few fingers.

Great. Thanks very much.

With Lehman Brothers, Felicia Cantor.

Hi there. Just a couple of quick questions. The first is you had mentioned part of the subscription growth this quarter was due to Motor City Online. I was wondering if you could just elaborate a little bit on how that's doing just versus your expectations. I know it's not a big part of EA.com, but just to get some color on that.

Just quickly wondering why the reserves were up this quarter just strategically, and then I'm wondering if you gave us a number of SKUs by platforms for the year. I'm wondering if you could give it to us in terms of expected percentage of revenues. Thanks.

This is John. I'll take the subscription issue with Motor City Online. The subscription numbers Stan had given you are very good for our fiscal fourth quarter. It's actually a combination of things, one of them is Motor City Online, the second is the bump in subscriptions that we get by shipping Blackthorn's Revenge.

Any time you put a new package goods product in the channel, we get a bump, and there's actually kind of a double bump that occurs as a consequence of the way we account for the subscription where the first month is free. And so we officially advertise the package goods sales for a couple quarters which actually helps us drive revenues in subsequent quarters as well.

That gave us a very strong Q4, and we won't actually hit as high a number in Q1 on subscriptions as a consequence of that because we don't have a package good product currently in the market selling for our subscription games.

You asked about Motor City Online in particular. We've got about 30,000 paying subscribers. That number is well below what we'd originally hoped for with the title. We think we've learned from that, understand it. It's a relatively stable number right now, so it's not a drag on us in any way, but it's holding at about 30,000.

I should point out that that product has got a very low cost base for operating and that it's really very close to being at a breakeven as a standalone product even at the numbers that John's talking about. So we're going to continue to operate it and see how that goes. The other question had to do with reserves and why they're up.

Well, you know, we have as we mentioned we have sales. Sales are up over 50 percent from last March where as the reserves - the accounts receivables reserves are up something like 29 to 30 percent.

So, you know, I think in line, that they're appropriate where they are, but, you know, the amount of sales and the amount of product you're putting in the channel determines the requirement for reserves typically.

The reserve percentage as a percent of accounts receivable is up a little bit, but that's largely a timing factor and it has to do with the timing of when products shipped during the quarter which affect the number of your gross receivables. As I mentioned earlier, our gross receivable number is actually low relative to last year.

It's up only 9-10 percent, and the reason for that is just the timing of sales during the quarter, that we had a lot more sales earlier in the quarter this year than we did in the same quarter last year. Does that - so.

Yeah. That helps there.

OK. So the next question you asked had to do with percentage of revenues by platform.

Yes.

OK. So here it goes. PlayStation 2 at around somewhere in the range of 30 percent; Xbox and GameCube in the range of 8 to 10 percent each;

PC in the range of 20 to 22 percent; PlayStation 1 in the range of 2 do 3 percent; Game Boy Advance 3 to 4; affiliate labels 16 to 17 percent; our OEM business a percent; Game Boy Color a percent; and then EA.com is 5 to 6 percent.

Great. OK. And then just to follow up on Motor City Online, you said something interesting, just that you know it was a little bit lower than expected but you have learned from that and I'm just wondering what you - what you've learned that you can kind of take forward to the other games?

I think that the principal learning, you know, relates to the kind of entertainment experience. So you know, partly trying to avoid a description of all

competition. I'm going to throw it all out there, but I think probably the biggest proposition here is we want to give the consumer - we want the consumers most excited about an online experience where there's a sense that they're - in the sense that they're

of other people in the game, the same time and they're interacting with them.

And if there's a sense of persistence so that they build a house, they come back, it's still there or maybe somebody tried to burn it down so it's got the corner burnt off of it and it's still there. As opposed to something that feels like you can play it online, you can interact, but it's more of a package goods connecting people to one another.

So it seems like the trick for generating subscription is that sense of community and the sense of persistence.

OK. Great. Thanks.

We have time for one more question.

That will come from Arvin Batilla of Southwest Securities.

Good afternoon guys. Wonder if you can talk about what your market share goals are. You know, obviously, you talked a little bit about PlayStation 2 but where do you think the ultimate number could be by the end of this year or maybe even fast forwarding to the end of the cycle?

Kind of market share goals. We kind of indicated this before. I guess we didn't talk about it today. But we think that our PlayStation 2 through the cycle can end up in the mid-20s somewhere, maybe into the high 20s even. That compares with our average in the last cycle of PlayStation 1 of around 21 percent of so. Now, that may vary by year as it did in the last cycle. But, you know, somewhere between let's say 25 and 28 percent.

And that will keep us in the lead position on that. For Xbox and GameCube, we haven't articulated specific market share goals, only that we wanted to be the number one third party supplier on those, provided that they were successful platforms and as I think Larry mentioned earlier, that our strategy is continuing with - we're going to do somewhere in the range of 10 to 12 products on Xbox this year, 14 to 16 or so on GameCube.

And that's not a reflection of more emphasis on GameCube, but it's just timing. We did the few more on Xbox this year than we did on GameCube. That's just because of the timing of getting them out. So we think that that kind of level will keep us in the range of - or keep us in the number one third party market share position.

We finished the year, as I mentioned with a market share on Xbox of around 17 percent and on GameCube of 15 percent. So we think somewhere in the 15 to 20 percent range will probably be numbers that we will be able to achieve.

And PC, Stand?

Oh, on PC, sorry. Well, the PC, I mentioned. We thought we did great a couple of years ago when we got it up from 9 percent to 20 percent. And we didn't think the next share of gains were going to come. But they did. They were up to 22 percent and now we're off to even a faster start this year. So I think that for the foreseeable future that our PC share will be - still remain in the low 20s somewhere and, you know, it's a very good business and we'll continue to put great products out there to keep it there.

How about Game Boy Advanced?

We don't have any specific objectives for Game Boy Advanced, as we've said in the past. The handhelds, we've supported opportunistically.

It's a lower level margin business and we get a lot more leverage out of doing the other platforms where we have big units we can do and much higher margins. We don't have a market share goal there. We're only going to do four or five products on Game Boy Advance as I've mentioned.

OK. Final question on the sports category in general and how that compares to the extreme sports. I know a lot of people talked about how extreme sports are maybe growing at a faster clip. Can you comment on that and what your plans are to address that market?

This is John. Extreme sports for a while did in fact grow faster than sports. I don't believe it did last year, but everybody's got a different definition of extreme sports. So coming out of nowhere, titles like SSX from EA and Tony Hawk from ActiVision, really put that business on the map and came from a relatively low base to be among the - we actually include wresting in extreme sports.

So that

of products, the WWF products from PHQ, ours and ActiVision, you know, put the category on the map and put some pretty stratospheric percentage growth there. You know, it's now a pretty established category. I don't anticipate it growing faster than the core sports business. EA has a strong strategy there. We were using our EA Sports brand, but we're leveraging it, different lifestyle, EA Sports Big.

We've done really, really well with NBA Street, a titled we introduced last June. We've done really well with SSX, and we've got a couple titles coming, Crank, out doing well. We've got a few more in the development plans. So by and large, we intend to lead the extreme sports business.

We've actually got a pretty significant new entry Q1 called Freak Style, which we'll be shipping before the end of June. We've got the next iteration of NBA Street in our fiscal year plan in Q4. We also have a wrestling product in development that we think has high potential once we get the marketing hook properly defined.

So we're going to be aggressive in both the extreme sports category, and continue to be the market leader in the traditional sports category.

Is that WCW Wrestling product?

No.

But to be clear, our expectation is to lead this category in the fiscal year, extreme sports in addition to sports.

Can you also clarify what you mentioned about wrestling? Where does the WCW license stand given the merger of WWF and WCW and -

Both those licenses are in one place. And so our product will not be a WCW license product, but we will be announcing further plans about that product in the future.

But that's a product for this year?

Yes.

OK. Thanks.

Thank you very much. That concludes the questions. We've run over time. But I know there are some other questions waiting, so we'll be happy to answer those offline. And please bear with us. We'll get to you as soon as we can. And thank you for joining the call. Thanks operator.

That concludes today's conference. We thank you for your participation.