美商藝電 (EA) 2005 Q4 法說會逐字稿

Good day everyone and welcome to the Electronic Arts fourth quarter and fiscal year 2005 earnings conference call.

Today's call is being recorded.

Now for opening remarks and introductions I would like it turn the call over to Tricia Goodler [ph], Director of Investor Relations.

Please go ahead, Ma'am.

Thank you, good afternoon and welcome to our fourth quarter fiscal 2005 year end earnings call.

Today on the call we have Larry Probst, Chairman and Chief Executive Officer.

Warren Jenson, Chief Financial and Administrative Officer.

And David Gardner, Senior Vice President International Publishing.

Before we begin, would like to remind you may find copies of our SEC filings, our earnings release and a replay of the webcast on our website at investor.EA.com.

Shortly after the call we'll post a copy of Warren's remarks on our website.

Throughout this call we will present both GAAP and non-GAAP financial results.

Non-GAAP results exclude charges associated with restructuring, asset impairment, other than temporary impairment of investments and affiliates, acquired in process technology, amortization of intangible, employee stock based commensuration and certain non-reoccuring litigation expenses and their related tax effects.

A supplemental schedule to our earnings release provides a reconciliation of non-GAAP to GAAP measures.

In addition, a supplemental schedule demonstrating how we calculate ROIC will be included in the copy of Warren's remarks we post on our website.

All non-GAAP measures are provided as a complement to our GAAP results and we encourage investors to consider all measures before making an investment decision.

All comparisons made in the course of this call are against the same period for prior year unless otherwise stated.

During the course of this call, we may make forward-looking statements regarding future events, in the future financial performance of the company.

We caution you that actual events and results may differ materially.

We refer you to our most recent Form 10-K and 10Q for a discussion of risk factors that could cause our actual results to differ materially from those discussed today.

We make these statements as of May 3, 2005, and disclaim any duty to update them.

Consistent with last quarter, we have included our trailing 12 month flat form shares and our 2005 estimated market outlook by platform and a supplemental schedule posted on our website.

And now I would like to turn the call over to Warren.

Great, thank you, Tricia.

Good afternoon, everyone.

Well, I think it's safe to say fiscal 2005 was an eventful year.

It was a year with many positives but also a year which we had an earnings disappointment.

On the positive side, first our titles performed extremely well.

We ended the year with 31 platinum titles up from 27 a year ago.

We now as a company have four 1 billion lifetime franchises.

Madden, FIFA, the Sims and Need For Speed.

In addition, we have seven 500 million lifetime franchises.

Of our 31 platinum titles, 20 had an average credit rating of 80 or higher and nine had average ratings of 85 or above.

This year, our teams won several important awards for creative excellence on three continents.

We received four awards from the Academy of Interactive Arts and Sciences.

Collectively, our teams walked away with five best of E Three awards last year.

Burnout 3 took out three awards from the British Academy of Films and Television.

EA received six top awards to China Joy.

China's equivalent to E3.

Two of our wholly owned franchises, the Sims and Need For Speed, each sold more than 15 million copies this year.

In sports our sales accounted for 63% of the category, our best performance ever.

Madden 2005 had 80% revenue share in the pro football category.

NBA Live continues to set the pace in pro basketball with over 70% revenue share.

And professional baseball, MVP 2005 was the hands down number one baseball title with more than 70% revenue share.

Three times that of our nearest competitor.

FIFA2005 we estimate remains the number one European football title.

FIFA Street in its inaugural year has gone platinum as of today and was the number one title in the U.K. for four out of the past eight weeks on the PS2.

This year, we significantly strengthened our long term position.

We added two world class studios including Criterion and Digital Illusion.

We added three new owned intelectual properties to our portfolio, Burnout, Battle Field and the URB.

We end entered into a five year exclusive relationship with the NFL and the NFL Player's Association.

We now have a 15 year partnership with the leader in sports broadcasting, ESPN.

We extended key relationships with the NBA and NCAA.

And we have also established a new relationship with the Arena Football League.

Render Ware has given ownership of the most advanced and sophisticated set of platform tools for next generation game development and finally we acquired a strategic stake in Ubisoft.

Taken together, these moves all serve to strengthen our core business and add to the long term stability of our revenue streams.

On the other side of the ledger, we missed our fourth quarter.

The silver lining is that we increased our resolve and in our fiscal 2006 determined in a strong competitive position and committed to winning on next GEN.

For the next few minutes I will focus my remarks in four areas, first I will review our Q4 financial results, highlighting the significant changes.

Second, I will talk about our focus and objectives for fiscal 2006.

Third, our market outlook for North America and Europe.

And fourth, our financial guidance for Q1 and fiscal year.

Following my comments, Larry , David and I will open the call to your questions.

Q4 performance, net revenue was 553 million, down 45 million year-over-year.

We had four titles that went platinum in the quarter.

NBA Street Volume 3.

Fight Night Round 2.

The Sims 2 University and MVP 2005.

We had four top ten titles in North America on both the PS2 and Xbox.

NBA Street volume 3.

MVP 2005.

Need For Speed Underground 2 and Fight Night Round 2.

In Europe we estimate we had two top ten titles on both the PSP and Xbox.

Need for Speed Underground 2 and FIFA2005.

Geographically.

North America revenue was 288 million, down 11 million or 4% year-over-year.

The decline was primarily the result of significantly lower PS2 related revenue and to a lesser extent the Game Cube.

These declines were partially offset by increased revenue from the PSP, MDF, the PC, and subscriptions.

Xbox related revenues were essentially flat year-over-year.

Europe revenue was 218 million, down 31 million or 12%.

The decrease was driven primarily by lower co-publishing and PS2 related sales.

Revenues increased at a double digit rate on both the Xbox and PC.

Total international revenue was 265 million, down 11%.

Asia/Pacific which includes Japan was down 7% year-over-year.

Foreign currency movement improved our top line by roughly 11 million or 2% in the quarter.

Co-pub and distribution.

Revenue was 16% of total net revenue, or 89 million down 21%.

The decline in revenue was a result of last year's strong performance of Final Fantasy 10-2 and Battle Field Vietnam which was partially offset by this year's performance of Time Splitters 3 .

Mobility, which include revenue associated with all mobile devices including hand helds and cell phones increased by $20 million in the quarter to $34 million up 140%.

The increase was driven by the introduction of the PSP in North America and to a lesser extent of NDF.

We were number two behind Sony on the PSP with 23% revenue share.

Need For Speed was the number one game and both NFL Street 2 and Tiger Woods were top ten title.

Internet services licensing and other.

Revenue was $28 million, up 46% year-over-year.

The increase was driven primarily by increases in Club Pogo subscriptions and licensing revenue.

We have just crossed an important online threshold as of today, over a million paying subscribers are using our services.

Moving on to the rest of the income statement.

Gross profit in the quarter was 320 million, down 14%.

Gross margin was 57.9%, versus 62.2% a year ago.

The decline was primarily driven by higher price protection and sales return charges taken during the quarter.

And lower overall pricing.

The decline was partially offset by lower co-publishing royalties and lower overall royalty rates.

Op expense, marketing and sales.

Marking and sales expense was 87 million, up 20 million year-over-year.

The increase was driven by lower co-marketing offsets in the current quarter and to a lesser extent increased advertising on titles released in North America.

We had higher payroll related costs.

The increase was partially offset by bonus adjustment in light of the company's performance.

G&A, G&A was 66 million, up 44% year-over-year.

The increase was driven by a 21 million charge taken in connection with employment related litigation.

G&A also increased as a result of increased head count and related costs.

Again, the increase was partially offset by bonus adjustments.

R&D.

R&D was 161 million, up 4% year-over-year.

The increase was driven by an increase in SKUs under development for current and new platforms.

Development of next generation tools, technologies and titles and some extent higher spending on current generation titles.

The R&D increase was primarily offset by bonus adjustments.

R&D related head count was up 34% year-over-year to roughly 4200.

Acquisitions accounted for 13 percentage points of the increase.

As a percentage of revenue, R&D was up 3 points to 29%.

Please remember that we generally expense all development and do not capitalize these costs on the balance sheet.

Interest and other income.

Interest and other income was $12 million up $6 million year-over-year.

This increase was driven primarily by higher interest income due to higher yields and significantly higher cash balances.

Diluted earnings per share were $0.02 versus $0.29 a year ago.

Non-GAAP diluted EPS was $0.09 versus $0.25.

The difference between GAAP and non-GAAP diluted EPS relates primarily to the after tax impact of certain litigation and acquisition related charges.

Our trailing 12 month operating cash flow was 634 million, versus 669 million for the comparable period.

To date, we have repurchased 805,000 common shares as part of our $750 million share repurchase plan.

We intend to complete this plan by the end of our September quarter.

Under the balance sheet.

Cash, short-term investment and marketable equity securities were 3.1 billion up 683 million year-over-year.

Gross accounts receivable were $458 million, versus $367 million, an increase of $91 million.

The increase was driven by the timing of releases within the quarter.

Reserves against outstanding receivables totalled 162 million, up 7 million from the prior year.

Reserve levels were 8% as percentage of trailing 6 month net revenue up 70 basis points over the prior year.

As a percentage of trailing nine month net revenue reserves were 6%, comparable to a year ago.

In the quarter we added roughly $60 million more in charges for price protection and returns than we did a year ago.

In the quarter, we likewise used approximately 50 million more than a year ago.

These charges and the related usage are why our reserve balance is relatively flat as compared to a year ago.

Ending net inventory was 62 million, up 7 million year-over-year.

No one title represents more than $4 million of exposure.

Total intangible assets increased $79 million year-over-year related primarily to our acquisition of Criterion and tender for Digital Illusion.

In short, our balance sheet continues to be solid.

Two quick housekeeping items, first, Sarbanes-Oxley.

As you know we are required as of the end of fiscal 2005 to report under the provisions of section 404 of the Sarbanes-Oxley Act.

We are well down the road in our testing and expect to report on a timely basis with the filing of our 10K.

Stock option expensing.

Last month the FCC delayed the expected date of statement 123 R , as a result we expect to begin stock option expensing in fiscal 2007.

Our outlook and guidance.

Before we get into the numbers, we thought it might be helpful to update our thoughts on the overall environment and discuss our fiscal 2006 operating plan.

First, the environment.

This is clearly a challenging period as the industry is clearly in transition.

This creates risk and a potential of increased volatility particularly as it relates to top line and gross margin performance.

It is also a critical period for investment.

The certainty of expense versus the uncertainty of revenue is never more pronounced.

That said, there appears to be real opportunity.

First, we love what we are seeing in next-GEN.

If you catch our next-Gen Madden spot in the NFL draft you got a glimpse of what we are talking about.

We think you will enjoy E-3.

As the quality of our entertainment improves our markets will naturally expand Second, the stakes for next GEN hardware leadership are enormous.

It's about owning the set top box that may connect the living room to the internet.

Our industry is a direct beneficiary of the attention this battle will create.

Third, there are a couple of things that will likely help smooth the transition, namely continued strength and demand for current gen consoles and software and the introduction of the PSP.

And finally, new distribution platforms are emerging and new geographies continue to open.

Whether it's the PSP, cell phone, micro transactions or further globalization.

Next, this is a period of significant change.

It is also a period of significant opportunity.

What you can expect from EA in fiscal 2006.

Well, for us, the key word is "execution."

We are focused on leadership and believe this the year in which we will lay the foundation for the next five years of our performance and advantage.

As we prepared our 2006 budget, we had a ton of debate.

We had to prioritize giving an expanding list of opportunities.

We made every attempt to strike the right balance between short term results and long term investment.

Our focus is pretty straightforward.

Number one, deliver on our SKU plan for fiscal 2006 with a highest quality lineup of hits.

Number two, own the launch of next gen software and we do that with our new Renderware technology and the strongest talent in the industry.

Third, win on the PSP.

Fourth, ramp our mobile business by launching 15 to 20 Mobile phone games.

Fifth, build a meaningful studio presence in China and sixth, take advantage of acquisition opportunities as they arise.

In summary, as we look ahead to fiscal 2006, it is a year of focus, it's a year of execution.

And a year of prioritized investment.

We can't afford to skimp.

It's about our long term lease.

I will conclude my portion of today's call with our market outlook and financial guidance. 2005 market outlook.

As Tricia mentioned, we will again be posting on our website the details summary of our market outlook.

Essentially our outlook remains the same with two exceptions.

First, given the delayed launch of the PSP in Europe, we have lowered our hardware estimates by a million and a half units and as a result slightly lowered our software growth estimates.

We have also lowered our PC software growth expectations by 5 percentage points.

Now on to our financial guidance.

The following forward looking statements reflect expectations as of May 3 rd, 2005.

Actual results may be materially different and are affected by many factors such as changes in foreign exchange rates, the overall global economy, the popular appeal of our top products, competition in our industry, our effective tax rate, development delays, our ability to secure key licenses and other factors to details in our earnings release and our annual and quarterly SEC filings.

I will cover our financial guide innocence two parts.

First I will discuss the first quarter of 2006 and then our outlook for the full fiscal year.

For the quarter ending June 30, we expect revenue to be between 300 and 340 million as compare with 432 million for the prior year.

We expect GAAP diluted net loss per share to be between $0.22 cents and $0.28 cents as compared with GAAP diluted earnings per share of $0.08 cents for the prior year.

These expected results include the projected impact of our share repurchase program.

In Q1, we expect to ship eight console and PC SKUs as compared to 11 a year ago.

We also expect to ship five handhold SKU's our Q1 titles include Medal of Honor, European Assault on three platforms.

Battle Field 2, on the PC.

Batman on four platforms.

FIFA2005 on the PSP, MVP Baseball2005 on PSP.

NBA Street Volume 3 on the PSP.

Need for Speed Underground 2 on NDS.

And Golden Eye Rogue Agent on NDS.

In addition, we plan to release Need For Speed Underground 2 on the cell phone.

Our full year guidance.

For the full year we expect revenue to be between 3.4 and 3.5 billion as compared to $3.129 billion for fiscal 2005.

GAAP diluted earnings per share to be $1.55 and $1.70 as compared for $1.59 for the prior year.

These expected results also include the projected impact of our share repurchase program.

In fiscal 2006, we planned to ship between 30 and 35 titles.

We believe our fiscal 2006 lineup is stronger than ever.

In fact, it may be our strongest so far this cycle.

We plan to ship several new properties and as always terrific and innovative entertainment.

Our lineup includes Batman, day in date With the movie, Harry Potter Goblet of Fire, day in date with the movie.

Marvel Nemesis.

Godfather, Bond from Russia with Love.

Black , our new first person shooter from Criterion.

Medal of Honor European Assault on the console.

Battlefield 2 for the PC.

Battlefield Modern Combat for the console.

The Sims 2 on the console.

In sports, the proven cast will be back.

And better than ever.

Led by the newly exclusive Madden NFL, FIFA Soccer and NBA live.

This year will also be exclusive with the PGA and Tiger Woods with the NCAA on Football as well as with NASCAR.

We will also release our first Arena Football League title.

On mobile platforms we plan to release roughly 15 titles on a PSP.

Five on the NDS and 15 to 20 mobile phone games.

On-line, we will continue to expand EA Nation.

Likewise we will continue to drive the Club Pogo subscription business.

We also expect to begin the process of rolling out Pogo in China by year end.

Further, we expect our revenues to fall roughly in the following percentages throughout the year.

Ninth to 10% of the total in Q1. 15 to 20% in Q2.

Fifty to 55% in Q3.

And 17 to 22% of the total in Q4.

Again, nine to 10% of the total in Q1. 15 to 20% in Q2.

Fifty to 55% in Q3.

And 17 to 22% of the total in Q4.

Remember, that we are in heavy investment mode.

We are also focused on maximizing the potential launch of next generation console and the expansion of the PSP installed base.

These factors combined skew our results to the back half of the year.

As a result, we expect our second quarter EPS to be roughly break even.

We expect gross margin to be roughly flat year-over-year.

Relative to fiscal 2005, we expect margin - - we expect margin pressure as a result of lower current generation pricing and higher content royalty rates.

We expect this pressure to be essentially offset by lower manufacturing royalty rates, lower outside development expense and to some extent product mix.

On the expense side, we expect R&D to be roughly 20 to 25% of revenue.

And both marketing and sales and G&A to be roughly flat year-over-year as a percentage of revenue.

We expect our operating margin to be in the high teens.

We currently project our annual effective tax rate to be roughly 27%.

This rate contemplates a favorable one-time tax benefit of roughly 15 million net.

Looking beyond fiscal 2006, from where we sit today, we believe our long-term rate will fluctuate around 28%.

Finally, please remember that our tax rate is constantly subject to change depending upon several things including changes in our business, nonrecurring items and the applicable tax laws.

As an example, we have not decided whether to repatriate foreign earnings as allowed by the 2004 Jobs Act.

If we were to do so this will negatively impact our rate.

On share count, we expect our fully diluted share count at year end to be about 320 million shares.

We expect to complete our $750 million share buy-back by the end of our second quarter.

Finally, we ask you to keep a couple of additional things in mind.

Deferred revenue.

Looking ahead particularly with the introduction of next GEN platforms and the global expansion of online gaming, you will see more games delivered with significantly inhanced online game play.

In some situations, this may increase deferred revenue.

This, of course, will have no adverse impact on cash flows.

We expect these amounts to be insignificant in the near term, but to grow over time.

Foreign exchange rate.

While we do attempt to hedge a portion of our results, any material movement in foreign currencies most notably the Euro and British pound, will have impact -- will impact our results.

We cannot offset either the top or bottom line impact of a significant depreciation in the dollar.

I will conclude with a few closing thoughts.

First, we leave fiscal 2005 with the strategically strong business.

Second we're fortunate to have the best and most talented team in the interactive entertainment industry.

Third, we move into our new fiscal year with what appears to be a great slate of hit titles.

Finally in the year ahead, we are intently focused on delivering our operating plan and winning the next generation.

We look forward to reporting our progress in the coming quarters.

With that, Larry, David and I will open the call up to you questions.

Operator?

Thank you the question and answer session will be conducted electronically everyone. [OPERATOR INSTRUCTIONS] a we will go to Jeetil Patel with Deutsche Banc.

Hi guys.

A couple of question's can you comment to us about the set top box concept for the next generation.

Interesting battle between pure video game and internet becoming more of a internet programming platform out there in terms of the next-gen.

Do you think that you are going to see a lot of the hardware vendors focus the next cycle not just only video game console but becoming a internet advertising and content programming vehicle above and beyond just pure interactive entertainment as you look at the next cycle starting later on this year and into 2006?

Secondly, a quick question on the football category.

Looks like the overall industry sell through is maybe closer to 270 million.

Do you think industry remains flat?

Or the category remains flattish on the professional football side or shrinks or expands as you look at fiscal '06 as a full year.

Jeetil, I will take the first part and then Larry can talk about the football market.

I think first of all as it relates to the consoles and on-line capability and advertising and the different things on which they may focus, I think we will just have to leave those comments on Microsoft, Sony and Nintendo.

I think what we can comment on are two things.

First of all we are excited about the processing power that these consoles will offer in terms of game development and what that will allow in terms of the quality of what we can produce.

The exciting thing for us is I think if history is any guide as the quality of our entertainment gets better, markets just naturally expand.

And we are very fortunate to be in a place where those markets are increasingly global.

The second thing that - - and I think this is a long term deal that's nothing that will be a big deal in this quarter or this year, per se, but its also going to open - - online is going open up a lot of opportunities.

I mean great consumer opportunity for on-line and connected game play as we are seeing today.

Secondly, the ability to download content and the third thing is micro transactions.

Materially from a financial perspective those are going to be more material as we get into the out years as opposed to the near years.

So in summary for us, this is all about great entertainment.

It's all about online connectivity and taking advantage of the technology.

Secondly, the point I tried to make on the call which I do think we are a direct beneficiary of is this is really an interesting battle.

To some degree if you believe it is a battle for the set top box that will bring the internet to the living room.

And I guess some people may have different use of that or who that may be.

But it's clearly an interesting situation.

We are fortunate that those boxes are directly pointed at great interactive entertainment and that's what we do best.

With regard to the football category, professional football category, we would expect it to be flat to slightly up.

I think some of the things that may help to some degree is the fact that there are a couple of new handhold platforms that could be addressed with the - - and PSP and theres potentially a next generation platform that's out there.

And I would also expect that in addition to Madden, which as everyone knows is exclusive, we would expect there to be an unlicensed football product that will be sold at a budget price point.

So when you wrap that all up, I would say flat to slightly up in the football category.

Once again, remind you may re-queue for a question by pressing star-one.

Now with Credit Suisse First Boston we have Heath Terry

Great.

I was wondering first if you could talk to us about the impact with Xbox Two all but confirmed . or actually after Gates comments last night, confirmed for this year, could you talk about the impact that would have on your guidance for the full year and at this point what your expectations are for product availability there.

If you could also with guidance here on the EPS line coming in GAAP form, can you give us an idea what you expect adjustments for the different adjustment categories for this year to look like so we can get an idea what the pro forma comparison would be.

Then finally if you could talk about pricing decisions on your title, some of the retailers are showing what in the past front line titles like Medal of Honor at $40.

If you could talk about where you are drawing that line on your product line what will be at 40 and what will be at 50?

With regard to a next generation platform from Microsoft, I think we will let Microsoft talk about that.

Either in the next week or when they get to E3.

And if and when they have something to say to E3, I think we will be appropriately positioned to support whatever platform may occur.

Heath, on the second question, let me address on pro forma, I would look at the top end of our GAAP guidance to be - - again, this is in rough terms because there will always be a few in and outs here.

It could be dependent on acquisitions and things like that but I would look at it as being roughly flat with non-GAAP at least as we start out.

And there will be ups and downs.

Overall, I would sort of consider it roughly flat with our GAAP guidance.

And then finally on the pricing side and I'm sure Larry will want to jump in on this one as well.

I think we will have to watch and see.

Our objective is to remain competitive.

We continue to think that we will be premium pricing for the top tier titles.

That said, we will absolutely be competitive throughout the year.

I think as a general trend and what is contemplated in our industry software guidance, is that current generation pricing will go down throughout the year as we point toward the launch of new consoles.

I think Lawrence said it well and we will price it on title by title basis and I think in general you will see fewer premium priced titles will encourage [inaudible ] consoles this year as we get on to next generation console again we will price according to product quality and competition.

Next we will move to Elizabeth Osur with Citi Group.

Thank you.

I' am sorry Warren if you could just maybe I misunderstood if you could specify between the GAAP and non-GAAP guidance.

I think you said is the 170 high end is that the middle of non-GAAP guidance?

Or is that meant to be the high end?

And then also if you could speak to - - I realize it's early in the transition but if you could speak to the longer term outlook and where you think the industry may grow if we assume we are getting a hardware platform at the end of this year, what kind growth you can expect to see from the industry just kind of balancing out the benefit you will get from a new platform and PSP and those feed into each other or additive.

I will take the first one and Larry will want to check in to the second one again.

You should assume our non-GAAP numbers are roughly equivalent to the GAAP guidance we gave.

So that if you look at our non-GAAP number for the year, that would equate to the high end of our guidance.

In other words, the high end of our guidance range, in rough terms, is roughly flat with our non-GAAP numbers of fiscal 2005.

So that's how you should basically take a look at that.

And with regard to the new platforms, I think Warren touched on this in his remarks, we think that the hand helds in the market are going to help smooth the transition if there happens to be a next generation console in the market later this year that will help smooth the transition.

We are looking forward to a lot of exciting new announcements from Microsoft, Sony and Nintendo going forward and that's what will help drive growth for the industry in the future.

Thanks.

Next we will have Shawn Milne with Friedman Billings Ramsey.

Okay, Warren, one more time, sorry to do it because there is a lot of confusion out there.

Did you just guide earnings down from your prior comments on your last conference call?

You came in with a non-GAAP number of 171 for the year.

Can you just be very clear on what you are saying on a non-GAAP basis?

Then I have a secondary question on seasonality and then looking out the holiday.

Thanks.

Yeah, let me try to explain that just one more time to be clear because I know this is of real important to everybody.

What we try to do, obviously at this point in the guidance setting process is to give you the right range for where we are , given our title performance, given everything that we can see and changing environment and also given the investments we need to make.

The top end of our range is roughly flat to our prior year non-GAAP performance.

If we were to come in at $1.55, that would be below our non-GAAP performance or fiscal 2005.

So we felt it was appropriate based on what we see, where we are today that we have the top end of our guidance roughly flat but the low end of our guidance is down.

Now, what I can tell you to this point is as a management team, we are focused on delivering to the top of this end of this range.

But sitting here I would similarly say you have to take into account the risks that are inherent in a transition year and in anybody's operating plan.

So from where we sit and what we are focused on delivering to the top end of that range.

That said, we think that the range from $1.55 to $1.70 is the right one.

And that I would encourage you all to consider the breadth of that range when you make your estimates.

And just as a follow-up to that, does the bottom end of the range contemplate the full stock buy-back?

Yes, it does.

And then on the - - you talked about some of the seasonal patterns and if you look at the guidance for December, that gets me around 17, $1.8 billion which is a big jump year-over-year, obviously you have Harry Potter will be a big incremental step up.

Larry, what else is out there that gives you the feeling that you can get to that revenue performance?

We think we have a very, very strong lineup in that December quarter, certainly stronger than we had in that same quarter the previous year.

So some of the key titles there we got next version of Need For Speed, Need For Speed Most Wanted on multiple platforms.

We are planning to ship FIFA2006 in that quarter.

NBA live 2006.

March Madness 2006.

Marvel Nemesis which Warren mentioned.

The next version of SSX.

So it will be SSX4 which hasn't been released for a couple of years.

The next James Bond title which is sort of a retro treatment of James Bond to Russia with Love.

Tiger PGA2006.

Godfather which everybody here is excited about and I think people will be excited when they see it at E-3.

And the Harry Potter Goblet of Fire title which will be released day in date with the movie.

So some very strong titles released on multiple platforms.

We think that is going to be a significant release schedule for us in Q3.

Thank you.

Tony Gikas with Piper Jaffray.

Mr Gikas, your line is open if you have a question, sir.

Yes.

Can you hear me now?

Sorry about that.

Could you give us a little bit of idea how much you need to grow the sports franchises to offset some the new licenses deals you have done?

And what do you expect the royalty rates to do in 2006?

Could you characterize the change?

Tony, we won't get into the very specifics of title performance.

I will repeat what we have been consistent in saying before.

This is the year where you feel the most margin pressure.

It's the transition year.

We are now moving into a whole new series of consoles which bring a lot of capability with them that should be pretty interesting.

But it is the year where the system has to adjust to higher royalty rates.

We feel margin pressure this year.

Now the interesting thing that I would also say, balancing that to some extent is that in sitting here today we expect our overall gross margin given the various ups and downs of current gen pricing - our assumptions relative to the future markets and royalty rates to be relatively flat.

Specific to your question, though, we do have an adjustment to take this year based on higher royally rates associated with these arrangements.

The flip side, on the biggest of those, meaning Madden and the NFL, is we were exclusive.

And a quick follow-up on the sport, what are your thoughts how these sports product work on the new hand held devices, specifically the Play Station Portable.

Do you get a similar market share on the PSPs as on the PS2.

We think sports will be important on PSP.

They make - - I'm not sure that it drives early adoption as aggressively as it does on the next generation consoles but we think they will be important.

If the question is about our market share relative to the competition, my answer would be yes, tha t we can certainly in the sports category achieve similar market shares on PSP that we have on Play Station 2.

In terms of overall market share, you know, we are looking for something like 20 to 25% market share on the PSP in North America.

Okay thank you

I'll take a question from A, excuse me Arvind Bhatai of Southwest Securities,

Good afternoon, guys.

Hey.

Arvind

Quick question on the international side.

Your sales were down for the first time if many quarters.

Could you comment overall on the health of the European market, in particular what kinds trends you are seeing there and how far behind do you think they are in terms of where they are in the cycle.

My name is " Ghedi" David Gardner and let me give you a little update Arvind on what's happening there.

Europe is a complex market because I wouldn't say it moves together.

So we have some trends in the U.K., which I think are far more similar to the U.S. market.

I would say there is in terms of the lifecycle of the platforms they tend to be about a year ahead of the rest of the European markets.

They adopt earlier and they are the most excited about the new platforms when they come out.

So there has more pricing pressure in the U.K. market than on the continental markets.

Having said that, we are seeing good market share results for EA and good market growth overall.

It's been a disappointment at the PSP will be not September.

I think that will reduce the rate of growth this calendar year compared to prior years.

But I would sort of answer it in that way.

And just one macro comment about Europe.

With regard to installed base of Play Station 2, if you look at it in Europe, it's about 28 million units, 20 million systems.

A similar number in the U.S.

Sony has done a good job of building installed base at a similar clip to what they have done in the United States.

Conversely, Microsoft and Nintendo have not built their installed basis that rapidly in Europe.

So that is a difference in that market as well

Let me ask a quick question if I could on the Xbox side, if Xbox 2 does come out say this holiday season, then in terms of the SKUs that you are coming out on Xbox, what is that as of today versus - is there any change in your strategy to Xbox current generation software?

We have consistently been a strong supporter of the Xbox platform and we are the number one market share company on that platform and we will continue to be a strong supporter on the existing generation of technology and I think we will be in good position on Xbox 2 even when that is released to the marketplace.

Now we will take a question from Jeffrey Mc Gillner with Decatur Jones.

I want to ask real quick, will you return - - are you expecting to return to the full priced sports line?

Well again, this is a similar response to what we said earlier.

We will take a look at each individual product and price according to the competition that's in the marketplace and product quality and how we feel the product will do relative to the competition.

Thank you.

We have Andrew Williams with Harris Nesbitt.

Good afternoon.

A couple questions.

First of all, Larry what is your expectation with regards to the studio head count as it stands today at 4200.

Where do you see that at the current fiscal year?

I would expect we will add approximately 500 people, 500 new employees in the studio on a global basis in fiscal '06.

In terms of where you think they will be?

Will they be in low cost areas such as Shanghai or are they going be in existing cities?

I think both.

I think the answer is both.

Existing locations will be adding to their head count and our intention is to try to begin to build a presence in China specifically and potentially other parts of Asia.

Okay.

And then looking at the platforms, what are your expectations with regards to your own sales on say the Play Station 2 and Xbox systems this year versus last year and then also which expectations with regards to North American sales and international sales on a dollar basis in fiscal '06 versus fiscal '05?

I would say in we are more bullish about our product line this year than we were last.

So I will answer that question in terms of market share.

I think we can move the needle in a positive direction in terms of market share on the Play Station 2.

We lost some market share last year.

I think we can regain some of that.

I think we will continue to have a strong market share on the Xbox.

That will be my answer about how we think we can do on Play Station 2 and Xbox this year relative to last.

We have a better product line.

Next we have John Taylor with Arcadia.

I have a couple of questions.

On the micro transaction front, can you talk a little bit about how you are thinking about the opportunity to improve revenue per user or revenue per unit on you know in terms of down loads or advertising or whatever.

Maybe give us a metric or two or when that will become an important contributor.

That's the first question.

And then I wonder if you could talk a little bit about the platform assumptions in the December quarter because there is an awful lot riding on that.

I wonder if you could break that down for us.

John, Warren here.

I think you just have to assume that micro transactions and the like are three to five year window and not one to two.

And it's really going to be predicated upon one the technology getting imbedded into the games and I think the real upside is when micro transactions really start to become part of the online console world.

And that is going to be more of the factor as we get further into the next cycle than it is in the near term.

From a metrics standpoint of I think you do get into some sort of harpoon-like measure when you look at follow on revenue to the packaged goods that in effect you could call it pure price.

You can also call it a form even though it's not a formal subscription agreement.

It's a way of form of subscription-like revenue.

The technology is clearly there.

We can clearly add content to our games in an online sort of expansion packed kind of world.

And I think all of those are longer term opportunities.

What we can't do is sit here and tell you that this is going to be a big financial deal in the near term.

It is more of a long term opportunity, but I think we would also say that we would expect that it is a real opportunity.

It's just going to take awhile for it to develop.

Your comment earlier about deferred revenue may be showing up as a number we will start to see.

That relates more to subscription related stuff than it does to, you know, micro transaction or whatever.

The concept of deferred revenue really relates to the service we are providing.

And if you will look at the rules under REV-REC, what the rules require is that if you are providing an on going service, you have to either be able to allocate a certain piece of the price to that service and or you have to amortize the revenue over the service life that you are committing to.

And what we are trying to say here is that as we advance in on-line and we continue to provide an on going service that will require that more and more revenue be deferred in line with our continuing obligation to provide a service to our customers.

Okay.

On a hardware front, I think the following comments that we would expect that there is more Play Station 2 hardware available in the marketplace both in North America and Europe which will be a positive thing.

There is the potential for a next generation from - next generation platform from Microsoft which will be an exciting thing for consumers.

There will be an installed base of PSP that is developed to pretty significant number in North America and will have launched in September in Europe.

So on the hardware front, I expect a much more robust market this coming holiday season than we experienced last year.

Okay.

What I was getting at is in your roughly 1.7 or 1.8 billion December guidance, what the platform break down of that might look like roughly.

I don't think we are ready to go there, John.

Okay.

Did you give us a SKU break down at least for that?

Could you do that for us?

I think we won't get into the specifics.

What Larry tried to do is go through a number of the titles that we will have during the quarter.

I would expect rough terms, SKU count-wise, to be perhaps 55, 60, somewhere in that ballpark.

That's the right range.

Next we have a question from Jennifer Jordan from Wells Fargo.

Actually, most of my questions have been answered.

I guess I just want to follow up on the idea about, you talked about pricing kind of feeling pressure as you go through the rest of the year.

Do you have a sense of the type of range of prices you are looking for on current generation titles and where do you think you will be price next generation titles.

On current generation, we would expect new releases to be in the 39.99 to 49.99 range.

And as we said earlier, probably fewer titles at the high end of that range than what the market saw last year.

And on next generation, we haven't finalized our pricing and again we will take a look at the competitive landscape and look at our product quality and making the appropriate pricing decisions.

There is a lot of conversation about whether it would be possible to bring out prices closer to 59.99 or even 65 as you got into the next generation.

Do you think that might hold?

We heard a lot of chatter along those lines from our competitors and we aren't going to participate in that conversation.

Okay, thank you.

We have Gary cooper with Banc of America securities.

Couple of questions.

So lets stay with the pricing issue.

Medal of Honor in this quarter, is it coming out at 39.99 and given the relative lack of shooter competition in that quarter, what will be the reason for that decision.

Quality issue or something else?

I have a few more.

I won't comment on the pricing decision.

What I will tell you is it's predicated for us, Gary, on competition, product quality and where we are.

And what we want to do is drive the right level of volumes relative to what the markets - - the markets going to accept.

And repeat what Larry said, you will see more and more titles come out at $39 prices points as opposed to $49 price points this year.

Just there is no question about it.

That is the very premium titles will likely continue to carry a higher price but overall pricing is coming down.

Okay.

Maybe I will ask JT's a different way here.

So a big number in Q3, we have all identified that.

Has your guidance taken into account the fact that there is going to be a cannibalization between the PSP and the PS2?

We have tied in our guidance to do -- to look at all those factors.

We can certainly be surprised Gary.

The reality is we have done our best, sat around numerous times as a management team and tried to go through our assumptions relative to historical pattern and relative to with a we feel will happen in the marketplace so we are certainly not going be immune from a surprise.

What I can tell you though is we tried to take all facts into consideration and listened to what Sony and Microsoft and Nintendo have had to say in order to make our judgment.

On the cannibalization front, certainly possible that there will be some cannibalization.

We don't think 1 plus 1 equals one.

However does 1 plus 1 equals two?

Probably not.

That said, we try to do everything we can to make our guidance completely appropriate for the year taking all of those factors into consideration.

Just two quick ones here.

One for David.

As you post the release of so many soccer games within a tight time period, and you reflect on that, do you think that was the right thing to do?

Do you think you changed the timing of the release of those soccer games?

And lastly, Larry, did I hear you correctly Q2 EPS anticipated to be flat with last year or zero cents?

I will take the last one and turn it over to David.

We said that we expect our EPS to be roughly break even.

Not flat to last year.

But roughly break even.

Regarding soccer in particular in Europe, it's a very competitive market and I think that we found very strong success with FIFA Street.

I don't know if you received the European chart data but you'll see that FIFA Street has been number one particularly in the U.K. for awhile and we will continue that franchise on a similar cycle.

And FIFA tends to be one of the top performing titles in the Christmas quarter.

So I think that timing is make sense as well.

And the other releases are really - have been driven.

So when there is an event like a World Cup et cetera we are locked to that timing.

I think we are sensitive to not put too much all in the same time period.

Next from Janco Partners we have Mike Hickey.

Thank you for taking my call.

I appreciate it this deep into the queue.

Looking at the mobile phone games in your 15-20 titles, can you give us a sense of timing of the title releases as well as how we should look at the economics.

And do you have a sense of line item might be material for this year -- maybe next.

And are you working on or have you closed any agreements with carriers or handset manufacturers at this point?

We are in the process of closing several agreements with carriers.

I don't have anything specific to announce today.

I would tell you that when we look at our title lineup as I mentioned, one title in Q1 is we move into Q2, Q3, the bulk of our 15 to 20 titles will be in those titles with maybe 25%ish in Q4.

Our operating plan for the year has roughly 20 to $25 million of revenue from mobile, for this particular year.

So in the near term, we kind of look at it as pushing a point of growth, not quite, but it's not so hugely significant, but important.

Clearly there are a lot of cell phones in the world.

We think we have great content and some wonderful brand names.

Our approach is to continue to build.

A couple of other factoids as we plan to launch these games in roughly 10 European countries and we will be in at least five languages.

As we move forward with respect to mobile phones, this is a global game.

And we will be am multiple languages and multiple countries and that will continue to build over the course of our building this business.

Operator, we will take one more question.

Last question will come from Evan Wilson from Pacific Crest.

Hi, guys.

Thank you for taking the call.

Two pretty simple yes/no questions.

Does fiscal 2006 guidance contemplate sales in Xbox 2 and second does it contemplate the price cut of the current generation.

It does not contemplate a price cut of current generation.

And it's the first question, we tried to craft our guide innocence such a way that if there is a next generation box this year, factored into our numbers.

If there is not, we think there will be more sales of current gen console.

And the range is sufficiently brought that it should cover at least as we sit today both possible scenarios.

So there is a nonanswer to your difficult question.

Okay.

That's what I was looking for.

Good.

Thank you for joining us.

We look forward to talking.

Bye.

Once again, this will conclude today's Electronics Arts conference call.

Thank you all for dialing in and you may now disconnect the line.