美商藝電 (EA) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the Electronic Arts fourth quarter fiscal year 2007 earnings conference call.

Today's call is being recorded.

For opening remarks and instructions, I would like to turn the call over to Ms.

Tricia Gugler, Director of Investor Relations.

Please go ahead, ma'am.

Welcome to our fourth quarter fiscal 2007 earnings call.

Today on the call we have Larry Probst, Chairman of the Board of Directors, John Riccitiello, Chief Executive Officer, Warren Jenson, Chief Financial and Administrative Officer, and Frank Gibeau, EVP and General Manager of North American publishing.

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

Shortly after the call we will post a copy of our prepared remarks on our Web site.

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

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

In addition, the company's non-GAAP results exclude the impact of certain one-time income tax adjustments.

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

In addition, we include a detailed GAAP to non-GAAP reconciliation on our Web site.

Information regarding our use of non-GAAP measures, along with a schedule demonstrating how we calculate return on invested capital will be included with the copy of today's prepared remarks we post on our Web site.

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 have also included a summary of our financial guidance in our prepared remarks as well as our trailing 12-month platform shares in a supplemental schedule on our Web site.

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) and 10(Q) 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 8, 2007, and disclaim any duty to update them.

As most of you know, John Riccitiello became our Chief Executive Officer on April 2.

But before we hear from Warren, Larry would like to say a few things.

Thank you, Tricia and good afternoon everyone.

My 16 years as CEO have provided me with an array of opportunities, experiences and insights into our business.

One of the most rewarding elements has been to watch a group of talented individuals mature to a team of seasoned executives and creative leaders.

When it came time for our Board to choose a successor as CEO, the solution was obvious.

In his first seven years at EA as our President and Chief Operating Officer, John proved himself as a leader with exceptional vision and an ability to inspire the people around him.

We are very fortunate to have a new CEO with a deep understanding of the industry, a proven ability to lead and a strong commitment to growing our business.

John is now running the company.

He is doing a terrific job and I have every confidence that he and his team will take EA to the next level of success.

With that, let me introduce John Riccitiello.

Thank you, Larry.

This experience has been both humbling and exhilarating.

As I mentioned when my appointment was announced, EA is my dream job.

Since joining, I've been on the road with our team and business partners.

This past month, I've had the opportunity to visit our studios in Vancouver, Montreal and Florida, and then visited our major studio and publishing operations in Europe, Asia and the rest of North America.

In total, I've met with over half of our employees and had a chance to meet one on one with hundreds of our people.

I have also had the opportunity to review our fiscal 2007 performance and our plans for fiscal 2008.

I've learned a lot and I've come away with a few early impressions.

First, I'd like to point out that Larry has done truly an extraordinary job in leading this company for the past 16 years.

He's led us through the most difficult transition in industry history and he has focused us on a set of far-reaching goals for investing and growing the business.

Larry has been the industry's best CEO and we owe him a deep debt of gratitude.

I'm also personally grateful, as Larry has made my transition back to EA easy and seamless.

Second, I'm impressed with EA's talent and incredible portfolio of assets.

No other company in our industry can match these strengths.

I'm also very gratified by the reception I received from all of EA's employees.

Third, EA has done a great job of laying out its global priorities to lead our next-gen platforms in online, wireless, Asia, and on further building out our portfolio of owned intellectual properties.

With that, I will now turn the discussion over to Warren.

After his remarks I will come back and outline some thoughts on our priorities for fiscal '08 and beyond.

Thanks, John.

Great to have you back.

Good afternoon, everyone.

I'd like to begin with a few highlights.

Our fourth quarter performance exceeded our expectations both on the top and bottom line.

For the quarter, revenue was $613 million versus $641 million, down 4%.

GAAP diluted loss per share was $0.08 versus a loss of $0.05 a year ago.

Non-GAAP diluted earnings per share were $0.06 versus $0.14.

During the quarter, several titles stood out.

We successfully relaunched the Command and Conquer franchise with C&C 3: Tiberian Wars, selling over 1 million copies.

The Sims 2 Seasons sold over 1 million copies, making it our fifth platinum Sims 2 expansion pack.

We shipped four retitles in March, Tiger Woods PGA tour, SFX, Medal of Honor Vanguard and Godfather Backhand Edition.

While we still have a way to go, we now have six [retitles] at retail and in North America we were the number one third party publisher for the month of March and we estimate number two in Europe.

In addition, Def Jam Icon, Medal of Honor Vanguard, NBA Street, and Burn Out Dominator each sold over 500,000 copies.

Finally, our catalog continued to perform well.

Need for Speed Carbon, Need for Speed Most Wanted, The Sims 2 and Madden '07 each sold over 500,000 copies.

For the year, revenue was $3.091 billion, up 5% from a year ago.

Our top core franchises were Need for Speed, The Sims, Madden and FIFA, all experiencing double-digit units and revenue growth year over year.

The Sims franchise continues to thrive with 22 million copies sold; both units and revenue were up a strong 49%.

For the year we had 24 platinum titles, down from 27 a year ago.

Our trailing 12-month segment share was roughly 20% in both North America and Europe, down roughly 2 to 3 points for the comparable period.

In sports, our business continues to grow with revenue up over 20%.

Madden '07 was our top selling title for the year with units and revenue up over 15%.

This year we launched Madden on 11 platforms.

Our soccer business had a banner year.

We sold over 13 million games across our soccer portfolio, FIFA, FIFA World Cup, Champion's League and FIFA Street.

In online, we grew digital revenue 47% to $127 million.

Our Club Pogo subscriptions have now passed 1.5 million, up 23% from last year.

In addition, we sold over 9 million pieces of digital content.

In cellphones, revenue reached $140 million as we continued to expand in both North America and Europe.

In the first year of our acquisition, EA Mobile delivered $40 million of non-GAAP operating profit at a margin of 29%, well ahead of our expectations.

Also, on a GAAP basis, the acquisition of Jamdat was accretive for the year.

Finally, over the last 12 months we further strengthened our long-term position.

EA Partners signed agreements to bring Rock Band, Mercenaries 2 and Hellgate London to consumers.

We acquired five companies -- Digital Illusions, Mythic Entertainment, Headgate Studios, Phenomic and SingShot.

In Asia we announced an agreement with Neowiz to bring online games to market and have acquired a 19% stake in this company.

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

First, I'll review our Q4 results; second, I'll go over our outlook and financial guidance.

Q4.

Net revenue was $613 million, down 4% from last year, primarily due to the decline in sales from current-gen platforms.

Revenue was driven by Command and Conquer 3, Need for Speed bon, Def Jam Icon and The Sims 2 Season.

Absent the impact of foreign exchange, revenue would have been down 8%.

We released 27 SKUs in the quarter versus 29 a year ago.

Console revenue was $298 million, down 17%, primarily due to the strength of last year's release of Black, Godfather and Fight Night and the decline in sales from current-gen platforms.

Next-gen revenue was $170 million, driven by the launch of the PS3 and Wii and growth in revenue from the 360.

Next-gen revenue was 57% of total console revenue.

Mobility.

Revenue was $105 million, up 19%.

On mobile phones, revenue was an industry-leading $36 million.

We had four of the top ten games in North America and three of the top ten in the UK.

On handhelds, revenue was $69 million, down $4 million; NDS revenue of $27 million was over 2X that of last year, driven by Theme Park and The Sims.

Revenue from both the PSP and GBA were down year over year.

PC revenue was $128 million, up 23%, driven by C&C 3 and the continued strength of The Sims franchise.

In North America and Europe, C&C was the number one PC title for the month of March.

Copub and distribution revenue was $45 million, down $7 million, principally due to last year's strength of Half Life 2.

Internet, licensing, advertising and other was $37 million, flat to last year.

We launched Pogo in Germany during the quarter.

We are also pleased that Pogo is now a top three casual game site in the UK, just six months post-launch.

Geographically, North America revenue was $307 million, down $33 million, or 10%.

The increase in next-gen, cellular handsets and subscription revenue did not offset decline from current-gen platforms.

NBA Street, Def Jam Icon and March Madness did not offset last year's performance of Fight Night, Godfather, and Black.

International revenue was $306 million, up $5 million, or 2%.

Excluding a $22 million positive impact from foreign exchange, international revenue would have decreased six points.

Europe revenue was $264 million, up $2 million; increases in next-gen, PC, and favorable foreign exchange essentially offset the decline from current-gen.

Asia revenue was $42 million, up $3 million.

Increases in NDS and PS3 offset lower copub and distribution revenue.

In Japan, Sim City NDS broke at number one in its launch week, and was the number 11 NDS title for the quarter.

Moving on to the rest of the income statement.

Gross profit in the quarter was $378 million, down 5%.

Gross margin was 61.7% versus 61.9%, primarily due to higher sales return charges which were partially offset by lower copub and distribution royalties.

OpEx.

As you know, at the beginning of the fiscal year, we adopted FAS 123 R.

In the fourth quarter, this resulted in after tax stock-based compensation expense of $24 million.

Marketing and sales.

Marketing and sales expense was $116 million, up $14 million primarily due to an increased add spend and higher personnel-related costs including stock-based compensation.

Excluding the impact of stock-based comp and acquisition, marketing and sales would have increased approximately 8% year over year.

G&A.

G&A was $66 million, up $12 million primarily due to stock-based compensation and higher facility-related costs.

Excluding the impact of stock-based comp, G&A would have increased approximately 9% year over year.

R&D.

R&D was $257 million, up $69 million primarily due to stock-based comp, acquisitions, facility-related expenses and third party development spend related to our EA Partners title.

Excluding the impact of stock-based compensation and the impact of acquisitions, R&D would have increased approximately 20%.

R&D headcount was roughly 5900, up 14% from a year ago, up 2% sequentially.

Acquisitions accounted for 5 points of the year-over-year increase.

GAAP diluted loss per share was $0.08 versus a loss of $0.05 a year ago.

Non-GAAP diluted earnings per share were $0.06 versus $0.14.

The $0.14 difference between GAAP and non-GAAP EPS was principally due to stock-based comp, $0.08, amortization of intangibles, $0.04, and acquisition related charges of $0.02.

Our trailing 12-month operating cash flow was $397 million versus $596 million for the comparable period.

A return on invested capital on a trailing 12-month basis was 10% versus 21% a year ago.

Now on to the balance sheet.

Cash, short-term investments and marketable securities were $2.976 billion, up $544 million from a year ago, primarily due to cash generated from operations and an increase in the value of our marketable securities.

Gross accounts receivable were $470 million versus $431 million a year ago.

Reserves against outstanding receivables totaled $214 million, down $18 million from last year.

Reserve levels were 11% as a percentage of trailing six-month net revenue, down 1 point.

As a percentage of trailing nine-month net revenue, reserves was 8%, also down 1 point.

Inventory was $62 million, relatively flat to last year and down $10 million sequentially.

No other title other than Need for Speed Carbon represents more than $3 million of exposure.

Deferred net revenue from packaged goods and digital content was $23 million, up $14 million from a year ago and $9 million sequentially.

Now our outlook.

As I mentioned in our last call, fiscal 2008 for us is all about growth and return on investment.

Growth.

We continue to expect industry growth in North America and Europe software sales to be between 13 to 18% for calendar 2007.

For EA, our projected growth will be fueled by a strong lineup.

We expect to launch our 15 wholly owned titles, five of which are franchise debuts: Army of Two, Skate, Playground, Boogie and a Wii Spielberg title.

In addition, our blockbusters Need for Speed and Sims will be back.

We continue to have enormous confidence in Spore as a franchise but have made the call not to include this title in our fiscal year financial plan.

In entertainment, we plan on launching Harry Potter and The Order of the Phoenix, Warhammer and The Simpsons.

Through EA Partners, we will release Crisis, Hellgate London, Mercenaries 2: World In Flames, Half Life 2: Orange Box and Rock Band.

In sports, our full lineup will be back, Madden NFL, FIFA, NBA Live, Tiger Woods PGA Tour, NCAA Football, MVP and NCAA Baseball, NHL and NFL Street.

While we love our lineup it really starts to kick in with the launch of Harry Potter in late June.

The timing of our SKU plan will clearly pressure our first quarter results in near-term segment shares.

Once we move into our second quarter we would expect to see much improved financial comps and shares.

By platform, for fiscal 2008 you can expect us to ship between 20 and 23 SKUs on both the 360 and PS3.

On the Wii and on the NDS, we expect to launch 10 to 13 SKUs for each platform, including originals like My Sims, Playground, Boogie, and a new title that is being developed with Steven Spielberg.

For the NDS, we expect to launch SimCity and for the Japanese market, we plan to release a beverage series: Sommelier, Sake, and Bartender.

In sports, Madden '08, FIFA '08, Tiger Woods PGA Tour and NBA Live.

In entertainment, Harry Potter and The Simpsons.

In short, we are on it and more to come.

In Mobile, we expect global industry growth of 20 to 25% for calendar '07, fueled by new handset sales, increased consumer adoption of mobile entertainment and more great games.

In the coming fiscal year, Mobile revenue will likely pass through $175 million.

Online, for fiscal 2008, we think our non-GAAP online revenue could exceed $175 million, up close to 40% year over year, driven by digital downloads, dynamic in-game advertising, micro transactions, Warhammer in the MMO space, Pogo.

And in Asia we will aggressively ramp up our mid-session game offerings.

We anticipate that FIFA Online will go live in both in China and Japan.

We also plan to roll out NBA Street.

Now on to our financial guidance.

Before jumping into the specifics, let me again take a moment to remind you we will no longer charge for online hosting as it relates to our online-enabled packaged goods titles.

As a result, for online-enabled games on the PS3, PS2, PSP, and PC, all packaged goods revenue will be amortized over the length of the online service period, which we currently estimate to be six months.

We estimate that between $400 million to $500 million in revenue that would have otherwise been recorded in fiscal 2008 will now be deferred and recognized in fiscal 2009.

We estimate that roughly 40 SKUs will be impacted, 30 of which are sports games.

We do not intend to defer any product costs.

Please keep in mind this change does not in any way impact the economic fundamentals of our business and will not adversely impact our cash flows.

As we discussed on our last call through our non-GAAP reporting, we will have comparability year over year.

We added a line to our non-GAAP reconciliation where we plan to add or subtract the change in deferred revenue related to packaged goods and digital content.

Once again, if you go to our Web site, you will see an expanded set of schedules and reconciliations, including an FAQ that should assist you in understanding the impact of this change and our other non-GAAP adjustments.

Now, the numbers.

Before I begin, we wanted to let you know that a one-page summary of our financial guidance will be included with the call script on our Web site.

Hopefully this will assist you to build your GAAP and non-GAAP model.

First, our GAAP guidance.

For the full year, we expect revenue to be between $3.1 billion and $3.4 billion, diluted loss per share to be between $0.77 and $0.23, gross margin to be between 50 and 55%, and basic share count to be 317 million.

We expect our GAAP revenue for the rest of the year to land in roughly the following percentages.

9 to 11% in Q1, 19 to 23% in Q2, 39 to 43% in Q3, and 25 to 30% of the total in Q4.

For gross margin, we expect the following percentages in the quarter.

For the first quarter, 49 to 52, 35 to 38% in Q2, 49 to 52% in Q3, and 66 to 69% in Q4.

Now on to our GAAP guidance; our non-GAAP guidance.

For a full year we expect non-GAAP revenue to be between $3.6 billion and $3.8 billion, non-GAAP diluted earnings per share to be between $0.90 and $1.20, non-GAAP gross margin to be 58 to 60%.

Given the increase in our EAP titles in fiscal '08 relative to fiscal '07, we expect our gross margins to be negatively impacted, diluted share count to be $328 million.

Overall, we expect our non-GAAP EPS to be roughly $1.42 to $1.68 better than our GAAP results.

The estimated break down of these adjustments is as follows: Change in deferred revenue related to packaged goods and digital content to be between $0.98 and $1.23, stock-based comp to be approximately $0.31, amortization of intangible assets, roughly $0.13, and restructuring charges, approximately $0.02.

We expect our non-GAAP revenue for the rest of the year to land in roughly the following percentages -- 9 to 11% in Q1, 25 to 30% in Q2, 39 to 43% in Q3, and 18 to 23% of the total in Q4.

On the expense side, we expect R&D to increase in the high single digits for the year, both G&A and marketing -- and both G&A and marketing and sales should decline 1 to 2 points as a percentage of non-GAAP revenue.

On taxes, first our GAAP numbers.

Given the revenue deferral we expect a GAAP loss for fiscal 2008.

That said, for the fiscal year on a GAAP basis, we expect to incur an absolute level of tax expense of up to $40 million.

For Q1 and Q2, we estimate our non-GAAP tax benefit rate to be between 15 to 20%.

For non GAAP we estimate our rate for the year to be roughly 30% consistent with last year.

For Q1 and Q2 we expect our non GAAP tax rate to be between 15 and 20%.

Finally, effective this quarter we will adopt FIN 48 which deals with how to account for certain income tax positions.

We are in the process of evaluating this new standard.

Accordingly its effect if any is not reflected in our guidance.

From EA Studios we plan to release roughly 35 titles and 120 SKUs.

EA Mobile plans to release 30 to 35 games on cellular handsets and 40 games for the iPod.

Now for the quarter.

For the quarter ending June 30, first, our GAAP guidance.

For the quarter we expect revenue to be between $300 million and $360 million; diluted loss per share to be between $0.66 and $0.56; gross margin to be between 49 and 52% and basic share count to be $310 million.

Now, our non-GAAP guidance.

For the quarter we expect non-GAAP revenue to be between $350 million and $400 million, non-GAAP diluted loss per share to be $0.40 and a loss of $0.34, non-GAAP gross margin to be roughly 60%, and basic share count to be $310 million.

Overall we expect our non-GAAP EPS to be roughly $0.22 to $0.26 better than our GAAP results.

The estimated breakdown of these adjustments is as follows.

Change in deferred revenue related to packaged goods and digital content should be between $0.10 and $0.14, stock-based compensation, approximately $0.08, amortization of intangible assets roughly $0.04.

For Q1, we expect to shift 13 SKUs compared to 16 a year ago, including Harry Potter and The Order of The Phoenix on six platforms, Command and Conquer 3: Tiberian Wars on the XBox 360, SimCity on the NDS, the Sims 2: Pets, for the Wii, Sims Pet Stories for PC, The Sims 2 Stuff packs, The Sims 2 Deluxe for the PC.

At EA Mobile, we plan to launch four games on cellular handsets -- ESPN Fishing, Harry Potter, Sims Bowling, Bejeweled Multiplayer and Sims Bowling on the iPod.

With that I will turn it back to John for some closing thoughts.

Thanks, Warren.

Before we open the call to questions I'd like to take you through a few general priorities in which we will focus.

First, we will focus on improving execution and predictability.

EA [inaudible] is a team that is unmatched in creativity and professionalism.

Our intent is to lead this team to deliver on our obligations to our consumers and our shareholders.

Second, I will be working to align our team for increased accountability, agility and speed to market.

My sense is we can be faster and better focused on capturing opportunities, increasing segment share and overall growth.

Third, it's time to accelerate.

We plan to set new goals for where we want to be at the peak of this cycle and beyond.

Our intent is to create a stronger, long-term performance trajectory.

Larry has brought me in to drive an agenda of change.

I'm very optimistic about EA's future and our ability to deliver on our fiscal '08 operating plans, and I look forward to telling you more about our plans and progress in the months ahead.

Now we will be happy to take all of your questions.

].

(OPERATOR INSTRUCTIONS).

And our first question comes from Bill Kreher with A.G.

Edwards.

Thanks for taking my question.

Just curious on the $175 million of online revenue expected, how much of that is the dynamic game advertising and how much is that environment from your perspective, and just maybe what the contribution from Warhammer is expected as far as that $175 million?

Thanks.

I won't get into all of the specifics.

I tell you that in terms of advertising you can count on, could be anywhere from call it $20 million to $35 million or so.

The MMO, looking at Warhammer, and I put it in the maybe $30 million to $50 million range.

The other thing on dynamic and game advertising is we are going to be dramatically increasing the number of titles that will be supporting it both on the PC and the 360.

We will also be looking at opportunities for advertising on other platforms including Mobile in the new fiscal year.

Let me just clarify because I mentioned Warhammer specifically but the number I was giving as you total MMO revenue which includes all of our MMO titles, Dark Age of Camelot, UO, as well as as well as Warhammer.

And next from Arcadia, we'll hear from John Taylor.

I wonder if you could talk a little bit about the growth drivers for the year and maybe break it down into baskets like EA Partners with lower margin segment, how much you're thinking is coming from the publishing side, the traditional side, and then if you look at all the new businesses, the advertising piece, the mobility piece, digital download pieces, advertising, all that stuff, kind of as a third basket, maybe give us a sense what that mix might look like in the new fiscal year?

Thanks.

I will take a high level cut at that and then obviously a lot of this really boils down to the strength of the SKU plan, JT.

Our packaged goods business, I think you can take a look at the SKU plan and the strength of it.

Obviously we had a slow start in Q1 relative to the size of our lineup; but it really kicks in in late June with Harry Potter.

We are forecasting 13 to 18% market growth for packaged goods across Europe and that's going to be the principal driver of that business.

The Mobile business, as we've said, did $140 million.

We think those revenues could pass through $175 million.

In online, which is comprised of a host of things obviously, all the way from digital downloads to microtransactions to our subscription revenue and the like, as I mentioned last year, was $127 million.

And as I just mentioned on the call we think that could go through $175 million.

For the full year geographically, I think we would be safe to say we expect strong growth from all geographies -- North America, Europe and in Asia.

And from Bear Stearns, we'll hear from Edward Urban.

Good afternoon, thanks.

I wanted to ask a question on the Mobile side.

You've talked about $175 million in revenues and just looking at the trailing 12 months, quarter over quarter, those revenues have been up slightly.

But now you're forecasting 20 to 25% growth.

So I am wondering if you can just talk about the key drivers on the Mobile side.

This is Warren.

Let me take a cut at that.

Looking at Jamdat, Jamdat actually had a very, very healthy year year over year and the comps are not just up slightly.

It has been a very strong year for the entire business.

As an example and I am using Jamdat comps to EA Mobile so this is pretty much apples-to-apples, FY '07 to FY '06, revenues are up 63%, to as I mentioned north of $140 million.

And then equally as impressively, they delivered $41 million of operating profit at a 29% operating margin, which is I think pretty darn spectacular.

For the fourth quarter, again just to show the strength of the growth performance, Jamdat revenues went from $25 million a year ago to EA Mobile this year of $37 million which is up 48%.

So this business has actually done very, very well and has done very well competitively.

In terms of the market, I believe -- I'm using rough terms -- our segment share has doubled in Europe during the course of the year which is exactly what we said, exactly what we said we wanted to do.

Hidden underneath this performance is the fact that we have a well-integrated business that is also leveraging the EA portfolio of titles.

We had just gotten going with about 10 of our titles so far really being integrated into that platform and portfolio of products.

So just as a point of clarification.

This has been a very healthy segment and thus far a very successful acquisition and we are very, very pleased with Michael Marketti and his entire team and their leadership.

Looking forward we have stated that we would expect 20 to 25% market growth for the Mobile segment and we will report on our progress.

From Janco Partners, we'll hear from Mike Hickey.

Thanks for taking my call.

John, welcome back.

I think you hit at the end there a little bit of your vision for the firm going forward and certainly we have heard the word acceleration before.

But can you give us more granularity on where you think you can have the greatest impact near term and perhaps longer term?

That's a pretty broad question, Mike.

I will do my best to come back to you on that.

I think probably the most important thing right now is getting the company increasing its accountability, agility, speed to market, the second point I was making in my last comment.

What I'm speaking to there is just moving faster in the marketplace to drive segment share.

We've had some issues with predictability in our titles, a little bit that we are focused on to bring up the quality.

It has not always met our objectives so harder driving on the front than would you expect us to, driving the segment share.

And from Pacific Crest, we'll hear from Evan Wilson.

Thanks for giving us a little bit of detail on what exactly you expect from each of the elements of operating expenses, but I remember on the last call you guys talking about significant operating margin leverage.

I don't see that in these numbers.

I wonder what you've seen change over the last three months.

Thanks.

What I would tell you is that we -- clearly, fiscal '07 -- we talked about making, it being a year of investment and it was.

What I can tell you what has happened over the past three months is we've gone through our budgeting process.

We've also set financial goals which are consistent with where the operating plan has come out.

We've tried to take a realistic assessment of our SKU plan and make sure that we've got the right titles in the right quarters and that we can shift them and rebuild an operating plan.

And it's on the basis of that the operating plan that both our revenues and expenses are built.

And that's what we intend to deliver.

Next, John McPeake with Prudential Equities Group.

Thank you for taking my question.

It sounds like based on your guidance, you are expecting begin to win back share in fiscal '08 and there are some important launches in the calendar fourth quarter, Halo 3 and Grand Theft Auto.

And I'm trying to get a sense as to your confidence in your ability to start to win back share?

And I just have a quick follow up.

Sure, this is Frank.

That is our, absolutely our key challenge.

And I think if you look at the way that our SKU plan is set up you are really going to start to see that share win back occur with the launch of Harry Potter in June.

Our portfolio from that point forward is pretty strong.

It's across all genres and all platforms and it's broader than just our sports business which has traditionally been our strength.

Just to mention some of our sports titles, once Harry Potter releases, you are quickly going to get a rolling effect with NCAA Football, John Madden Football, you're going to have NBA Live, you're going to have FIFA and we're also are going to have an NFL Street product coming for the fall.

You are going to have a very broad and stronger base of sports titles that we believe will benefit from a growing market.

Secondly, you're going to see some big entertainment launches.

It starts with Harry Potter in June.

But coming back in the fall with The Simpsons, that's a title that we are very bullish on.

We think we have a unique twist and a positioning in the way we built that game and it is the year of The Simpsons with the film and the major DVD release.

We think that's going to be a major media event for us.

If you move into the place where we have wholly-owned IP, it's a tremendous lineup year over year.

You have another Need for Speed title coming as one of the key tent poles, but stepping out from that, you have a tremendous line of Sims titles, our EAP business is bringing things like Mercenaries 2, Hellgate, Crisis.

We've got titles in the action sports category with Skate, Medal of Honor in the shooting category, Army of Two, and then we have a very large bet this fall, with a title that we are working with MTV and Harmonix on called Rock Band that we are extremely excited about.

So our goal is absolutely to be the biggest murderers on Murderers Row this fall and it starts in late June and it's a rolling set of titles that just hit hard.

Moving on, next we'll hear from Lazard Capital Markets, Colin Sebastian.

Thanks for taking my question.

I guess two parts, first in terms of your growth assumptions for the year, in terms of guidance as well as the industry outlook.

I was hoping you would talk about your assumptions for pricing on both the new hardware platforms as well as on software and then secondly I realize that Spore may not make it into the year.

So I was curious if you could expand on to the progress of that title.

Thank you.

First off, in the last month I've had the opportunity to visit with all the major first party, Microsoft, Sony and Nintendo.

To be honest with you, while we are in the position to know more about this than we can talk about today, it's not our view of our role in the world to preannounce their plans for the fall.

We've remained confident, though, that in our prognostication of 13 to 18% growth across the business, we also believe that there are three strong valid platforms that will survive and prosper through this cycle and we are going to support all of them and seek to lead on each of these platforms.

I am not going to give you more granular than that because frankly to do so would be getting ahead of the announcements that each of the major platform owners bring to you.

Beyond that, Spore.

Spore.

right now Spore is a title we have enormous confidence in.

I've had the chance to review the title three times in the my short return to the EA and it looks fantastic.

I will also tell you that it's right on the bubble in Q4, if not sometime in early fiscal '09.

So we don't feel comfortable in forecasting it.

Our focus is quality over speed to make sure we build a franchise that feels more like The Sims than a franchise that we ship once and hope to sequel at some point in the future.

And next we'll hear from Justin Post with Merrill Lynch.

Thank you.

John or Warren, you might want to answer this but when you go back to '04 you had $511 million in R&D and in 2007, excluding the stock comps were about 965 so it's almost doubled and revenues were up around 5%.

Is is there a way to and I know if you benchmark it against some of your competitors as far as publishing revenue to R&D adjusting for their capitalization, it looks like you're spending quite a bit.

Is there a way to rein that in and how do you expect the R&D spend to affect your peak margins as we look out a couple years from now?

This is John.

I will give you a couple of broad thoughts to start.

One is you are comparing peak of the last cycle to trough of this cycle so you can barely get compression, you get less return on investment.

I am very pleased that Larry led the team to make strong investments in intellectual property, strong investments in new technology to lead on the new platforms, strong investment in the past year to get us in a better position on Nintendo and Wii, which we had initially underforecast by a bit.

So it puts us in great position.

Those are investments that don't pay out in the year that you make them.

Those are investments that are going to pay out beginning in '08, moving into '09 and fiscal '10.

We have accurately pointed out that we nearly doubled R&D while revenue has been relatively flat in that time frame.

That is exactly what happens as you move from peak through the transition.

These investments need to pay out as we come through to the cycle in the coming months - or coming years.

One other observation, having visited with most but not quite all of EA Studios, I do see an opportunity both to generate more revenue from our portfolio and to be stronger in the cost management side to make sure we realize what we ought to realize as we move through the cycle.

Warren, do you want to add anything to that?

No, I think at the end of the day we understand the issue, Justin.

And the nature of it is that we -- over the course of the coming years -- need and want to get more out of every dollar of expense we have on our income statement.

And from Oppenheimer, we'll hear from Shawn Milne.

Good afternoon.

I'm trying to reconcile the expectations for a little bit more to drop to the bottom line next year, this fiscal year.

The marketing costs were also up.

Is there -- in the current quarter, has there been any change in how aggressive you want to be on the marketing front heading into '08 or is that more of a reflection of the title count we saw in the quarter?

Thanks.

Some of that's going to be the comp issue year over year.

Our add spends are pretty much in line.

In a year like we have upcoming, it is a big competitive year.

We are very confident in the power of our brands and how the marketing spends will be deployed.

We don't expect to see anything unusual with regards to the percent that we spend on marketing versus title.

I would say if you cut through the ins and outs of that, Sean, we had $5 million of higher marketing spend directly on our products, some higher contracted services supporting our products in Europe.

About $4 million of that was stock-based comp and roughly $4 million was higher headcount-related cost.

And from Piper Jaffray, we'll hear from Tony Gikas.

Hi.

Thanks, guys and John, welcome back.

Look forward to working with you again.

Real quickly, relative to industry growth during the next cycle, do you have a goal in terms of EA growth, relative to the industry?

And in terms of a potential share repurchase or let's address the cash position which is now $3.3 billion in cash, very strong cash flow in the next few years here, any comment on what to do with excess cash at this point?

Warren is going to pick up on share repurchase and I will come back on the share targets.

Tony, I would say, and this question has come up several times.

I think our first -- and in the meetings we've had together as a management team and with the Board and with John is our first and primary objective is going to be to grow this business and to drive shareholder value.

As we move into the cycle and as we continue and build on our cash position and build our cash flow generation capability, I certainly can't speak for the Board.

But I know the Board is wide open to any and all alternatives that will help to drive shareholder value and on an ongoing basis will consider all alternatives including acquisitions, including partnerships, including investing a new bills.

But also including thing like a share repurchase and or dividends.

Returning to your question with regarding market share, first off I tell you that the one thing we generally don't give our multi-year forecast market share revenue or margin and frankly it's a little bit early for me to be providing those in any case even if we were to have them.

I will point out two broad thoughts here that are very important.

One is share growth is, [inaudible] it's in the DNA at EA.

It's what we are after, it's what we intend to do.

As I mentioned before we have blessed with an incredible talent pool, the best intellectual property in the industry and the strongest studios, it's our job to harness those assets for growth.

And then secondly, I had mentioned that there is going to be some work done to realign our organization, to help us get to increased accountability, agility and speed.

Frankly, we think that's the perfect combination, drive for speed with these assets, and the goal would be market share growth.

Next we'll hear from Jeetil Patel with Deutsche Bank Securities.

Thank you.

It looks like your European growth, on a constant currency basis has been generally flat over the last couple years, three years.

I guess, can you talk about what you think the European market grows?

I know you bracketed 13 to 18, but can you give us a sense what if the growth rate looks like and then the contribution from an FX standpoint?

And second, can you give us a sense of a partner revenue contribution for fiscal '08 in your assumptions?

Thanks.

Jeetil, I would say, I would put the revenue growth for Europe in the 13 to 18% range.

So, I don't think it falls outside of that range.

I can't argue with the fact that revenues over the past couple, three years have been flat.

That just is a fact and I think it's pretty well reported in our financial statement.

FX, as I mentioned was $22 million for the quarter.

For the full year it was $53 million.

And partner revenue, at least at this point is pretty insignificant.

Our biggest partner that at least comes to mind most recently is what we are doing with Neowiz in terms of FIFA Online in Korea and then on into Japan.

And right now, that is just not a material part of our international revenue stream.

This is John, just to add a little bit to that.

One is complexity and one is a little broader definition of partner.

On the broader definition of partner nearly all of our EA Partners business does, in fact, go out into Europe so kind of like Rock Band and Mercenaries and Hellgate that you heard Frank speak to earlier are generally worldwide deals.

So those also fall through to Europe to generate revenue.

And secondly, for those of you who write analyst reports, all of you reported back that Europe is a much more complex market than it's ever been before.

One of the things I'd point out is that to grow our business in Europe, is frankly the diversity from market to market, Eastern Europe still being very much a PS2 market, the UK.

standing alone in terms of how Microsoft and Sony are performing and Continental Europe being different to the exception there and Germany which remains a strong PC market.

So one of our challenges in Europe is frankly the nature of it being a bit of a patch quilt, different strategies really are in the market.

Next, we'll hear from Heath Terry from Credit Suisse.

Warren, just making sure that we understand the guidance on the expense line the right way, on the last call I seem to recall you saying that R&D costs would be up in the mid single digits this fiscal year.

It sounds like from your guidance today that that's actually going to be higher, Is that a function of the acceleration that John is talking about and if so is that from putting more products into development or is it from the cost of the current products in development being higher?

And then also, John, if you could talk to the balance that you want the company to have between license and kind of newly created intellectual property and how you see that kind of rebalancing that was started with the company a couple of years ago progressing.

I will try to answer that question, I was just trying to recall my exact words in the last conference call.

And as I recall, I talked about single-digit growth for R&D.

And this is really a clarification to allow you to be more specific.

I don't think our view has actually moved from three months ago.

What I did say on the call, and it holds true again, is that we talked about spending in our core studios being less than 5%.

And that is in fact the case.

That has not changed.

So net/net is, I think it's pretty consistent with where we were three months ago.

Of course studio growth, under 5%, the bulk of the growth in spending is coming in areas of online investment on the R&D line.

John, back to answer your question regarding license versus owned intellectual property, you mentioned newly created properties.

I'd like to come back and give you a broad answer.

In the past we've talked about getting to as much as 50% of our business being owned intellectual properties.

Frankly, I've never seen a stronger portfolio of new property starts at EA in its history, whether it's Army of Two or Boogie or what we have going on with SPORE.

Unbelievable portfolio of new properties.

We are also building on the strength of our existing fully-owned properties, like Medal of Honor, importantly, The Sims.

These great contributors to our business.

In general I would say if you go back five or six years, EA was probably over tilted to license properties.

We saw the writing on the wall in terms of the costs of our licensed properties rising.

Larry and the team redirected resources to owned intellectual property.

That has paid dividends and there is big investment made in the last 12 months to further enhance that strategy, with the list of titles I and Warren and Frank have mentioned on the call so far.

Next we will hear from Michael Savner, Banc of America.

Good afternoon, thanks.

I'm sorry if I missed this bullet but have you given a firm release date for The Simpsons game?

Is that going to coincide with the theatrical release in August?

If not what would be the strategy or was it not planned to not have them coincide?

The title is planned to launch in the fall.

It will be near the DVD release in the late Christmas time frame.

When we originally did the deal it was never the intention to make the movie date due to the timing.

From UBS Securities, we'll hear from Ben Schachter.

John, welcome back.

Given your time on the private side I was wondering how that has changed your view on looking at acquisitions and how you might bring that over to EA and if you could address that maybe by geographic area in the U.S., Europe and Asia.

Thanks.

First I could probably point out that EA did more acquisitions in the last 12 months than I did on the private side.

So with six separate transactions so this has been an acquisitive group.

If I turn to broad new prospectives, we clearly made an investment with Neowiz in Korea, strong interest in growing our platform in Asia, Europe and in the North American marketplace and we really don't differentiate further in terms of wanting to get to any particular geography.

I would suggest that our priorities on the M&A side first would be growing the strength of our intellectual property portfolio, the breadth and depth of our property list.

We'd like to grow that.

We are also looking to expand talent where talent can be found, that is, if you will, the shortest commodity in our industry.

We are trying to build on EA Mobile.

Our Mobile business through Jamdat is doing a great job with building internationally but in particular, we are interested in further international growth.

And, of course, we are expanding our online presence.

So by and large, we are looking at M&A as a strategic way to enhance the same list of priorities this company has articulated in recentcalls, whether it's next-generation platforms, in wireless in Asia.

Next we'll hear from David Joseph of Morgan Stanley.

Hi, guys.

I just have a minor question at this point.

Warren, it seems like your expectations for deferred revenue for 2008 -- fiscal '08 went up since last call and it sounds like you've gone through a budgeting process but I am wondering if there is anything else there that might have increased that number?

No, the range is roughly $400 million to $450 million so it's modified, or to 500 million.

So, yes, it is a range and we are just trying to be a little bit conservative with that range, hopefully.

The reality is, this is our first year through it as it's your first year through it and a slight movement in ship dates can make a big difference.

So we felt like it was probably pretty smart on the GAAP side inputting a relatively sizeable spread on that, David.

And we'll take a question from Dean Gianoukos from JPMorgan.

Can you just touch on specifics as to what you are going to do to improve game quality?

It seems like game quality at EA has deteriorated over the past few years.

Is there anything you are planning to get quality up and bring a better set of games to the market?

Thanks.

This is John.

First off, I would tell you that just a fact pattern for you.

If you take a look at all of the major publishers -- Microsoft, Sony, Nintendo, in addition to our more direct competitors on the third party side -- you'll see that pretty much all of them have seen slight reductions on their Metacritic scores on average over the last three to four years as they've tackled next-generation consoles.

And EA doesn't stand out in the crowd as having missed more than others have.

That's not a good answer for where we want to go.

I've been trying to be somewhat generic in addressing the need for increased accountability and agility and speed to market and that we want to align our team to tackle that opportunity.

I'm not in a position today to try to expand upon that in great detail.

But I think there's a number of things we can do, expect some changes at EA, expect the change to be both in how we align ourselves organizationally, and then the focus that we intend to get in terms of cost leverage as we build our business through the balance of the cycle.

We've got to climb both a revenue curve and a relative ratio of expense to top line to drive the business to where we want to drive the business.

So if you want to understand what our agenda is, driving our organization for more accountability, driving our business for top line, driving our bottom line for margin.

That's what we are focused on over the next two years.

And our final question comes from Edward Williams with BMO.

Good afternoon, guys .

Just a couple quick questions for you.

As you look, John, to the kind of midpoint of the next platform cycle, how do you see the geographic revenue mix as well as the new revenue streams, the digital download mobile phone and such?

How significant do you think they will be to the total revenue for the

We may end up splitting that question up a little bit.

First off, one of the things that I think in general we try not to do is be precise about fiscal '10 and fiscal '11.

I think it's very difficult to do that.

So understand EA's strategy.

It's not frankly hugely important to us what the relative market shares are between one console and the other.

Our intent is to lead on all of them.

It is not necessarily critical to us if online grows a little bit faster than wireless or vice versa.

Our intent is to lead on them.

We have the best portfolio of assets.

In fact, I believe we are the only major publisher with strengths in wireless, on line, all three major consoles, PC, micro transaction models, online subscription models and the hand held.

We have that breadth.

So we can make sure that we generate the revenue regardless of how the market develops.

In terms of broad prognostication we think it's a pretty safe bet that the biggest business over the course of the next three years is still the console business.

With an increasing share driven to new revenue models, in particular in Asia.

What we are most pleased by there is we've learned in the last 12 to 15 months that our intellectual property is strong in Asia.

Simcity rising to the top of the charts in Japan where we have the platform right into DS; FIFA rises to the top of the charts in Korea where we have the right delivery and visibility.

We want to push EA's intellectual property to the right business model, the right platform at the right margin structure and that's what we are focused on.

Any final questions, operator?

There are no further questions.

Great.

Thanks, everyone, for joining us.

Ladies and gentlemen, that does conclude today's presentation.

We do thank everyone for their participation, and have a wonderful day.