美商藝電 (EA) 2007 Q1 法說會逐字稿

Good day everyone.

Welcome to the Electronic Arts fiscal quarter -- first quarter 2007 earnings conference call.

Today's call is being recorded.

For opening remarks and introductions, I would like to turn the call over to Ms. Tricia Gugler, Director of Investor Relations.

Please go ahead.

Welcome to our first quarter fiscal 2007 earnings call.

Today on the call we have Larry Probst, Chairman and Chief Executive Officer, Warren Jenson, Chief Financial and Administrative Officer, and Frank Gibeau, Executive Vice President and General Manager of North America Publishing.

Before we begin, I'd like to remind you that 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 will post a copy of Warren's remarks on our website.

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

Non-GAAP measures exclude charges and related income tax effects associated with acquired in-process technology, amortization of intangibles, employee stock-based compensation, restructuring charges, and certain litigation expenses.

In addition, the Company's non-GAAP results exclude the impact of certain onetime income tax adjustments.

Our earnings release provides a reconciliation of our GAAP to non-GAAP measures.

Information regarding our use of non-GAAP measures, along with a schedule demonstrating how we calculate return on invested capital, will also be included with a copy of Warren's remarks we post on our website.

These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior 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 the prior year unless otherwise stated.

We've included our trailing 12-month platform shares in our 2006 estimated market outlook and a supplemental schedule on our website.

During the course of this call, we may make forward-looking statements regarding future events and 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 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 August 1, 2006, and disclaim any duty to update them.

Now I'd like to turn the call over to Warren.

Good afternoon, everyone.

We would like to start off with a few highlights from the quarter.

First-quarter results exceeded our expectations.

Revenue was $413 million, up $48 million or 13% year-over-year.

GAAP diluted loss per share was $0.26 versus $0.19 a year ago.

Non-GAAP diluted loss per share was $0.12, an improvement of $0.06 versus a year ago.

These results were driven by the strong performance of several titles.

FIFA World Cup sold more than 2.8 million copies.

It was the number one title in the UK for seven consecutive weeks and in Germany for six consecutive weeks.

FIFA World Cup also had a strong showing in North America.

It was our biggest title for the quarter.

On cell phones, we completed or first global launch with FIFA World Cup.

We released 2000 SKUs with over 80 carriers in 33 countries.

Battlefield 2 Modern Combat on the 360 was also well-received.

Sims 2 Family Fun Stuff sold over 700,000 copies.

NFL Head Coach had a solid debut, selling over 400,000 copies. [Life] to date, we're now the number one publisher in both North America and Europe on the 360, and our FIFA franchise has now generated over $2 billion at retail.

In the quarter, SPORE won three awards at E3, Best Original, Best PC, and Best Simulation Game, the most wins for any one game and the most for a third-party publisher.

We have extended our exclusive relationship with the PGA Tour and have also extended our NHL and NHL Players Association non-exclusive licenses.

All licenses for our major sports games are now secured through at least 2009.

In Korea, we launched our first on-line game, FIFA Online, with our partner Neowiz.

A few interesting data points.

FIFA Online was the first game to reach 100,000 peak concurrent users in its first month.

On the day of July 15th alone, over 1 million people played the game.

And in just 60 days, we have registered over 3.5 million unique users.

Although still early, we're pleased with the strong consumer response.

We are planning to begin monetizing FIFA Online with microtransactions this week.

And finally, we're pleased to have recently closed the Mythic Entertainment acquisition.

We're happy to welcome Mark Jacobs, Rob Denton, and their team to EA.

For the next few minutes, I'll focus my remarks in two areas.

First, I'll review our Q1 financial results.

Second, I'll go over our outlook and financial guidance, and then following my comments, Larry, Frank, and I will open the call to your questions.

Q1 performance, net revenue was $413 million, up 13% driven by FIFA World Cup, Battlefield on the 360, and strong catalog.

By platform, the revenue increase was driven by Xbox 360 and cellular phones, partially offset by declines in current gen.

We released 16 SKUs in the quarter, same as a year ago.

Console revenue was $194 million, up 6%.

The increase was driven by Xbox 360, which more than offset the decline in all current generation revenue.

In North America and in Europe, we had three of the top 10 titles on the 360.

Mobility, revenue was $85 million, up $33 million or 63%.

On mobile phones, revenue was $33 million.

We had four of the top 10 games in North America, with Tetris at number one.

On handhelds, revenue was $52 million, flat year-over-year.

We launched four handheld SKUs in the quarter versus six a year ago.

PC revenue was $66 million, down 11% primarily due to last year's strength of Battlefield 2.

Co-pub and distribution revenue was $42 million, up 40%, driven by the success of Half-Life 2.

Internet, licensing, and other revenue was $26 million, flat to last year.

Club Pogo now has 1.3 million subscribers, up 44% year-over-year.

Geographically, North America revenue was $209 million, up $25 million or 14%, driven by the Xbox 360 and cellular phones, partially offset by declines in current gen, PSP, and PC.

PS2 related revenue was flat year-over-year.

International revenue was $204 million, up $23 million or 13%.

Excluding a $10 million negative impact from foreign exchange, international revenue would have increased 18%.

Europe revenue was $169 million, up $25 million or 17% driven by the Xbox 360, PSP, and co-pub and distribution revenue, partially offset by declines in current gen consoles.

Asia revenue was down 5% primarily due to foreign exchange.

Moving on to the rest of the income statement, gross profit in the quarter was $245 million, up 14%.

Gross margin was 59.3% versus 58.6%, up 70 basis points.

The increase was principally due to lower sales return charges, and a shift in mix toward higher margin platforms.

These improvements were partially offset by a higher mix of license titles and increased royalty rate.

Operating expense.

As you know, this quarter, we adopted FAS 123R.

In total, this increased our operating expenses by $37 million.

Marketing and sales, marketing and sales expense was $77 million, up 3% due to our adoption of FAS 123R.

Excluding stock-based comp, marketing and sales would have been down 4% due to lower ad spending.

G&A, G&A was $59 million, up $8 million due to stock-based comp.

Excluding the impact of stock-based compensation, G&A would have been down 6%.

R&D, R&D was $216 million, up $33 million or 18%, primarily due to the expensing of stock-based compensation and the addition of JAMDAT.

Excluding stock-based comp, R&D increased 7%.

R&D headcount was approximately 5200, roughly flat versus year end, and up 15% from a year ago.

JAMDAT accounted for 8 points of this increase.

Our GAAP tax rate for the quarter was 18%.

Let me remind everyone that in a loss quarter, a lower tax rate results in a greater net loss and an increased loss per share.

As I mentioned in our last call, you can expect our rate this year to be volatile and potentially fluctuate dramatically quarter to quarter.

GAAP diluted loss per share was $0.26 versus $0.19 a year ago.

Non-GAAP diluted loss per share was $0.12 versus $0.18.

The $0.14 difference between GAAP and non-GAAP EPS is due to employee stock-based compensation, amortization of intangibles, and restructuring charges.

Our trailing 12-month operating cash flow was $589 million versus $669 million for the comparable period.

Our return on invested capital on a trailing 12-month basis was 17% versus 47% a year ago.

Now, on to the balance sheet.

Cash, short-term investments and marketables were $2.4 billion, down $35 million from year end.

Gross accounts receivable were $225 million versus $278 million a year ago, a decrease of 19% due to the timing of our release schedule.

Reserves against outstanding receivables totaled $184 million, up $73 million from last year.

Reserve levels were 17% as a percentage of trailing six months net revenue, up 5 points as a percentage of trailing nine months net revenue, reserves were 8%, up 3 points.

Inventory was $59 million, down $7 million from last year.

Other than NCAA Football, no one title represented more than $5 million of net exposure.

Now, our outlook and guidance.

Before getting into the numbers, we thought we would highlight a few things.

First, while things can change very quickly, the current sales environment is healthy.

NCAA sellthrough is up over 10% year-over-year and pre-orders for Madden are at record levels.

Second, we're very much looking forward to a great fall and holiday with all platforms hitting the store shelves.

We're not far off from having all the pieces of the Next Generation engine in place.

Third, we're very pleased with the excitement that is surrounding the Nintendo Wii and DS Light.

We see these platforms as real opportunities to grow our business.

Accordingly, we have recently ramped up development for both the Wii and DS Light.

And finally, we think the early success of FIFA Online in Korea is encouraging.

These early learnings will be invaluable for the long-term.

I'll conclude my portion of today's call with our market outlook and our financial guidance. 2006 market outlook -- essentially, our outlook for the industry remains the same.

We expect overall software sales in North America and Europe for calendar 2006 to be flat to down 5%.

We're planning for the PS3 and Nintendo Wii to launch in the late fall.

In addition, we expect the overall mobile phone game segment to be up 25% to 30%.

Now, on to our financial guidance.

I'd like to once again highlight a few points.

First, there are many uncertainties.

While we expect the PS3 and Nintendo Wii to launch successfully, there could easily be delays and shipment quantities could fall below our estimates.

Should this happen, it would cause our numbers to drop materially.

We have also yet to finalize our next gen royalty agreements with both Sony and Nintendo.

Second, demand for existing platforms and software could fall off abruptly, even below our expectations.

Third, there is significant development risk, particularly given the challenges of transition.

It is possible that a title could slip out of any given quarter for the fiscal year -- or any given quarter or for the fiscal year.

And finally, it is important that you carefully review and assess the risk factors detailed in our SEC filings.

Now, the numbers.

For the second quarter ending September 30, we expect revenue to be between $635 and $685 million;

GAAP diluted loss per share to be between $0.28 and $0.22; and our non-GAAP diluted earnings per share to be roughly breakeven.

Overall, we expect our non-GAAP EPS to be roughly $0.25 better than our GAAP loss per share.

The estimated breakdown of these adjustments is as follows -- stock-based compensation, approximately $0.10; amortization of intangible assets, roughly $0.04; restructuring charges, approximately $0.02 related to our European reorganization; and acquisition charges of roughly $0.09 associated with our acquisition of Mythic Entertainment and Digital Illusions.

If you are projecting a loss in the second quarter, the appropriate share count would be approximately $308 million.

If you're projecting positive earnings, the appropriate share count would be roughly $317 million.

In Q2, we expect to ship 43 SKUs compared to 37 a year ago.

We have already shipped NCAA Football on four platforms and Lord of the Rings Battle for Middle-earth II on the Xbox 360.

Lord of the Rings is a breakthrough product which, for the first time, successfully brings Real-Time Strategy to console.

In addition, we expect to release Def Jam on the PSP, FIFA 2007 on seven platforms, Godfather on two platforms, Madden NFL 2007 on eight, Madden NFL 2007 Hall of Fame Deluxe on two platforms, NASCAR Thunder on three platforms, NBA LIVE 2007 on five platforms, NHL 2007 on five platforms, The Sims 2 Glamour Life expansion pack, Tiger PGA Tour on four platforms.

In the quarter, we also expect to offer downloadable content on Xbox Live Marketplace.

Some examples include a map pack for Lord of the Rings Battle for Middle-earth II, and we will also be releasing a steady stream of EA SPORTS content later in Q2.

On mobile phones, we plan to release seven games -- Tetris Mania, EVDO Tetris, Scrabble, SimCity, Madden NFL 2007, FIFA Street 2, and Def Jam Fight for New York.

Now, our full-year guidance.

For the full-year, we expect revenue to be between 2.8 and $3 billion, GAAP diluted loss per share to be between a loss of $0.30 and breakeven, non-GAAP diluted earnings per share to be between $0.35 and $0.65.

Overall, we expect our non-GAAP EPS to be roughly $0.65 better than our GAAP results.

The estimated breakdown of these adjustments is as follows.

Stock-based comp, roughly $0.31; amortization of intangible assets, approximately $0.15; restructuring charges, roughly $0.05 related to our European reorganization; and acquisition charges of approximately $0.14 related to our acquisition of Mythic Entertainment and Digital Illusions.

Please note we have tightened and slightly increased our topline estimates.

We have increased our GAAP, estimated GAAP loss as a result of our recent acquisitions and because we have increased the number of SKUs under development, including more SKUs for the Nintendo Wii and DS Light.

Much of this spend is for fiscal 2008.

We continue to believe our non-GAAP EPS guidance is appropriate.

Finally, a few housekeeping items.

Looking ahead to the holidays, we now expect our Q3 revenue as a percentage of the total year to be roughly 40%.

If you're projecting a loss for the year, the appropriate share count would be approximately 310 million.

If you're projecting positive earnings, the appropriate share account would be roughly 320 million.

We again ask you to keep in mind that with the introduction of Next Generation platforms, and the global expansion of online gaming, you will see more games delivered with significantly enhanced online game play.

In some situations, this may delay the recognition of revenue.

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

With that, we're pleased to open the call to your questions.

(OPERATOR INSTRUCTIONS).

Edward Williams, BMO Capital Markets.

Good afternoon, guys.

Just a quick question, if you will, on the PlayStation 3 relative to the Xbox 360.

Can you characterize where you are at this stage, Larry, in terms of the development for that system and how long it will take to really harness the power and leverage it with the releases?

Hi, Ed.

This is Frank.

Right now in terms of development with PS3 versus our 360 launch titles, we're seeing some very strong breakthroughs from the multiprocessor environment on the PS3 that will enable us to do some really unique things for that platform.

But in this timeframe that we're looking at going forward with this Christmas, it's going to be difficult to harness the full power of the PS3 on first generation software versus what will be second generation 360 games.

So while there might be some differences between the games, they're going to be more alike than different is our opinion at this time.

As those machines develop over time, there's a lot of horsepower inside the PS3 that we'll be able to unlock over years two, three and four that we're very excited about.

Okay.

Can you just comment a little bit about the development efficiencies in next gen products, where you are on the learning curve with the 360 and --?

Just to give you a sort of brief summary, I would say we're slightly ahead of where we were on the 360 at the same time last year.

Lowell Singer, Cowen.

Thanks.

I was wondering if you could talk a little bit about your assessment of the hardware environment.

It's clear that you're making a more aggressive push, both on handheld and consoles, with Nintendo platforms.

Do you see that evolving as a share shift from Sony and Microsoft to Nintendo, or do you think Nintendo's expected success over the next couple of years is all incremental to what you had originally forecasted?

Thanks.

We believe that the momentum behind the Microsoft 360 and the Nintendo systems is very strong right now and will probably have a market expansion effect.

The PS3 is clearly the market leader -- the PlayStation technology is clearly the market leader worldwide, but strong competition from Microsoft and Nintendo we believe will expand the market.

The DS right now is a very hot platform at retail.

It has a very strong lineup of software and the sellthrough in June was extremely strong.

We believe that momentum will carry that platform forward to very high levels.

The PSP is doing well in the international markets as well as in North America, and for the first time, we really have a competitive handheld market which again is having a positive overall effect on the market.

Okay, thank you.

Mike Wallace, UBS.

Just a couple of things.

How many launch titles do you think you're going to have for the PlayStation 3 and for the Wii?

And what's your best guess at the units that are actually delivered this Christmas on both?

We expect to have four or five launch titles on the PS3.

We have specifically talked about Madden, Need for Speed and Tiger.

We suspect there will be one or two more.

And by launch period, I'm describing that as from the day they ship the hardware to the end of the calendar year.

The number on the Wii platform is probably two, but we expect to ship five in our fiscal year on the Wii platform.

And with regard to quantities on the hardware, we can't give you an answer at this point.

I'm sure you've read what Sony has said publicly.

Nintendo has not made any public statements.

If history is the guide, I suspect that Sony will be challenged to hit the 6 million number that they talked about in their fiscal year.

We hope they do, but history has shown that hardware companies typically come up a little short against their initial forecasts.

So I assume you're doing what we're doing, which is assuming that Sony comes up short.

As far as Nintendo, you think they're kind of in the ballpark of the numbers that Sony has put out there, or maybe a little better?

Well, Sony's talking about 6 million units in their fiscal year on a global basis.

I don't think Nintendo has said anything along those lines.

And as I said a few moments ago, we would expect that they will be challenged to hit that 6 million unit number.

And that is a number that they talk about in terms of manufacturing, not sold through.

We'll have to wait and see what Nintendo says about their specific quantities by market.

Okay.

And the Wii -- I assume Madden is one.

What would the other one be if you said two?

Need for Speed.

Need for Speed.

Okay.

One more thing.

Do you think -- a lot of speculation that the PSP is going to cut, which they probably need to do, what about the PS2?

Some rumblings that maybe they take the price down this Christmas to $99.

Do you there's a shot that one or two of those things happen?

I would be surprised to see a downward price adjustment on the PS2.

Okay.

PSP maybe?

Possibly.

Possibly.

Okay.

You'll have to ask Sony.

All right, thank you.

Chris Kwak, SIG.

Great.

Just two questions.

You commented about the royalty structure that you still need to negotiate with Sony and Wii.

Can you give us a sense for what we should be thinking about that in terms of whether it's going to be roughly the same percentage?

Or is there going to be fluctuating pretty wildly depending on the vendor there?

And secondly, when you look at Nintendo Wii and the DS Light and your commitment there, clearly it's a greater commitment.

Can you put that in perspective, maybe the size or range of that commitment, number of heads, things of that nature?

Thank you.

With respect to the third-party business model with both Sony and Nintendo, we don't have details and we're hoping to have some in the next few weeks.

In terms of relative investment on the Wii and the DS, we're moving resources against those platforms to increase SKU count.

I'm not sure headcount is the right metric to look there in terms of level of commitment, because the systems are different to develop for and it could be external versus internal mix development.

But we're definitely going after those platforms as a greater percentage of our mix in terms of development.

Is it reasonable to assume that you could have the same number of SKUs may be 12 months from now on the Wii versus the PS3, for example, or is that being too aggressive?

That is too aggressive.

It's unlikely that we would have the same number of SKUs.

We haven't talked about how many.

We haven't finalized our SKU plan, but I would say it could be something like roughly half of what we have on PS3.

Thank you.

Justin Post, Merrill Lynch.

Thank you.

A quick financial question.

It looks like the ratio of receivable reserves to receivables is really high.

Did you ship any reorders in June?

And second question, the expense levels with R&D -- clearly an issue for the Street, how that is ramping this cycle versus the last cycle.

Do you expect to see some expense synergies as you're able to [pour] maybe a little later in this cycle than you did in the last cycle?

Let me go ahead and I'll take that question.

On the reserves, I don't think that ratio of reserves to receivable is really relevant, because, for example, the receivables went down largely having to do with when we shipped the product, so you end up with smaller receivable.

And the absolute amount of the reserve really has to do with that which you got reserved in the channel.

So it is kind of comparing apples to oranges, but it's just the way the GAAP accounting works.

I think the better methodology is that which we talk about, which is looking back on a trailing six and trailing nine-month revenue basis.

The net is as we've gone through and analyzed the channel, we think where we are is exactly where we should be.

On the expense side, we are trying to do several things.

One, we are investing across the board in what we think the opportunities of the next gen will be, so that's going to be in getting ready for the next gen platforms, in getting ready for online globally, and I think what we're doing in Korea with FIFA Online is a good example of that in online.

And then finally, doing things that we need to win in the mobile marketplace globally.

As we look ahead to the R&D line, right now, I would say we're at a point where all eyes have to be focused on delivering the product against these product launches.

And then from there, it's all about looking at ways to deliver great entertainment and see that which we can do to generate productivity in order to scale that line.

And I think you can assume, one, we'll make the necessary long-term investments to win.

But at the same time, I know there's nobody in our organization anywhere, including the studio or, for that matter, in any of the other functions, that really isn't focused on building scalable solutions so that we can scale that expense base as we move forward.

Thank you.

One follow-up just on the receivables.

Did you have an abnormally low amount of shipments in June just relative to last year?

Thank you.

I wouldn't say in June, no.

There's no -- it really has to do with when you created the reserve and when the programs have been applied.

So for example, in Europe, many of the reserves that have been established, those programs may not have been applied yet.

The only thing that I would tell you is that -- the only thing that I would -- the only thing that I would focus on relative to the charges in the quarter was that we did have smaller charges this year as opposed to last year, and that ended up helping gross margin.

Thank you.

John Taylor, Arcadia.

I have got a couple of quick questions.

One, so the change in format for E3, I'm wondering how you guys are thinking about that as potential cost savings for next year, given you don't need to throw a ton of resources at [spiffing] product just for the show, and having all of the bodies down there and so on, so that's the first question.

And then I wonder if you can quantify what your direct to consumer business was, all the direct digital download, what that piece was, and kind of help us understand how you're thinking about it, and maybe in relation to that, talk about how we ought to think about how you're going to monetize FIFA and Pogo in China, that sort of stuff.

Thanks.

So with regard to the adjustment that was made to E3, we fully support the decision that was made by the ESA board.

We think it makes good business sense.

We see that as the appropriate evolution of the E3 event.

And in terms of cost savings, it will save us multiple millions next year.

Is there a potential offset in dues and so on so that it's not just a straight savings?

Are there any offsets?

Obviously, E3 was the primary revenue driver for the ESA.

And without that event happening as it has in the past, there are going to be some dues assessments to all of the companies in the industry association that are different than what they have been historically.

Net net, it is still a big win financially.

Does it maybe have double-digits?

Double-digit what?

You know, millions.

What is a double-digit million?

$10 million or more?

I think for some of the larger companies in the industry, that's a possibility.

Is that right?

Okay.

And then, can you talk about that direct digital -- how you're thinking about that for this year and maybe some specifics on the monetization of FIFA, etc.?

Sure.

I'll get to FIFA in a second, but there's -- conceptually what we're doing is creating a digital distribution channel for our PC products that includes both full product as well as mission packs, and basically what we call paid downloadable content.

And that will be available on multiple platforms, not only the PC but also through the Xbox Live service, so we're looking at a variety of strategies there and looking at that business as an opportunity to further monetize our gains in new ways that were not available in the last generation.

So that direct to consumer link is important to us from the standpoint of not only the distribution of goods that we sell, but also customer service and eventually being able to serve dynamically advertising into those games.

So building that link and that online connection will help us monetize the gains in new ways.

With regard to Pogo and China, that is still in closed beta.

And also, with regard to FIFA in Korea, the monetization strategies are going to start to get executed in the next couple of weeks, and those are going to be primarily microtransaction based.

And when we start to get that data in, we'll have a much better sense of what the total opportunity will be.

Okay.

And so --.

I would just add, if you look at the absolute dollars recognized in the quarter, it's probably somewhere around $4 million or $5 million.

Okay.

And as you're thinking about the potential for this year, I am wondering -- you made an interesting comment that maybe it moves into a deferred revenue kind of account as opposed to being recognized.

Can you give us any sense of are we thinking 50-50 in terms of cash flow division between those two accounts, or how should we think about that?

It's really going to be dependent upon the product because the way the accounting really works is you have to determine two things.

You have to determine the value of the online service that you're providing and have evidence of that value, and then determine a useful life.

So it could be that the entire product or revenue value of the product is deferred over a period of six months.

It could be over a period of three months.

It could be that a portion of it is.

So it's really going to be dependent upon the product and dependent upon the nature of the service.

Okay thank you.

Evan Wilson, Pacific Crest Securities.

Thanks for taking the questions.

I've got three.

I'll just throw them all out there.

First, how are you thinking about FIFA this year in fiscal Q2?

You obviously sold a lot of FIFA into the channel in the last particular quarter.

Also, would like to get a little detail on gross margins for fiscal Q2 so we can back into quantifying your increasing royalty costs there.

And then also, could you give us a little direction on the amount of revenue you guys expect to see over the next two fiscal years from all the Asia stuff you're doing, Tales Runner in Korea, the Pogo beta in Shangai, as well as Warhammer Online.

Thanks.

With regard to FIFA, we're feeling really good about that product.

If you add the number of units that we sold on World Cup and FIFA, it will probably be our second best-selling franchise this year after Need for Speed.

So we have high expectations for FIFA on the coattails of the success that we have had with the World Cup.

And just with the launch coming up in Q2, we obviously are managing the channel inventory on World Cup and FIFA '06 to get us in the position for FIFA '07 to be set for a great launch over Christmas.

I will hop onto the other two questions, but one thing I would also add on FIFA, clearly we're building momentum in North America in soccer.

I think if you look at World Cup 2006 as an example, the momentum continues to build there, which is absolutely a positive.

As I look at gross margin, looking into Q2, I would expect it today to be down year-over-year, give or take roughly 300 basis points.

Looking at the monetization of our activities in Asia, I think it's too early to make a prediction.

Again, I think the early signs coming out of the beta in Korea are very positive now.

Our next test is to see how the monetization works, and we are going to have to go through that with Pogo over, hopefully, in the next -- in the coming months to make the same call.

Our commitment is we do believe in the market.

We do believe in the successes that we've had and will look for ways to take several of our other products and repeat what we've been able to do, at least so far in a very short period of time, on FIFA.

So the opportunity is there.

I think it's too early to quantify the results.

So it sounds like you think that FIFA shipments can be flat this fiscal Q2 over last fiscal Q2 at least?

Not making any predictions today in terms of unit volume for the quarter, although I would expect -- you could say at least flat, maybe up from there.

Yes, we expect it to be slightly up.

Thanks very much.

Colin Sebastian, Lazard Capital Markets.

Good afternoon, and congratulations on the quarter.

Of the titles you mentioned for Q2, are there any you would care to mention that are on the cusp?

That's first of all.

And secondly, recent sales trends, have they given you any insight into the $60 price point for next gen products, and related to that, what are your assumptions for Wii software pricing?

We think the SKU plan for Q2 is in good shape.

With regard to pricing on the Wii, all of the companies in the industry are going to have to make a decision about that.

The only thing I've heard is the CEO of Nintendo saying he could not imagine any of their titles being sold beyond $49.95.

So again, everybody's going to have to make their own decision about pricing on that platform.

Okay.

And following up on the question about microtransactions or digital downloads, is there anything you can tell us about the online capabilities of the PS3, or at least your PS3 titles that are planned for there?

Thank you.

There have not been any formal announcements from Sony on what their online plans or capabilities will be, so it's difficult for us to comment on that at this time.

You'll have to ask Sony.

We do know that from the experience with the Xbox 360, that the online connection on the console is something that customers love and that will be a key leverage point from this point forward.

We think that Sony understands that, but we haven't heard anything formally yet in terms of those announcements.

I think one thing you can count on, though, is that we have in development actively alternatives to monetize the online environment.

Whether it's the creation of digital content, whether it's downloadable capacity, expansion packs, however that model ends up working out, hopefully we'll be prepared.

Okay thank you.

Tony Gikas, Piper Jaffray.

Good afternoon.

A couple of quick questions for you.

I know it's early, but if hardware launches go off with your expectations, not Sony or Nintendo, what type of a growth rate should we be looking at for the industry in calendar 2007?

Is it a double-digit number?

If so, is it mid-teens or approaching 20%?

Second question, I'm sorry if I missed this.

Did you indicate what the level of revenues were from microtransactions during the quarter?

And do you get any more visibility on that revenue model?

If so, could you maybe describe that a little bit more for us?

And third part, level of in-game advertising in your long-term outlook.

I'll take a piece of that and then Frank can jump in.

Looking ahead to calendar '07, I think we obviously all want to see how the launches go, but I'd say sitting here today this early, we would easily see double-digit growth in the marketplace for calendar 2007.

Sitting here again, we're a long way from that, but from all that we can tell, we would easily see that.

It wouldn't be any more specific than that other than to say we foresee a very healthy market looking into the next calendar year.

We did mention in terms of digital downloads and things like that, it was -- call it $4 million or $5 million in the quarter and would expect to see that build over time.

Frank, if you would like to add to that.

With regard to your question about dynamic in-game advertising, we believe that will grow very fast with the next generation of connected consoles, which is really the key driver for how big that market is.

I'm sure you're aware of all the different market estimates out there; they are all over the map in terms of how big this opportunity is.

We believe it can be significant for us.

We have a substantial amount of inventory inside our games that is fairly easy to monetize, given the types of games that we're making with racing and sports and so on.

So we are looking at it as significant, but it's really going to come down to looking at the GAAP market growth rates and looking at the connecting units within that.

Could those two revenue streams, the microtransactions and in-game advertising, say three years out be mid or high single digits as a percent of total sales as just a possibility?

It's hard to make that call, but sure.

Okay, thank you.

Heath Terry, Credit Suisse.

Thank you.

Can you give us an idea, the 10% increase that you're seeing in NCAA, is that unit or revenue that you're referencing there?

That's units, and so the revenue will be higher because we have higher price points attached to the Xbox 360 this year.

Can you give us an idea of what kind of mix you're seeing so far between Xbox 360 and the previous generation?

360 is trailing the PS2 by a little bit.

The percentage of business that is moving to the 360 is within line with what we expect, but the PS2 is still the number one platform.

Great.

Thank you.

And you said just by a little bit.

Is that -- is that much of a surprise given the fact that there's such a huge difference in the installed base?

It wasn't surprising to us.

It was basically what we forecasted based on preorders and looking at the market data.

There's a lot of activity in that 360 base where your power users of sport products have moved on to the 360.

So in the first two weeks of sellthrough, it wasn't that surprising at how high 360 was.

It will obviously, as we get into the holiday period, smooth out a little bit more where that base will start to take over more.

Okay, so when you see that combined with the higher attach rates that you're seeing with 360, I guess to what degree do you feel like -- or is that giving you more confidence that the $60 price point is going to be sustainable longer-term?

And I guess how long do you think this higher attach rate or this attach rate growth that we're seeing in next generation is going to be sustainable?

It's interesting.

I think they're at a 4.5 tie ratio through year-to-date on the 360, which is higher than it has been historically at this time period.

The $60 price point, we are not getting a lot of resistance to.

We are launching good quality products that have high def with connected game play that, frankly, customers are feeling is a good value for $60.

So we're not seeing any weakness in the $60 price point.

The tie ratio, there's a good slate of 360 games coming between now and Christmas, so that tie ratio should be solid.

It's interesting that even on the DS we are seeing higher than historical tie ratios.

We're not sure quite yet what's driving that, but the tie ratios are much better-than-expected at this time this year.

Great.

I guess just one last question.

Can you -- when you look out at the online attach rates that are being talked about for microtransactions, and I realize we're still in the very early stages of this, to what degree do you think you're going to be able to migrate those same kind of transactions into your games?

How many games do you think will ultimately support microtransactions?

And should we expect that the attach rate we're seeing on some of these now also holds up as we start to see a proliferation of available content, downloadable content out there?

Well, I think there is a couple things to consider.

First, from a technical standpoint, all of our games that are connected will have microtransaction capabilities.

Whether or not we have content for a given franchise available and positioned for that, that remains to be seen.

I can tell you that in the case of EA SPORTS and a lot of our major franchises on the entertainment side, we're planning to have downloadable content available for those connected users.

I think one of the things you have to look at on the 360 is when they say it's 60% connected, some of those are Silver users versus Gold users.

So some of the folks are using it for browsing and not necessarily commerce yet.

The percentage is growing on the Gold level, which is really great news.

And if they can hold at 60%, that will be amazing.

We think it will come down a little bit as they get further into the cycle, but the percentage of Gold versus silver will go up, so that will probably offset.

I think one thing I would add to that, Heath, if you get a microtransaction-based world, big games are going to win.

So if you're a small game, there will be limited capability and limited life.

If it's a game that's got legs and a big following, and particularly on the online site, those are going to be the ones that are going to do decent numbers.

Great.

Thank you.

(OPERATOR INSTRUCTIONS).

Elizabeth Osur, Citigroup.

Most of my questions have been asked, but I guess just two quick ones.

Warren, with regard to your R&D guidance and some of the detail that you have given on the last call, can we assume an increase in resources being put towards DS Light and we would increase your R&D estimates for the year?

Yes, you should.

Okay.

And will there be increases in any of the other areas versus your prior expectation, either on mobile or online?

No.

I would say that -- and also in reference to G&A and marketing and sales, and they still continue to hold in line with their historical percentages of revenue.

Okay thanks.

And I guess this last quick question.

The content that you have downloadable on Xbox Live marketplace now, I assume that the majority of that content is free and not paid.

If that's true, can you talk about when the balance might switch such that more of the content might be paid content?

The balance is shifting now to paid.

Our most recent release was a booster pack for Lord of the Rings Battle for Middle-earth II.

It was Aragorn's Journey, which was three maps.

It was roughly 700 Microsoft points.

That was our most recent release, but when we look at the relative mix of paid versus free, it's going to start to head more towards pay.

Okay, thanks a lot.

Operator, we'll take two more questions.

Arvind Bhatia, Sterne Agee.

Good afternoon, guys.

First question was catalog for the quarter, what the percentage was.

And then second, on Madden, can you quantify the preorders?

Just those two housekeeping questions.

Catalog for the quarter was 61%, and that is up from last year.

Last year was 50% for the same period.

So very strong catalog coming out of Q4 last year.

With regards to the Madden preorders, we don't publicly release those quantities, but there are several hundred thousand and they are up over last year.

We're feeling very good about the momentum.

And last question on the development costs for Nintendo Wii, obviously people expect that to be much lower than the other two consoles.

Is there a way for you to help us understand what the delta is?

Is it 25% less than the other two consoles, some metric that helps us conceptualize the difference in cost?

It's really too early to give you anything specific because we haven't finished the Nintendo Wii product, so I think on the next call we can give you better information because we will be close to -- in fact, we will have finished some titles and we can give you some metrics.

It's just too early.

Got it.

Congratulations on a good quarter.

Glen Reid, Bear Stearns.

A lot of my questions were answered.

Just, maybe broadly speaking, and historically you guys have been -- this whole sector has been pretty insulated from any sort of consumer weakness.

I'm curious to get your thoughts just as -- a lot of those concerns are kind of flowing through different sectors of the market, how you think about the videogame sector and your Company in particular in the face of potential consumer weakness or economic softness.

Thanks.

My response, and I will give you some thoughts and the other two guys can chime in.

Based on our conversations with retailers, they seem pretty bullish about this category in the back half of this year.

Given the expected launch of the PlayStation 3, the Nintendo Wii, the building momentum on the handheld platforms, Xbox 360 continues to sell well, so their outlook is pretty positive and we would agree with that.

Very good.

Thank you.

Thank you and thanks, everyone, for joining us.

That concludes today's conference.

Thank you for your participation.