美商藝電 (EA) 2003 Q3 法說會逐字稿

Please stand by.

Good day, everyone, welcome to the Electronic Arts third quarter and fiscal year 2003 earning conference call.

As a reminder, today's conference is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Karen Sansot (ph), Director of Investor Relations.

Please go ahead, ma'am.

Great.

Thank you for joining us today on our third quarter fiscal 2003 earnings conference call.

Today in the car call we have Larry Probst (ph), Chairman and Chief Executive Officer, John Ricatello (ph), President and Chief Operating Officer, and Warren Jensen (ph), Chief Financial and Administrative Officer.

Before we begin, I'd like to remind you that during the course of this conference call, we may make forward-looking statements regarding future events or the future financial performance of the company.

We wish to caution you that these statements are only predictions made as of January 29, 2003, and actual results may differ materially.

We refer you to the form 10-K for the period ended March 31, 2002 and our form 10-Q for the period ended September 30th, 2002 on file with the SEC and our earnings press release of today for discussion of important factors that can cause the actual results to differ materially from those discussed today.

Those risk factors include among others, delivery and subscriber acceptance of our on line products.

We make these statements as of January 29, 2003 and disclaim any duty to update them.

And now I'd like to turn the call over to Warren Jensen.

Hi, everybody.

Thanks for joining us today.

First, this was a great quarter.

Revenues of 1.2 billion, we're up 48% year over year.

This is also the first time our quarterly net revenue exceeded $1 billion.

Our operating margin reached a record 29.9% in the quarter, while on a trailing 12-month basis our operating income exceeded 500 million for the first time.

Earnings per share grew 84% to $1.69 exceeding our guidance of $1.52 to $1.60 a share.

Our operating cash flow was 583 million or $3.92 a share.

Second, we continue to demonstrate our global strength and leadership.

North American revenues for 696 million, up 36%.

In Europe, revenues were 471 million, up 68%.

Europe continues to be an important source of growth for our company.

Together, revenue from Japan and Asia Pacific reached 69 million, up 58%.

In the quarter over 50% increase came from outside of North America.

Just as we are not dependent on one title for growth, we are likewise not dependent on just one geography either.

Third, we have the right products in the right places.

We're in a sweet spot.

PS 2 continues to win big.

The install base in North America of PS 2 increased 8.5 million units.

In Europe, the base increased 6.7 million units.

Our revenue were 459 million, up over 100%.

If you include affiliate PS 2 sales, close to 44% of the revenue son this platform.

Our U.S. share on the PS 2 was 27% with five of the top ten titles.

In Europe, we estimate our share to be roughly 25% as well, with four of the top ten titles.

For 2002 and for the holiday quarter, PS 2 delivered as expected and we delivered right alongside it.

Finally, we enter calendar 2004 with strong momentum.

We're number one on console, number one on the PC, number one on line, and finally, we're always working toward our objective of being the number one people company for high performance teams and individuals.

I'm pleased to say that "Fortune" Magazine recently named EA as one of the 100 best companies to work for, for 2003.

We were the only entertainment company to make the list.

Similar recognition to has occurred in both Canada and in Europe.

In summary, we had a great quarter.

Congrats to our teams around the world.

You delivered.

Our industry also delivered.

It was, however, highly discriminatory.

There were clear winners and there were clear losers.

As we look ahead, our brands, our scale, and our platform focus don't go away, and we will continue to drive our leadership position in growth into 2004.

For the next few minutes I'd like to discuss the December quarter in detail and I'll then share our perspective on the industry and provide financial guidance for the March quarter.

I'll focus my remarks really in four areas.

First, I'll talk about EA core, second EA.com and the Sims online, third, talk of the consolidated results and finally our market outlook in guidance.

Following my comments, Larry, John and I will then open it up to your questions.

First, a look at the core business.

Core revenue increased 49% to 1.21 billion.

Title included Harry Potter and the Chamber of Secrets, which sold over 9 million units.

James Bond, 007 Night Fire, our fifth Bond game, sold over three million units.

The Lord of the Rings, the Two Towers sold over three million units on the PS 2 and GameBoy Advance.

And by the way, in the fourth quarter, it's doing great on the XBox and GameCube.

We have sold almost four million units and outsold the nearest competitor by approximately 2.5 to 1 across Europe.

NBA Live sold almost 2 million units worldwide and outsold the closest competitor by two to one in U.S.

Need for Speed Hot Pursuit 2, Medal of Honor, Madden, Tiger PGA Tour and the Sims Unleashed were over a million in the quarter as well.

In total for the quarter we had 11 titles that sold over a million units.

Next our revenue by platform.

First on the PlayStation 2.

PS 2 revenues were 37% or 459 million.

This is an increase of 102% year over year.

Again including affiliate title, PS 2 were 44% of total revenue.

In North America, we have five of the top ten titles including Madden, Lord of the Rings, Kingdom Hearts, NBA Live and Bond.

In Europe, we have four titles in top ten.

FIFA, Lord of the Rings and Bond and Harry Potter.

Our share in the U.S. was 27% and we estimate about 25% in Europe.

On the PC, PC revenues were 18% of total revenue or 219 million.

This represents an increase of roughly 12% year over year.

In the U.S., we have five of the top ten titles Sims Deluxe, Sims unleashed, Harry Potter, Medal of Honor and battlefield 1942.

Our share of North America was 26%.

In Europe, EA had six of the top ten PC titles.

FIFA, Sims Deluxe, Sims unleashed, Harry Potter, Medal of Honor Allied Assault and the Sims on Holiday.

In Europe, our share averaged 31% with the stellar 36% in the U.K.

Three times that of our nearest competitor.

XBox and GameCube, sales on these platforms together represented roughly 18% of total revenue in the quarter.

On the XBox, we had three of the top ten titles in the U.S. and we're number one in market share with 21%.

On the Nintendo GameCube, EA had two of the top ten titles and 17% share in the U.S.

In Europe, our market share averaged approximately 19% on XBox, and we estimate 21% on GameCube.

Gross margin in the quarter improved to 54.3% up 300 basis points.

Our core operating income was 398 million dollars, up 71%.

Our core operating margin was 33% up over 400 basis points.

And on a trailing 12-month basis core operating income was 616 million, while our trailing 12-month operating margin was 26%.

Now, moving on to EA.com.

For the quarter, EA.com revenues were 22 million flat year over year.

Let me now spend a few minutes and give you an update on the Sims on line.

First, from the outset one month in, we are behind.

That said, we are okay with the performance of this product.

And make no mistake, we are committed to the success of Sims on line.

We have sold through approximately 105,000 units, we have 82,000 active registered players.

Of those whose free subscription period has run out, approximately 90% have converted to pay.

And that said, long-term we don't think this is sustainable, but it is a positive sign.

Going forward with TSO, we're focused on three things.

First, of course, building the number of players.

Second, building content.

The nature of the PSW is that you listen to the community and with your customers keep building.

We are doing that by continuously adding new features and objects.

Third, marketing this product.

We do not intend to let up our marketing efforts.

We believe in TSO and we'll continue to do everything to help drive its success.

We think it's early for TSO.

The Sims continues to be the most successful PC game in history, and we will keep building this PSW.

On the bottom line, EA.com continues to be pressured.

Our pro forma net loss for the quarter was 19 million, comparable to the year-ago quarter.

For the full year, we now expect EA.com losses to be approximately 70 million dollars as a result of higher than anticipated marketing spin on TSO, slower than expected ramp in TSO purchases and subscribers and lower AOL advertising revenue.

We expect revenue for the full year to be roughly or between 75 to 80 million dollars.

Make no mistake, this financial performance is not acceptable for us.

And we are committed to -- minimizing these losses.

Now, back to our consolidated results.

Consolidated revenue for the quarter were a record 1.23 billion, up 401 million or 48% year over year.

Gross profit in the quarter was 675 million, up 56%.

Our gross margin increased to 54.7% versus 51.9 in the year-ago quarter.

Our margin improvement was driven by really three things.

First, product mix as we had a higher mix of next general titles as well as a higher mix in the AO business.

Higher average selling prices on the new PC titles and third, lower manufacturing royalty rates given volume discounts.

Operating income was 369 million an increase of 181 million or 96%.

Operating profit growth was two times the rate of our revenue growth.

On a trailing 12-month basis, operating income was 514 million.

Our operating margin for the quarter was a record 29.9%, versus 22.6%.

This improvement was a result of leverage on virtually every line of our income statement.

However, you'll see that marketing and sales as a percentage of revenue was roughly flat versus a year ago.

As we continue to invest in our brands.

Research and development.

While down as a percentage of sales was up on an absolute basis by 15 million.

While we continue to invest in our products, at the same time, we are benefiting from streamlining our development process and standardizing our tools and libraries.

Net income was 250 million versus 132 million dollars, up 89%.

On trailing 12-month basis, our net income was 356 million.

Diluted earnings per share were $1.69 versus 92 cents a year ago and 84% improvement.

While EPS on a trailing 12 was $2.41.

On trailing 12-month basis, our operating cash flow perhaps the important measure was 580 million dollars or 3.92 a share.

Now, the balance sheet.

Cash, short term investments and marketable securities were 1.167 billion.

Net accounts receivable were 609 million.

Reserves against outstanding receivables were 207 million or 25% of gross receivables.

In the year ago December quarter AR reserves were 23% of growth.

We feel comfortable with our reserve position going into the fourth quarter and we expect no surprises in the months ahead.

Ending net inventory was 33 million versus 37 million at September 30, and 25 million in the year-ago quarter.

We entered Q4 in great shape with respect to our inventories.

At December 31, our total net exposure to the GameCube, for example, was approximately 6 million dollars.

Other current assets decreased to 82 million dollars versus 159 million at September 30, as a result of amortization and prepaid advances.

Finally, today we filed a 2 billion dollars self-rebel station statement.

For us, we consider this to be a matter of good housekeeping in order to provide us with ultimate financial flexibility.

Let me remind everyone we finished the quarter with 1.2 billion dollars of cash on the balance sheet, and we generated 580 million dollars of operating cash flow on a trailing 12-month basis.

I'll conclude my portion of today's call with our market outlook and our financial guidance.

Looking at our industry in 2002, from our vantage point, we really see five headlines.

Our first headline -- North American next generation console sales were in line with our estimates.

The PS 2 install base ended at 15.9 million units which was slightly above the top end of our estimates.

The XBox install base ended at 6.4 million unites which is slightly above the top end of our units.

And the GameCube ended at 3.6 million units which was slightly below our guidance.

Next, the PS 2 and the XBox are ahead of forecasts, the GameCube is a little behind.

Overall, the hardware numbers came in as expected.

At the same time, overall software sales were in line with our expectations as well.

Headline number two -- PS 2 remains the clear winner.

And we see no slowing in Sony's momentum.

Headline number three -- Europe is growing faster than the United States and Europe is a big part of the edge.

Fourth -- one size does not fit all.

The relative strength of our Q4 performance demonstrates this in spades.

We are a company that knows how to create and publish multiple million unit hits.

We are a global company and with the leader on the PlayStation 2 and on the PC.

And then finally our fifth headline -- our estimates for calendar 2003 hardware and industry software essentially remain unchanged.

We have not experienced nor have we seen anything that would cause us to alter our forecast.

As we look ahead to calendar 2003, we expect the PS 2 to continue to lead the market and we do not expect any meaningful movement amongst the console manufacturers.

We expect console prices to be reduced by midyear.

We anticipate prices on the PS 2 and XBox being dropped to 149 and then the Nintendo GameCube to 99.

Software price, we expect the premium titles will continue to hold the 49 dollar price point, but that lesser titles will move toward 39 dollars.

In North America, we expect growth in software sales as follows.

For the PS 2, up 25 to 30%.

For XBox, up 20 to 25%.

For the Nintendo GameCube, up 15 to 20%, and for the PC up 0 to 5.

In North America, we expect the following next general unit sales.

PS 2 unit sales are between 9 and 10 million units.

XBox are between 2 1/2 and 3 million units and Nintendo GameCube are between 2 and 2 1/2 million units.

In Europe, we expect the following next gen (ph) unit sales.

PS 2 between 8 to 9 million units. (inaudible) between 2 to 2 1/2 million units and most likely toward the upper end of that range.

And then Nintendo GameCube between 1 1/2 and 2 million units.

Overall, we expect growth rates in Europe to outpace the comparable growth rates in North America.

For many, this point may be irrelevant.

For us, it is not.

Now, our financial guidance.

The following financial estimates reflect our destination as of today.

There are plenty of unknowns and several things that could happen which could cause our actual results to be materially different.

We think it's very important for you to consider the risk factors carefully when considering our future performance.

That said for the our fiscal fourth quarter, we expect consolidated revenue to be between 420 and 460 million.

In the quarter we will begin consolidation of our urban (ph) Los Angeles and Las Vegas studios, into one hub facility in Los Angeles.

Once complete, we'll have major centralized studio operations in Vancouver, walnut creek, Los Angeles, Orlando, Tokyo and in the U.K.

This is all part of our ongoing effort to maximize the efficiencies and capabilities of our development process.

As a result of these actions, we do expect to incur restructuring charges in the fourth quarter.

The exact amount of these charges are not yet finalized, although we do not expect these charges in the quarter will exceed five cents a share.

Consolidated EPS.

We expect to be between 27 and 35 cents.

This guidance does not include the impact of any potential restructuring charges as again the exact amounts are not yet finalized.

In Q4 we expect to shift 13 SKUs.

As you know, we shipped the Lord of the Rings on GameCube and XBox.

Sim city 4 on the PC and the Sims on the PS 2.

We're very pleased with the performance of these titles so far this year.

We've already sold more than 800,000 units of Sim city 4 and 600,000 of the Sims on the PS 2.

We expect to ship the following additional SKUs in the fourth quarter.

The Sims on XBox, command and conquer generals on the PC, MVP Baseball, DefJam Vendetta on PS 2 and GameCube.

By the way this is the number one most anticipated game, according to the official PlayStation magazine.

James Bond night fire on the GameBoy advance.

Age of shadows another expansion pack for ultimate on line.

And we'll also publish in the quarter battlefield 1942, the road to Rome expansion pack A copublishing title on the PC.

And please make note that we now intend to ship NBA street 2 on the PS 2, Nintendo GameCube and XBox in first quarter of fiscal 2004.

Again, we now intend to ship NBA street on the PS 2, Nintendo GameCube and XBox in first quarter of fiscal '04.

This title by the way looks great.

We think that is a much stronger marketing window.

We (ph) opening it up to your questions, we'd really like to, you know, end this call by sharing our preliminary thoughts about our likely performance in 2004.

For 2004, here's how we see things generally.

First of all, we see a healthy industry continuing.

But the action, make no mistake, will continue on to be on the PS 2.

And most importantly for our share owner TPS 2 is our sweet spot.

Secondly, we know how to create and publish multiple million unit titles.

This will not change in 2004.

In our fiscal 2004.

And by comparison, in calendar 2002, we've created and published 22 million unit plus sellers.

EA.com -- while the ultimate strength of TSO will be a key driver of improved financial results, we are committed to minimizing these losses one way or another.

Even with lowered expectations for TSO, we see at least a 20 to 30 cent year over year improvement in the EA.com.

Fourth, we don't see anyone taking share from EA.

Like in most years, we have challenges to deal with.

This year, there's no World Cup.

There's also no Harry Potter movie.

On the other hand, we intend on publishing two Potter games this year and there is a fifth book coming out.

We also think that Lord of the Rings has a good shot at being the biggest movie of 2003.

Bottom line -- we have a lot of franchise strength and tile strength.

We have a great publishing organization also.

We will take advantage of these strengths to once again preserve and build on our lead in the year ahead.

Finally, we will continue to be a globally strong company.

Europe is the strength of the EA and we expect continued strength in that geography.

In summary, this was a historic quarter for Electronic Arts.

Record revenue, record earnings and record cash flow.

We find ourselves exactly where we want to be going into 2004.

We're number one on the PS 2, we're a company that knows how to build big hits, and we are global.

Finally, while we have work to do as always, we're in great shape heading into the new year.

With that, Larry, John and I will open it up to your questions.

Operator?

Thank you.

The question and answer session will be conducted electronically.

If you would like to ask a question, please do so by pressing the star key, followed by the digit one on your touch-tone telephone.

If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Again, that's star one to ask a question.

And we'll go first to Mike Wallace (ph) at UBS Warburg.

Caller: Hi.

A couple of questions.

First, can I get a clarification on 169?

It looks like without charge works -- amortization and the impairment charges you did 179 in the quarter?

That is correct, Mike.

We took -- there are two things involved in that.

First of all, we had -- we consolidated our Seattle studio into Vancouver and then consolidated the pogo studios into redwood shores in San Francisco.

That resulted in about a 10 million dollar charge.

The second thing is we had certain cost basis investments in total three that as we always do, we go through quarterly and look to see if there's permanent impairment.

It was our judgment in the quarter that these investments were permanently impaired and that was another 10 million dollars charge.

So that street estimate of 157, that was without charges, I assume?

So the comparable number's 179?

Yes, it is.

Okay.

As far as the EA.com goes if the Sims doesn't start to accelerate do you look across all the pogo stuff and start getting rid of some the free games?

We're kind of downsizing?

What action could you take to get to profitability and is the target still some time in fiscal '04 to get that to break even?

Mike this is John.

Our pogo business, our free game business is actually not a loss-making part of it total as we stand today.

Really what we're doing is we're carrying very significant investments in TSO, earth and beyond.

The depreciation of investments that were made in past years essentially is driving us into the negative column.

As Warren would say, we're going to get the break even one way or the other.

We'll make the top line bigger enough to match our expenses or the top line down to match our bottom.

We're focused on that.

As you know TTSO did not meet our expectations.

We are going to continue and invest for a couple more months heavily on the content side to see if we can push that up strongly enough to get where we originally felt we would be.

If we can't, we'll match it with expenses.

So we are driving hard to reach the goals that we outlined in Warren's early comments in terms of the 20 to 30 cent share improvement.

Do you think the pricing on Sims on line is an issue?

With any subscription business, the number one reason in every research why people don't do it is because there's a subscription involved.

In other words thanks eel take anything for free.

But when they have to pay for a subscription it's an issue.

At 9.99, I think we have a good offer.

The average player is playing 2.7 hours a day.

In terms of the package grossed (ph) price (ph) were (ph) originally went out at 39 dollars.

We have communicated to retail channel -- right, we originally went up 49 dollars and communicated to retail channel that we're bringing that down to 39 dollars next week.

So we are improving the offer of the value in that regard.

On going in the future there some room for different types of packages that we'll be exploring along with the new contents to try to drive up that subscription number.

Okay.

I want to ask you about the hardware estimates in the XBox GameCube.

I can see why GameCube expectations are down relative to last year, but XBox, why do you think unit shipments would be down instead of up this year, especially given the fact that the price will go down to 150?

We actually said that we expected the range on XBox to be 2.5 to 3.0 in North America.

I think that we're probably of the opinion that it's going to be closer to the high end of that range, and may move up a little higher than that.

But as always, Mike, we tend to forecast conservatively and if there's upside, great.

Okay.

But we think that rage subject a reasonable expectation range at this point in time.

Okay.

And just one last question and then I'll shut up.

How would you describe the current retail environment?

I know there's a lot of product, and most of it's not yours, but there's a lot of product out there that the retailer's trying to get rid of.

As far as a new products you have coming out, is there any -- on how many units they take in?

Not just for you guys, but across the board, are retailers feeling a little better than they were at Christmas?

I really can't comment on other company's situations but I can tell you from our standpoint the retail channel is in good shape and we got good sell-in on the key releases that we put into the market in the last four or five weeks and the sell through has been extraordinarily good so far on the Sims console and Sim City 4 and we're expecting good, strong sell-in on command and conquer and some of the other key titles coming up between now and the end of the quarter.

From where we sit, the retail channel is in good shape.

We're getting great sell through.

And reorder has been strong on Madden, Lord of the Ring, Bond.

What we're seeing is basically the key titles we have out there retailers aren't hoeing a lot of hesitation here or abroad.

I assume you're not going to say anything about the shelf?

You know, I would -- the only thing I'd say, Mike, what I've said, if you look at the company today, we're in great financial shape. 1.2 billion of cash on the balance sheet.

We have a conservative capital structure.

We generated, you know -- this is after tax operating cash flow 580 million.

This for us is about housekeeping, and, you know, what you do is you provide yourself with optionality and flexibility and that's what a shelf does.

Nothing more, nothing less.

Okay.

Thanks.

Thank you.

Moving on we'll take our next question from Gino Patalette (ph) from Deutsche Bank Securities.

Thanks.

Can you talk about I guess for the fiscal fourth quarter any affiliate label titles coming out of square EA that we should be looking after?

I guess if you look at the European market, it seems like it's lagging the U.S. by about six months to a year.

I guess as you look into this year, do you expect to continue to gain share and can you give us a sense of I guess, you know, what -- you know, the PlayStation 2 seems to be the platform of choice there as well.

You know, should we expect similar types of market share gains that we saw here in the U.S. this past year maybe play out as you look into the calendar 2003 year for the European market for EA in particular on the PS 2?

Well, as we think about the European business, I think Warren addressed this in his comments.

We talked about PlayStation 2 software growth in North America at 25 to 30%.

We think the -- we think the European market has the opportunity to grow at a rate greater than that.

So we think the business is pretty robust in Europe.

PlayStation 2 is going to continue to lead.

We think that PlayStation 2 can sell between 8 and 9 million units of new hardware in the calendar year.

And we don't expect to lose market share, and if we can execute well on the key titles I expect that we'll move it in a positive direction in Europe.

And just to add to that, percentage wise on software, we will see big numbers in terms of software group because they're lapping part years.

So we'll see nice numbers there.

But again, it's relative live small business so it doesn't influence us that much.

You asked about affiliated label.

We have two affiliated label titles (ph) in the quarter.

Someone an expansion disk on battlefield and the other is an expansion with our 1503 which is a European title coming out of Germany.

There aren't significant (inaudible) the quarter, although we have good catalog on the parts.

Was there anything else, Mr. Patalette?

That's it.

Moving on, we'll hear from Heath Terry (ph) at Credit Suisse First Boston.

Just one question on the guidance you gave of 5 to 5%.

You were talking more like 5 to 8% last quarter.

Can you give us an idea what's driving change there and what you see the EA specific growth rate for PC looking at, should we assume it should be higher than the overall market because of the big releases that you have to share?

And then if you could talk a little bit about I guess the Sims on line.

The kind of mistakes I guess that -- or what it was that kept it from getting to your expectations as quickly.

And I guess that will cover it.

I'll take the PC piece of this first.

The overall PC market in North America did not finish as strongly as we had anticipated the end of calendar '02, so as a consequence we brought down our forecast for calendar year '03.

Significantly as you mentioned.

We were out there five or eight and now we're talking 0 to 5.

Our business certainly outperformed the overall market in calendar year '02.

We expect that to be the case in '03.

We have an incredibly strong lineup of new products for the year.

Led by Sim City 4 which is off to a great star, command and conquer generals.

We have a new expansion pack with the Sims called superstar.

So we've got a great, great lineup of PC products that are on the slate for calendar year '303.

So we are expecting to do better than the overall market.

But again, it's going to be a matter of executing against some of the strong franchises and titles that question in the queue.

It's interesting on the PC side, big titles that we're shipping are performing much better than any sort of, you know, single digit or mild decline, you know, industry total would indicate.

What seems to be happening is that big titles are, you know, rising to record levels.

But there's fewer titles overall.

So, you know, by and large, you know, you're commenting about us outperforming the industry is correct.

On the TSO, you asked about mistakes, we launched this title a month ago, a month and ten days ago.

So in terms of all the things we did right and wrong, it seems awfully early to give a full summary.

But if I were to give two comments, I would make these.

The first is we probably made an error in expectations.

You know, we feel great about the intellectual property.

We expected its transfer to an on line subscription model to be well received from the marketplace and from a conceptual basis it has been.

We have had fewer subscribers than we had hoped for.

But that's more our expectations in terms of what we might have executed differently.

If we could have executed anything differently than we did, I'd say that the level of content that we'll have in this product on April 1st, we'd like to have had that at launch.

So our consumers have told us pretty clearly that they are very appreciative of a new content our studio is adding, whether to ban objects in the casino stuff and other elements.

That's starting to make people feel really good about the product.

I wish we had that at launch.

Got you.

I guess one quick question.

Have you started to get any feedback yet from retailers on the revamp to the baseball franchise?

Have they seen the changes yet and have you seen any change in kind of their -- what would normally be their buying patterns because of the new MVP version versus the old triple play?

It's little early in the process.

We just had a sale -- a national sales meeting with all of our sales folks about ten days ago, showed them the (inaudible) for (ph) the first time.

The feedback from our sales organization was really, really positive about the changes.

And the improvements.

But to give you feedback about levels, it's the early because they're shipping towards the end of the quarter and we'll be out presenting them and taking orders over the next four to six weeks.

The numbers give on Sims City 4 and the PS 600 and 800,000, those were sell through numbers?

Sell in.

Great.

Thanks.

From U.S.

Bancorp Piper Jaffrays, Tony Gillcus (ph).

Hi.

The filing of the shelf (ph) is going to prompt some questions regarding your acquisition strategy.

Any comment there on what that strategy might be?

Are you looking to develop your PC business?

Is it domestic or international?

Of course with the Vivendi assets for sale in the market and three quarters of that business PC, is that something or the type of business that interests you and then on the EA.com A couple little follow-ups.

How are you marketing TSO right now?

What's the consumers are on -- to the game?

Are you getting the response that it's the good game play and the type of game that you thought it would be?

Any surprises on that front?

And then any changes in ad revenue outlook going forward?

Tony, I'll take the question about acquisition strategy, and it hasn't changed.

I mean we continue to look at every competitive company in the industry on a regular basis.

I think we've frequently discussed our acquisition criteria, and at the top of --at the top of the list we looked for companies that would be strategic acquisitions.

And the things that we look for first are companies that own significant intellectual property and companies that have world-class development organizations within the companies.

So where we can find those two elements wholly owned I. P., resources and the financial deal makes sense and the company's well managed and our company's going to be culturally compatible, we will pull the trigger.

We don't have anything to announce, but the acquisition assessment criteria remain the same, and again, at the top of the list is intellectual property and world-class development resources.

This is John on the dotcom and TSO question.

Just a start.

It might be useful to put the Sims on line into a little bit of context.

Even had we met our goals with, you know, the larger number of subscribers and had continued to build through '04, it might have been in the range of 2 at best 3% of our revenues.

So just as a perspective, we focus a lot on it because it's a strategic priority for us, but its absolute rev lens to the top or bottom line is more limited.

In terms of our question about how we're marketing it, we have been on TV.

The campaign did a great job, covered -- cover of "Newsweek."

We definitely managed to let people it was out there.

The consumer response, I can tell you is basically in -- kind of think of it as two target audiences.

The original beta users that starred with us when the game was much less complete.

Really did not get to the point of complete satisfaction.

The new users that have bought the product, much higher level of satisfaction.

So think of it as somewhere between 5 and 6 out of 10 rating from the beta using community and then the product continued to get better.

And 7 or 8 out of ten from the new user which is a far better average, but not as high as we have had with the Sims so far.

It's our expectation with these new assets and features to get this into the nine out of ten range which is where we think we'd like to see it before we go back and invest heavily in marketing and bring a whole new raft of consumers to franchise.

In terms of our ad revenue outlook, you're probably aware that we have a relationship with AOL where they're the primary seller of EA through the AOL games channel.

We did reasonable numbers in the quarter.

Just over 9 million dollars.

Our outlook going forward, you know, clearly to the degree that we are linked exclusively to that, we'd expect it to go down.

The -- pleasantly we are not exclusively linked to that and we are working on different systems to ensure that our free games business remains profitable and grows profitable and in FY '04.

Not quite ready to share the details in today's call.

Okay.

A quick follow up for Larry.

Historically, you haven't done acquisitions of side and haven't been aggressive in the market.

Should the opportunity present itself, would you overcome those two attributes?

If the right criteria are in place, the answer is yes.

And I would disagree with your premise.

At the time, when we bought Max, that was a significant acquisition as was westwood when we acquired that company.

We have done it in the past and we're prepared to do it in the future where it makes sense.

Thanks, guys.

Moving on to Edward Bouillons (ph) at Gerard Klauer Madison.

Good afternoon.

I was looking into the June quarter, and looking at the anniversarying against the FIFA World Cup game as well as medal of honor, what are the other games that you have coming besides the NBA street 2?

This is John.

I think the biggest contributor for the coming -- for quarter as we try to lap medal of honor frankly is the carry from what we're launching in the current quarter.

So we have a really unprecedented strength in PC titles this quarter with the combination of Sim City and generals.

And we add to that the Sims PS 2.

What we're getting out DefJam Vendetta and MVP baseball.

We have a strong carry as we leave our fiscal quarter and move into the first of the quarter.

Now, you said in addition to NBA street which we put out into the June quarter.

The principal new title we have announced so far is in fact NBA street, and the biggest addition to that will be the ongoing catalog sales from our major titles in this quarter.

And one addition to that would be Sims superstar.

June quarter.

Which is also in the June quarter.

And given that I forgot about that in my response, let me note that Sims superstar is probably -- at least we believe, going to be the biggest of the expansion packs.

It's got great new contact.

We'll be announcing affiliation with a large number of celebrity talent, which I think speaks perfectly to a product that sells well to a female audience, 13 to 17.

Okay.

And then as you look out towards allocating R&D dollars for the various consoles, what are your thoughts with regard to GameCube?

Well, we're going through that assessment process right now for fiscal '04.

The one comment I would make is that we're going to is continue to support the GameCube platform and all the genres that make sense.

We were a little disappointed with the achievements in the sports category so I think we'll look at the number of sports titles that we'll develop for the GameCube platform in the coming year.

Okay.

Then Warren, just a housekeeping question for you.

What are you looking for for your share count in the March quarter?

I would look just slightly ahead of where we are right now.

Roughly 148.

Put it around the 150 sort of range.

Great.

Thanks.

Thank you.

Our next question will come from Shawn Milne (ph) with SoundView Technology.

Thank you very much, and good quarter.

Thanks.

Thank you.

Especially in this environment.

Warren, just a couple follow-up housekeeping questions.

Did I catch the Harry Potter unit number correctly?

Can you repeat that?

As we said over 90 million units, and between 9 1/2 and ten.

Let me make a follow-up comment to that.

Because there's been a lot of negative commentary about the results that we achieved with Harry potter this year.

So our business was significantly up year on year.

We beat our internal plan by 15% on that title.

It did not sell through as well as we expected on the PC platform, but overall, it was a hugely successful franchise for us this year and we're very pleased to be part of that business.

PC softest, only a North American phenomenon.

We do just fine in Europe.

So overall, it has been a great franchise.

But overall -- I mean stronger in Europe, right?

Stronger in Europe relative to the PC platform where we've got both higher pricing and strong sell through.

Console, like PS 2 is compare to believe the two markets.

Okay.

Great.

Warren, can you talk a little bit about the currency impact on international sales and how you're thinking about that for fiscal '04?

The currency impact in the quarter was about 15 million so you can figure, you know in the neighborhood of 5, 6% on the growth rate.

On the bottom line, however, the impact was about 2 million dollars.

So the school of hedging that I come from says that you can't hedge revenue but you do hedge your bottom line so you make your operating plan.

So as we think about hedging that is how we're thinking about it as (ph) we want to protect our plan protect our net income.

Okay.

And Larry, on the square EA deal any update relative to I believe we're coming up to an important date at the end of March?

What I would say is that we are in discussions with square about a potential ongoing relationship that would likely be structured on a title by title basis.

Okay.

And lastly, maybe for Warren, if you think through next year and the margin, how about break out, you know, between your licensed business and your own intellectual property, how does that mix change year over year?

Well, I would put -- you know right now we're just going in over the course of the next month and a half into our formal, you know, budget meetings where we'll have all the operators come in and go through our plans.

So if it's still a little bit early to address that.

What I can tell you is this is, you know, we would as you would expect to see some downward price pressure.

You know, kind of go up -- up or around through the income statement and tell you what we can tell you today.

Pricing pressure.

But at the same time, we have a lot of top tier titles.

So -- we think as we mentioned earlier the top tier titles will still be able to hold the 49 dollar price point.

On the gross margin line to the extent revenue for unit goes down, our royalty rates also, you know, go in concert with that.

So it's not a dollar for dollar impact on gross margin.

The other thing I see us doing next year is really -- we have a concerted effort to bring more development in house, and as you know the outside development fees goes through gross margin, but the internal development goes through the line.

So I think you'll see it benefit to some degree as a result of in-house development taking place.

As I think about, you know, the income statement lines from there, you know, we're going to continue to do everything we can to drive productivity, but at the same time, you know, we believe in really, you know two things fundamentally and that is you know, continue to invest (ph) in the marketing of our brand and our products.

Because these are lasting strong franchises.

So I would continue to expect that revenue to move in concert -- or as a percentage of revenue to hold roughly in line, and at the same time, we're going to continue to invest in developing our product.

And you'll see some of those costs move out of gross margin into -- into the R&D line.

Although I do have to really pay our studios a particular compliment here because we have been consolidating our facilities to drive efficiency, and not only in terms of real estate but also in terms of really how we develop product.

And making our tools and libraries and our development process standardized to allow us to put more money into the title as opposed to more money into the overhead.

So I don't know if that gives you any perspective, but that's how we see things.

Well, that's helpful.

Just lastly, would you still stick to the comments that you can think you can drive operating margin or at least operating expansion next year?

Well, I would say, you know, first of all, EA.com, as John mentioned and I did as well, you know, our drill there is to drive -- as we said 20 to 30 cent improvement and really, you know, continue to go on from there.

I think that's going to continue to expand our margins in total.

Thank you very much.

Thank you.

From RBC Capital Markets, Stewart Halpern (ph).

Thank you for taking the question.

A couple of things.

First, did the TSO impact your plans and maybe give you an update on what you're thinking there.

Secondly, did you think of reconsolidating the EA.com?

I guess with all the cash flow generation, do you ever think a little bit about dividend which seems to be a popular topic of conversation these days?

Maybe finally for Larry, if you can think back to the time of the gulf war did being at war have any impact on business during that time?

Were people watching CNN as opposed to buying video games?

I have no recollection of what happened during the gulf war.

I guess we can go back and check that and give you a response off line.

Okay.

In terms of -- you know, I think -- in terms of the subscription businesses, we concluded when we came up short of expectation if last year on subscription businesses that for PC length of subscription we had a reduce in that.

We had been experimenting aggressively with on-line connection for both our PC sports and several of the PS 2 titles.

The tie ratio between the number of PS 2s out there on line and the number of people who registered to play Madden is actually in excess of one to one.

There are more registrations of players from on line and there are PS 2 hardware kits out there.

And our research tells us that the consumer is willing to pay for this.

So where we think we are is in a position where we want modest investment, we want to learn a lot because we think subscription revenue for us in the future is going to be building into a meaningful part of our business.

But at this point in time, we are not looking to make huge double digit million dollar investments as we did with Sims on line.

Just to embellish that a little bit, I think you'll see us concentrate the efforts beyond the Sims on line.

We want to get the Sims on line right.

Take it to all the key international territory.

So that is going to be the focus, and the key effort in fiscal '04.

Okay.

The other couple of things are maybe more for Warren.

Let's see, you had the question on the dividend and then the second part of that was -

Well, did you think of reconsolidating EA.com just to simplify the financial reporting?

I think our number one objective on EA.com is to do the right things to drive down the profitability.

I think anything -- and all things are on the table.

And, you know, that could --we're evaluating things as we go but it could involve the consolidation of EA.com back into the core.

All things are on the table and those things are being discussed as part of our planning process.

As we think about things financially, and in dividend, you know there are no current plans at this time.

I think, you know, we are committed to driving share owner value.

We see a lot of opportunities ahead for our business in terms of its continued expansion.

But no plans at this time.

Okay.

Thank you.

Thank you.

Next we'll hear from Gary Cooper (ph) at Banc of America Securities.

Hi.

Thanks.

Just a couple of product-related questions, guys.

I think that you had released need for speed in several consecutive years during the last cycle.

So just wanted to kind of see if you think you'll do that this year?

Secondly, you haven't released Lord of the Rings game on the PC.

The (inaudible) game appears to be doing pretty well, so I wanted to see if you had plans to release a two towers game before this fall.

I have a couple more.

A need for speed, we are, in fact, working on a title for our next fiscal year now.

We haven't made that announcement yet.

We haven't named it yet.

It may or may not carry the need for speed game, but that's the internal working title and much the same team that built the last one.

So yes, we're (inaudible).

On Lord of the Rings PC, we did not in fact build the two towers game, and we're working on a title for next year.

Yeah.

You should expect a PC version of return of the kings probably in Q3 next year along with the release of multiple platforms.

Okay.

Thanks.

And then just a couple more.

First, what is the launch date for TSO internationally and is that different from what it was?

And then lastly, could you guys talk about the AOL business?

It's becoming a pretty important piece overall here in terms of maybe what the margins are and what the margins are or the difference in margins between your deals and your street deals.

To the launch date for the TSO, we have always been considering a launch schedule that was around the summer to Christmas quarter of 2003 for the international markets.

We'll probably be towards the --the back end of that.

But to be specific, we have an internal hurdle as well.

The internal hurdle we get the product improves in when we get to the nine out of the ten consumer rating before we take it international.

We want to make sure we're --what we're bringing around the world is a hit the day it launches.

So there's also internal measurement going on.

In terms of our AL business, it runs through our P&L in a different way than our studio does.

Many of our deals involve codevelopment where we fund the development is very, very similar on the P&L to what we have in our studio.

And, you know that would be a title like battlefield 1942.

The P&L impact on businesses like the square EA joint venture are smaller, and what we have there really is a scenario where we generate distribution revenue through our North American business, and we also take a share of the publishing profit.

But the net income is lesser for that.

We have been moving more towards pub deals where we generate greater income.

To be specific, if you take a look at the last few fiscal years in fiscal '01, last year it was 19, and this fiscal year to date is about 25.

So we're making that a more profitable business.

Thank you.

Moving on to Irvan Boteo (ph) with SWS Securities.

Good afternoon, guys.

Great quarter.

Thank you.

Just wanted to address the growth question one more time.

You gave detailed guidance for the U.S. market by a platform.

What would that translate into overall software growth, including PC?

And then if you were to add GameBoy advance to it, I know that's not a very big part of your business, but with the new GameBoy advance coming out in a few months, you know, where would you see growth in that market?

And finally on Sims on line, what do you think was the delta on EPS as a result of the, you know, on the under performance of the initial under performance of that product?

In other words, if you were expecting that to contribute X amount, your EPS and I know revenue wise it's not that big of a deal to your total top line, but EPS wise what's the delta?

I'll take a look at the --I'll take a crack at the GameBoy advance.

I think the introduction of the new front system will be a plus.

I think you'll continue to see Nintendo post some pretty significant unit sale numbers on the hardware.

And that ought to help drive software.

You're correct, it's no a it is cant part of our business.

We'll be opportunistic with the number of titles we do on GameBoy advance.

But at the end of fiscal '04 it is still going to represent a minuscule portion of the overall business.

If I can add on to the question on EPS, if you look at the spread between EA.com's financial performance from what we had previously said at 50 million going to losses of 70 million it's roughly a third, a third, and a third.

A third being lower TSO revenue -- third being marketing spin which is a conscious decision.

I would consider that more an investment than a decision as opposed to a loss of earnings per share.

And then a third of that is really lower advertising revenue expected.

So I think that's one way to think about the EPS, in fact.

Okay.

Then off the 88,000 people who are spending 2.7 hours at the computer you said every day, how many of these are beta testers?

Just for clarity sake, there's players don't play every day.

They average playing every other day.

And when they log on, they log on for 2.7 hours.

So when you -- so when you kind of do the math what you really end up with is something around 42, 43,000 players playing for 2.7 hours.

One of the issues in terms of knowing how many of them are beta testers is a beta tester doesn't have to have to reregister as a beta tester.

So we don't have a perfect count on that.

If you call back, we can give you a better estimate in a couple of days if we researched or logs, but I would guess that it's somewhere less than 15% of the total of the beta testers.

So just to make sure on this, you're saying off the 88 the actual number might be more like 43,000?

No. 43,000 is about how many play every day.

Okay.

The number unregistered users is in fact in the 80s.

You then asked how many of those in the 80s were among the beta testing community and I said a minority.

Final question, again, software growth rate you said in Europe is much faster than the U.S.

And you mentioned that on PS 2 it's going to be much more than 25 to 3035%.

Can you, one, speak to what that much more than 25 to 30, you're thinking 30 to 40 or 40 to 50 and then XBox and GameCube, if you can give your projections there as well.

Okay.

So I don't think anybody said much more.

I think what we said -- I think what we said that we expected growth rates to -- in Europe to be slightly higher than what happens in the North American market.

So, you know, going back to the overall market guidance we provided we said PS 2, 25 to 30%.

We think the number in Europe is higher end of the range.

Same thing applies to XBox and Nintendo GameCube.

Operator, we'll take one more question.

We'll take our final question from John Taylor (ph) at Arcadia Investment Corporations.

Congratulations.

Thank you.

I have a little list here.

Can you give us any color on the relative importance of say PS 2 and PC and XBox in the U.S. and Europe?

I guess I'm looking for a little segmentation by platform in those two regions.

Can you give us any highlights there?

Are you talking about hardware?

No.

I'm sorry.

Your software mix, you know, so the total PC business, this amount was in North America, the other amount was in Europe and PS 2, same kind of idea?

I think we can probably give you that off line, unless -

Yeah, we'll take that off line.

Okay.

All right and then -

I just point out that -- now, it's not segregated but if go to the metric of the back of the press release, we of course do provide it in total.

By platform.

Basically what it is, PC is higher than in North America.

As a percentage of the mix.

Okay.

I'll be honest, I'm trying to cheat to compare the U.S. sell end versus the sell through kind of thing.

That's kind of what I'm interested in.

Okay.

The -- one of the things that on the Harry Potter thing, could you share with us what percentage of the units or revenue amount on Harry Potter went to the U.S. or North America as opposed to the rest of the world?

...

Probably going to be to have to be off line again.

Okay.

Let's see.

On the subject of Sims on line, what are you currently thinking might be a reasonable subscriber base goal at the end of March and then maybe what do you think -- do you have any range for us or anything at the end of 12 months out from March?

So, I think we really need to shift the focus away from the short term and think more about the longer term.

Is of, you know, when I've been asked this question in the past, I've talked about a subscriber level in the hundreds of thousands at the first year anniversary.

And I think specifically I said 400,000 to 450,000.

So, you know, as an organization I think that's still a goal to get to that kind of subscription level if a 12-month period.

I think it's important to realize that this is a marathon, not a Sprint.

If you take a look at the successful persistent world products in this business, ultimate on line has been out there for five years.

Ever press has been out there for four or four-plus years.

So we need to think about the longer term on TSO.

Not so much what happened in the first five or six weeks, but what's going to happen after five or six months or 18 months or 24 months.

And as both Warren and John commented earlier, we're committed to make this -- make this a success.

It's about constantly updating and adding to and refreshing the congress tent.

And supporting that with really high-quality, strong sustaining markets that's what we're committed to do.

What the subscription level is after six weeks or ten weeks is not that important.

What's important is the longer term.

Okay.

All right.

Let me just come back to your other question, on Harry Potter, geographical break down, just within - this as the of 50/50.

Okay.

And that -- is that units or dollars can?

That's in units.

Okay.

And then the other income line was a negative for the first time as long as I can remember.

Anything impact that in particular?

Yes.

That was the impairment of investments of 10 million dollars.

In other words, when you impair an investment like that, that's the line it goes through.

So that is the spread.

Okay.

All right.

We can have that back.

And then let's see.

Are you seeing anything from any of the format owners?

And I'm thinking more in terms of the number two and number three format owners that would suggest they're getting more aggression aggressive in trying to acquire proprietary titles for their machines?

Well, I think you're aware that the Nintendo sold their position in rare which was acquired by Microsoft.

So that's the most recent, significant transaction.

So I would say that the Nintendo is backing up in terms of that effort, and Microsoft seems to be out there aggressively looking for exclusive intellectual property.

I guess what I'm asking is are you hearing any --any solicitations from them to try to get you closer to them on an exclusive basis for anything?

That's something that is an ongoing discussion.

Yes, they would be interested in having us do that, but that typically has not been our strategy.

It would take some sort of extraordinary proposition for us to consider that seriously.

And you wouldn't need a shelf filing if that was the case?

A little humor there.

The consolidation of the studios into Los Angeles, is there a number you can Lange on in terms of annual savings or how would you have us think about in terms of line items?

We won't go into that as we go through the planning process and up until the point we give forward guidance, I'd hold off on that one.

The restructuring charges shouldn't be more than a nickel a share.

Okay.

If you go into 30,000 feet and look at the revenue stream coming in for December quarter, could you break it down roughly into what percent came from EA sport, what percent came from movie franchises what may have come from other?

What the big blocks look like?

I don't think we cut it up that way, but in terms of subtotal by category.

We'll tell you relative to normal, sports was a lesser percentage because of the huge success that we enjoyed with the movie franchises in the quarter.

So, you know, relative to our normal split, I think it went down a bit.

But I'd have to pull up a couple pieces of paper to do some math for about 40 seconds to give you a better answer than that and Larry is doing it now.

I'm doing the first thing you asked for, John, which is the split by platform by territory.

Is that what you wanted?

Yes.

What are you looking for?

I'm looking for PS 2.

Can you give us a sense of how that breaks down by, you know, by the three major regions?

Sure.

So North America it represents about 38% of the overall -- well this is Q3.

Okay.

38% in North America, 36% in Europe. 32% in Asia-Pacific. 36% in Japan.

Okay.

Any other question on that spreadsheet you haven't filled out yet, JT?

I'm still writing, man.

We're out of time here.

Last question, Larry, what's your head count these days?

It's just under 3800 worldwide, and a little over 2200 in R&D.

About 60% of the head count is in product development.

Okay.

All right.

You're the best.

Thank you very much.

Thank you.

Thanks everyone for joining us.

And that concludes today's Electronic Arts third quarter 2003 fiscal call.