美商藝電 (EA) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Electronic Arts first quarter fiscal year 2008 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, ma'am.

Welcome to our first quarter fiscal 2008 earnings call.

Today on the call we have John Riccitiello, Chief Executive Officer, Warren Jenson, Chief Financial and Administrative Officer, and Frank Gibeau, President of EA Games.

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

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

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

Non-GAAP measures exclude charges and related income tax effects associated with the impact of change and deferred net revenue related to packaged goods and digital content, acquired in-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 website.

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

These non-GAAP measures are not intended to be considered in isolation from, in substitute for, or superior to GAAP results and we encourage investors to consider all measures before making 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 with our prepared remarks as well as our trailing twelve months platform series and a supplemental schedule on our website.

During the course of this call, we may make forward-looking statements regarding future events and 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, 2007, and disclaim any duty to update them.

Now I would like to turn the call over to John.

Thanks, Tricia.

I would like to briefly talk about our Q1 performance, our fall and holiday lineup, and then give an update on our agenda for change in Electronic Arts.

We're pleased that our Q1 numbers exceeded our guidance given the strength of our catalog and the solid launch of Harry Potter.

We have to say up front we're not pleased with our year-to-date segment shares.

For the first six months of the calendar year, our shares have been in the midteens, down 7 points in North America and down 6 points in Europe.

While anticipated, this is not acceptable.

For the remainder of our fiscal year you should see our quarterly share performance improve to the low and mid-20's given the breadth and quality of our lineup.

Looking ahead, we have a strong slate.

Make no mistake, the competition will be out in full force, but we will be too.

In addition to EA Sports and blockbusters like Need For Speed, The Simpsons, and Medal of Honor, we'll launch ten new properties.

That's more new titles than we've launched in recent memory and includes highly anticipated games like Skate, Army of 2, Rock Band as well as Boogie and Playground for the Nintendo Wii.

I am particularly impressed with our on you studios are addressing accessibility, innovation and the new platform.

Boogie from EA Montreal is right where we need to be.

It is on the Wii.

It is innovative and perfect for the casual consumer.

EA Sports, this fall, our Wii Sports titles will include a family play mode, game making the games even more accessible to a broader audience.

Parents now have a chance when playing against their kids.

SimCity Societies on the PC is a fresh take on a popular franchise, franchise, proof that sequels can be as innovative.

In Skate, this property is getting great early reviews and brings a whole new approach to skating drama.

When you add it all up, no one is coming to the holidays with more collective strength than Electronic Arts.

This fall and holiday promise to be really, really exciting.

Let me update you on our go-forward agenda.

As most of you know, we've accomplished two important objectives in the past quarter.

First, we reorganized our businesses into four labels.

We are now in the the process of aligning our people, our systems and processes into this structure.

Second, our labor leadership is now in place, joining Nancy Smith and Frank Gibeau and the rest of the management team are [Cathy Grabeck] and Peter Moore.

Clearly, this company and our strategy are tracking some of the most creative successful people in our business.

I am particularly proud this team came together so quickly, giving us the foundation to drive our change agenda that much faster.

Over the next several months, we'll be building out the specifics of our go-forward plan.

Our plan will be focused on the following five long-term priorities: First, increasing our revenue or our segment shares.

It is about growing our core franchises, going after new intellectual properties, new audiences and new platforms, including the Nintendo Wii and the DS.

Second, expanding new revenue streams including in-game advertising, micro transaction, subscriptions and the expansion of our midsession gaps and our third revenue driver will be smart growth through acquisitions.

On the cost side, first thing we would like to to do is to simplify our infrastructure.

Our EA historical structure served the Company well, but we now believe we're on a scale where we can streamline many of our systems and processes in order to drive margin benefit and better scale of our business.

Secondly, R&D productivity.

Today we're not getting enough bang for the buck.

We expect to better utilize our capacity, make sure our spending is spending is maxed to the opportunity, and take advantage of opportunities for low cost development.

While you won't hear anything more definitive or quantitative today I can tell you we're on the case and in the process of formulating the specifics of our plan.

We look forward to reporting our progress.

In summary the change agenda at EA is moving toward.

I will now turn the call over to Warren.

Thanks, John.

Good afternoon.

Before getting to the specifics, let me remind everyone that effective this quarter we no longer charge for hosting as it relates to certain online enabled packaged goods titles.

This change as you know requires the deferral of significant revenue which is materially impacting our GAAP results.

Now a few highlights.

Our first quarter performance exceeded our guidance both on the top and bottom line.

GAAP revenue was $395 million, down $18 million year-over-year driven by a $36 million sequential increase in net deferred revenue.

Revenue ex-deferral was $431 million, up 4% from a year ago.

Excluding the impact of foreign exchange, revenue ex-deferral was roughly flat.

GAAP diluted loss per share was $0.42 versus a loss of $0.26 a year ago.

Non-GAAP diluted loss per share was $0.22 versus a loss of $0.12 a year ago.

During this light release quarter, several titles stood out.

Harry Potter and the Order of the Phoenix sold 2 million copies in just one week.

Command and Conquer 3: Tiberium Wars, continues to do well with the introduction of the Xbox 360 SKU.

Life to date, this title has sold over 2 million copies on the PC and Xbox 360.

The Sims franchise had another great quarter with four titles launching, including Sims 2 Celebration, Sims 2H&M fashion, Sims Pet Stories and Sims 2 Deluxe.

In total the Sims franchise sold over 3 million copies, up 18% with over 65% sold internationally, and finally our catalog continues to perform.

In the quarter, our digital revenue ex-deferral was $39 million, up 40% year-over-year.

Pogo revenue was $24 million, up 57%.

Today this business is monetized with every business model, including advertising, subscriptions, digital downloads and micro transactions.

Since launching gems last fall, subscribers have purchased $6.7 million worth of gems with each buyer purchasing $27 on average.

Internationally, Pogo is now up and running in the U.K., Germany and France.

FIFA Online had its strongest quarter since commercialization.

We continue to expand into more internet cafes and experiment with content and pricing.

Life to date,we have completed 4 million micro transactions at roughly $1.39 per item.

Since launch, the average revenue per buyer is $18.

In addition, we have begun development on two other midsession games for Asia, Battlefield and NBA Street.

The Warhammer close beta has more than 300,000 registered testers, making this one of the most successful MMO introductions.

We made a 15% equity investment in The9 and are partnering with them to bring FIFA Online to China.

Finally, at the E-3 Summit, EA won six Best of E-3 awards, up from three a year ago.

Congratulations to Madden, Burnout, Crisis and Rock Band teams.

For the next few minutes I will focus my reports in two areas.

First, I will review our Q1 financial results.

Second, I will go over our outlook and financial guidance.

Q1.

Revenue ex-deferral was $431 million, up 4% from a year ago, and roughly flat excluding the impact of foreign exchange.

This performance was driven by Harry Potter and the Order of the Phoenix, Command and Conquer 3: Tiberium Wars, Need For Speed: Carbon, The Sims 2 Pets and FIFA '07.

We released 14 EA SKUs in the quarter versus 16 a year ago.

Console revenue ex-deferral was $169 million, down 13% primarily due to our light release schedule.

Harry Potter, which launched the last week of the quarter, did not offset the strength of last year's FIFA World Cup.

Next gen revenue ex-deferral was $96 million or 57% of total.

On mobile phones, revenue was $34 million, up 3% year-over-year.

We had five of the top ten games in North America and two of the top ten in the U.K.

On the handhelds revenue ex deferral was $57 million, up 10%.

NDS revenue of $25 million was over 3 X that of last year driven by Sims City and Harry Potter.

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

PC revenue ex-deferral was $96 million, up 45% driven by the Sims franchise and the continued strength of C&C 3.

C&C 3 was number 3 on the PC in North America and we estimate number 2 in Europe.

Copub and distribution revenue was $39 million, down $3 million, internet licensing, advertising and other revenue was $36 million, up 38%, primarily due to subscription and advertising growth on Pogo.

Club Pogo subscribers at 1.5 million are up 17% year-over-year.

Geographically, North America revenue ex deferral was $171 million, down $38 million or 18% driven by year-over-year declines in catalog.

The increase in Wii subscriptions, PC and NDS did not offset the declines in other platforms.

International revenue ex-deferral was $260 million, up $56 million or 27%.

Excluding a $17 million positive impact from foreign exchange, international revenue, ex-deferral would have increased 19%.

Europe revenue ex-deferral was $225 million, up $56 million, or 33%, driven by the strength of catalog, Harry Potter, and the Sims.

Increases in next gen more than offset the declines of current gen.

In addition, PC and NDS each had growth of over $10 million.

Asia revenue ex deferral was $35 million, flat to last year.

Moving on to the rest of the income statement, GAAP gross profit in the quarter was $229 million, down 7% due to revenue deferral.

GAAP gross margin was 58%, versus 59.3, down 130 basis points, also due to the revenue deferral.

Non-GAAP gross profit was $272 million, up 8%.

Non-GAAP gross margin was 63.1% versus 60.8%, up 230 basis points, primarily due to the favorable mix of wholly-owned properties.

OpEx.

Sales and marketing expense was $82 million, up $5 million primarily due to higher personnel related costs.

G&A.

G&A was $71 million, up $12 million primarily due to higher contracted services associated with systems initiatives in North America and Europe and higher professional fees.

Salary and related costs were roughly flat year-over-year.

R&D, R&D was $250 million, up $34 million or 16%.

For the year, we continue to expect R&D to be up in the high single digits year-over-year.

R&D head counted was 6,000, up 16% from a year ago, and up 2% sequentially.

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

GAAP diluted loss per share was $0.42 versus a loss of $0.26 a year ago.

Non-GAAP diluted loss per share was a loss of $0.22 versus a loss of $0.12 a year ago.

The $0.20 difference between GAAP and non-GAAP EPS was principally due to the change in deferred revenue, $0.09, stock-based comp of $0.07, and amortization of intangibles, $0.04.

Our trailing twelve-month operating cash flow was $243 million versus $589 million for the comparable period.

The decline was primarily a result of the timing of collection of our receivables, lower net income, and the adoption of FAS 123-R, which basically -- which required us to classify the excess tax benefit on stock options in financing cash flows on a perspective basis.

Our return on invested capital on a trailing twelve-month basis was 9% versus 19% a year ago.

Now onto the balance sheet.

Cash and short-term investments were $2.2 billion, down $446 million from year end, primarily due to cash utilized in operations and our investments in Neowiz and The9.

Marketable equitable securities were $660 million, up $319 million sequentially, primarily due to our investments in Neowiz and The9.

Gross accounts receivable were $299 million versus $225 million, an increase of $74 million, primarily due to the timing of our release schedule.

Reserves against outstanding receivables totaled $176 million, down $8 million from a year ago.

Reserve levels were 17% as a percentage of trailing six-month net revenue, consistent with last year.

As a percentage of trailing nine-month net revenue, reserves were 8%, also consistent with last year.

Inventory was $74 million, up $15 million from last year and up $12 million sequentially.

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

Deferred net revenue from packaged goods and digital content was $68 million, up $36 million from year end.

This quarter, we also adopted FIN 48, which clarifies the accounting and recognition for uncertain income tax positions, the impact of this adoption is reflected on our balance sheet and did not impact our P&L.

The net result was a $36 million increase in deferred tax assets, a $32 million increase in net equity, and a reclassification of $278 million from current to long-term liabilities.

Our outlook and guidance.

Before getting into the numbers, a few quick observations.

First, even though we exceeded our guidance for the first quarter, we are not adjusting our full year non-GAAP EPS estimate.

It is just too early.

Second, we don't intend to update our industry guidance at this time.

Although it seems clear that Nintendo is showing upside, it is giving us confidence in the higher end of our 13 to 18% range for North America and Europe.

Third, as John mentioned, we are very much looking forward to the holidays.

It should be an exciting season for consumers.

A lot of terrific titles are on the way, and great software sells hardware.

Finally, we are heading into the sweet spot of our release schedule.

We have one of our strongest lineups ever with ten new properties, 13-plus titles for both the Wii and NDS and a strong portfolio for the PS2 and PC.

Now the numbers.

Let me remind everyone that a one-page summary of our financial guidance will be included with the call script on our website.

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

First, our GAAP guidance.

For the full year, we expect revenue to be between 3.2 and $3.5 billion, which is $100 million increase to our previous range.

Diluted loss per share to be between $0.63 and $0.10, gross margin to be between 50 and 55%, and basic share count to be 317 million.

We now expect that between 350 and $450 million in revenue will be deferred and recognized in fiscal '09.

This is a reduction from our previous estimate of 4 to $500 million.

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

40 to 43% in Q3, and 27 to 32% of the total in Q4.

For gross margin, we expect the following percentages by quarter: 50 to 55% in Q3, and 60 to 65% in Q4.

Now our non-GAAP guidance.

For the full year, we expect revenue ex-deferral to be between 3.65 and $3.85 billion, an increase to our range of 50 million.

Non-GAAP diluted earnings per share to be between $0.90 and $1.20, non-GAAP gross margin to be between 57 to 59%, diluted share count to be $325 million.

Overall, we expect our non-GAAP EPS to be roughly $1.30 to $1.53 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 to be between $0.82 and $1.05.

Stock-based comp approximately $0.31, amortization of intangibles, roughly $0.13, restructuring charges related to the reorganization and establishment of our international publishing headquarters, approximately $0.04.

We expect our non-GAAP revenue ex-deferral for the back half of the year to land in roughly the following percentages.

40 to 43% in Q3, and 20 to 24% of the total in Q4.

For the quarter ending September 30, a couple of changes since we last spoke.

We are now planning to launch Crisis in early November and FIFA will launch in North America the first week of Q3 as opposed to the last week of Q2.

These timing changes will shift roughly $60 million of revenue ex-deferral and roughly $0.10 of non-GAAP EPS out of Q2.

First our GAAP guidance.

For the quarter we expect revenue to be between 465 and $570 million, diluted loss per share to be between $0.92 and a loss of $0.76, gross margin to be between 26 and 32%, tax benefit rate to be between 20 to 25%, and basic share count to be 312 million.

Now our non-GAAP guidance.

For the quarter, we expect revenue ex-deferral to be between 825 and $910 million, non-GAAP diluted earnings per share to be between $0.10 and $0.20, non-GAAP gross margin to be between 57 and 59%, our non-GAAP tax rate to be between 15 to 20%, diluted share count to be 321 million.

Overall, we expect our non-GAAP EPS to be roughly $0.96 to $1.02 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 to be between $0.84 and $0.90.

Stock-based comp approximately $0.08, amortization of intangible assets roughly $0.03.

Restructuring charges related to the reorganization and establishment of our international publishing headquarters, roughly $0.01.

In Q2 we expect to ship 44 SKUs compared to 43 a year ago.

NCAA football '08 on four platforms, FIFA '08 on seven platforms in Europe, Madden NFL '08 on nine platforms, Tiger PGA tour on seven platforms, Medal of Honor: Airborne on the Xbox 360 and and PC, MySims on the Wii and NDS, NASCAR '08 on three platforms, NHL '08 on four platforms.

Boogie on the Wii, Rugby '08 on two platforms, Sims 2 Bon Voyage for the PC, Skate for the Xbox 360, Harry Potter and the Order of Phoenix on the GBA.

E A mobile.

We plan to launch six games on cellular handsets.

Madden NFL '08, Medal of Honor: Airborne, Burnout, Skate, The Simpsons and Sims Bowling Multiplayer.

With that, we would now be happy to take your questions.

(OPERATOR INSTRUCTIONS).

Our first question is from Mike Hickey with Janco Partners.

Thanks, guys, great quarter.

John, you mentioned as part of your strategy to look at acquisitions, and we heard about EA's philosophy in the past, but can you let us know your philosophy and what you look for in a potential acquisition target, and secondly, do your label heads have specific cost reduction goals at this point or will they, and is this something supposed to be material or just kind of a light cleaning of the house?

In terms of M&A, the priorities I think remain largely consistent what they've been historically.

When it comes to additions to our core business, what we'd be talking about is content acquisitions where we get new intellectual property, strong studios and additional scale.

From a strategic perspective, we would also be looking at opportunities to expand our casual platform in particular areas like mobile or like PC game area or investments to further expand our plant in Asia.

I think it is largely consistent, so I don't know if that adds a lot to your understanding.

In terms of the label heads and their targets for cost reduction, the label heads, three out of four are here, one is just about to arrive, and a new one will.

We are focusing them on margin growth, and I am talking net margin including all the costs.

It is not specifically at this point on cost reduction targets we're able to share with you.

As you would expect, we're looking for the right combination of top line growth and bottom line growth with broad expansion of the bottom line.

We've got big ambitions there, but we're not ready to spell out and specifically on the cost side and quarters and years ahead beyond the guidance we already provided.

Okay.

Thank you, guys.

We'll take our next question from Edward Williams with BMO Capital Markets.

Good afternoon, John.

Just to follow up on Mike's question a little bit, can you talk a little bit about your philosophies with regard to capital structure and as you look at your balance sheet with the significant amount of cash have you on hand, how much do you feel as though the business really needs to operate and what could you do with some of the excess cash if anything at this point?

I will let Warren pick that one up.

Ed, I would tell that you our philosophy remains unchanged and first of all, what we would like to do is put the cash we have on our balance sheet to the most productive use possible to grow our business.

Clearly with all of the changes that are happening globally, we hopefully believe there may be some opportunities out there for us to productively use that cash in the form of either partnerships or through acquisitions.

To the extent that does not transpire in the coming years, I don't think there is any hesitancy and as a matter of fact is something we review, both John and I regularly with our Board, the possibility of return of that capital directly back to the shareholders if in fact we can't put it to better use.

Okay.

Thanks.

We'll take our next question from Todd Greenwald with Nollenberger.

Good afternoon.

Thanks.

Good quarter.

A lot of people very excited about Rock Band, as am I.

I was wondering if you can talk about what you learned so far about the supply chain for the hardware peripherals cross multiple platforms there, how hard it has been getting all the different instruments out on two platforms and just how prepared and confident you are for November launch on both the 360 and PS3 for Rock Band?

This is Frank.

We're very confident about our fall release plans with Rock Band.

Clearly it is a complicated launch from the stand pointed of a supply chain across multiple peripherals with manufacturing overseas.

The good news is we have great partnerships with Harmonics, MTV and others that have really helped us design and build the right supply chain to deliver the product for this fall, so we're very confident at this point.

Clearly the game is doing very well from a demand standpoint.

It was a multiple award winner at E-3, including Best of Show, so at this point in time we feel very good and confident about the launch of Rock Band.

Great.

Thank you.

We'll take our next question from Evan Wilson with Pacific Crest.

Hi.

Thanks for taking the questions.

First, don't know if you saw Disney's acquisition of Club Penguin this afternoon.

Sounds like that's an area you're looking at investing in and is that something you looked at and on the casual game side do you expect to see more and more competition from large media companies like Disney and Fox and et cetera, and can you also talk about the mobile business?

It was flat year-over-year versus the industry growing north of 30%.

Can you talk about changes in strategy you can do there to possibly resume growth?

Thanks.

I think we may quote this up a little bit a few inside questions there.

First off we did see the Club Penguin acquisition.

It definitely is a strong business.

It is in a area that we would be interested in otherwise competing.

I would not get into specifics of companies that we've either looked at or considered.

It would seem an inappropriate conversation outside of our boardroom.

In terms of more competition from various media companies, I think we've long been in competition and cooperation with various media companies.

People with whom we've been great partners over the years, most of them have videogame businesses and/or mobile game businesses and casual businesses and have for years, and I don't expect that to change.

Really not a lot to add there.

For Disney, we certainly understand the strategic rationale for Club Penguin.

We know they made further announcements about increasing their investment on that front.

We expect them to do so and we will continue to prosecute our strategy.

I will take the mobile question.

My head line would be one quarter does not a year make or a trend make, and so I think we've had a tremendous amount of success at JAMDAT.

The second thing that I would point out relative to our Q1 results is Q1 at least in North America was a very weak quarter for handset sales which did impact us.

The second thing that happened was we over indexed a bit at Motorola, and obviously they've had some level of difficulty.

The flip side of that is we're beating our plan in Europe, but it is obviously a small part of our business.

Finally, when I look ahead, recognizing Q1, we had five SKUs,s, Q8 we have eight, and in the back part of the year we have 10 and I believe 11 in Q4, so relatively even though releases don't entirely drive this business, our release schedule is tilted towards the back part of the year.

Pickup it is Q2 we have eight as opposed to Q8.

That's a good catch.

It did run our minds we could only get eight quarters in a year.

Thank you.

We'll take our next question from Eric Handler with Lehman Brothers.

Thanks.

When I look at your second quarter guidance, there is a pretty big disparity between the low end and high-end of your net revenue outlook.

Is there any specific factors that would cause you to think what would come in at 465 versus something really hits that would come in at 570?

This is Warren.

I will go ahead and take that question, and I will focus a little bit more on the non-GAAP numbers pre the deferral because I think the thing you have to recognize there is going to be a meaningful deferral of revenue out of Q2 given the fact that most if not all of the sports titles are online enabled, so you could be looking at a $350 million revenue deferral.

That's one of the things you have to take into account.

Looking at our non-GAAP range for Q2, the range we just thought was appropriate given the size of the quarter, and we honestly felt it was a little silly to have a $400 million quarter and have a $50 million range and then look at $1 billion quarter and say that the same $50 million range was applicable, so we tried to look at the ups and downs and the pluses and minuses and felt that our range of revenue guidance was pretty much what it should be.

Okay.

Thanks.

Thank you.

Our next question is from Jeetil Patel with Deutsche Bank.

Hey, guys, a couple of questions.

Looks like your videogame publishing operations have about 5% operating margin versus about 20.

The same period in the last cycle, can you discuss, John, as you dug into the business a big more, do you think that driving margins in the cycle is going to be a function of increasing unit scales to drive leverage or do you think it is a combination of unit scale and head count and cost reductions, and I have a quick follow-up.

The answer is obviously both.

In terms of we have to manage the costs lines, we have to manage the top line.

I tell you point-blank that this cycle is developing quite differently than the last cycle, the next gen hardware build is going slowly and the last cycle, probably the biggest delta this to last is that we are riding the right wave.

We were out on PS 2 in a gigantic way and that turned out to be the lead platform in the market.

This time, we've obviously got unexpected strength with the Wii and the PS3 hasn't yet performed as well as we expect it to.

That's probably had a bigger impact than any other factor in our margins.

Beyond that, you have increased costs cycle over cycle, and that we have to manage by doing two things really well.

One, driving unit volumes so you can get that R&D, if you will, the bang part, really right, and then making sure that you've got your costs aligned.

We have to be very careful in managing our costs per title as we work through the balance of the cycle.

In terms of specific cost reduction numbers, we are not providing further guidance on that at this point in time.

Any idea time frame wise when you can actually catch up from a margin standpoint as you look at your product portfolio over the next couple years and second, you have a 10% market share all in today.

You have historically averaged in that 20 to 25% range.

I guess do you think that the product portfolio this fall or the interest rate allows you to get back in into the 20% range or do you think it may take into fiscal '09 to get there?

Two questions.

One, asking for guidance beyond that what we provided for the fiscal year unfortunately we're not going to go there.

There will be a time and place for it, but today is not it.

Secondly, with regard to market share, we are in the midteens year-to-date in North America and Europe.

We expect to be north of 20% from this quarter forward for the balance of the fiscal and the balance of the calendar.

That comes with our title slice, really in North America, in clips with Madden and in Europe in clips with FIFA.

We have not been pleased with our first calendar two quarters in either North America or Europe and we're focused on making sure we get it back to where it needs to be.

We'll take our next question from Ben Schacter with UBS.

John, wondering if at a high level you could talk about one of the key benefits that EA's scale and EA's personnel brings to the casual initiatives?

What do you guys have that's going to make it a success for you, and the second question is about advertising.

I wonder if you can discuss what the key factors that you look for in partners that you may look to help you monetize particularly Pogo.com.

Thanks.

In terms of what we bring to the table in casual, I think we bring a number of things.

To start with, casual is a pretty complicated business from sort of traditional perspectives when we're -- when you look at the consult business, it is typically three platform sincerely where you look or two platforms historically.

Casual is everything from what goes in Xbox Live Arcade to the mobile business.

It is a variety of different business models, handhelds, mobile phones, et cetera.

Frankly I think the first thing we bring to the business is to the breadth of our ability to bring intellectual property to market across a large range of platforms.

Frankly we don't have a single competitor with the same breadth both geographically and platform wise as we do, by organizing our sales into a casual label we're able to prosecute intellectual property across all of those platforms, and I think we're singularly capable of doing that today in the game industry.

Beyond that, we bring focus, and capital and a long history of creating intellectual property that is successful and interactive.

I feel very strongly about those.

Two areas in particular that represent points of differentiation, one is mobile where we have the strongest platform in the industry on a global basis that came with the JAMDAT acquisition, and second is Pogo where we've been able to develop a five if not six business model business around Pogo, everything around subscriptions to micro transactions all of which are really hitting on all cylinders and pushing that business across Europe.

Frankly I think EA brings an awful lot to the table on casual.

In terms of advertising, that may seem like a new subject to most of us on the call.

It has to be something we've been talking about in the industry for the better part of a decade, and I think a couple of observations.

One is that we're primarily in the business of getting paid for our contacts, and as demonstrated by Pogo, people actually are willing to give us significant dollars in subscription in order to have less or no advertising, so while advertising is an area we believe we can generate significant revenue growth in the coming years, it is not likely to be the dominant revenue source for us, a majority revenue source for us.

It is going to be additional margin, additional revenue.

In terms of partners, we're very pleased with what we're getting in massive.

We used a number of partners on the sale side and different geographies around the world.

We work very closely with the sports leagues relative to getting their sponsors to come into our games in terms of revenue generation, and we're building on businesses like Need For Speed which are really naturally receptive to the ad side.

There has been a lot of discussion, some of which I believe is unfounded, about a variety of partners we might be working with.

Right now it is a relatively small business, growing rapidly.

We're pleased with it.

We're monitoring it, we're investing to see more growth.

We don't have any further strategic alliance to say announce at this point.

Last question and quick update on pricing around Rock Band peripherals?

We're not in a position today to announce pricing on Rock Band publicly.

Thanks, guys.

Thank you.

We'll take our next question from Justin Post with Merrill Lynch.

Thank you.

Just a couple things.

First, looks like you're raising the year.

Why are you doing that, I guess, and with PlayStation 3 sales potentially tracking a little behind where we were a quarter ago?

Are you confident in that raise, and secondly, I think you gave help with how the football titles are doing last year on this call.

Can you talk a little bit about pre orders for Madden or how NCAA is doing at this point?

I will take the first part and Frank can take the second part.

We felt like it was the right thing to do when we looked at all of the in's and outs of the year.

Obviously, we're ahead on the top line in Q1 and if you had to point to one thing looking ahead to Q3 and even into Q4, as Rock Band looks very, very strong, so we felt pretty comfortable taking up our top line range by the 50 million that we did.

The other corollary to this is obviously we did not do the same on the bottom line, and as I mentioned in the call script, we really felt it was too early to modify the lower end of our bottom line guidance.

And adding to that, if you recall, Rock Band is a different business model for us.

If the lion's share of that $50 million is associated with rock band, lesser portion of that top line drops through, so it wasn't a meaningful adjustment for us in the bottom line.

In terms of how preorders are tracking with Madden, we're about two weeks out from our street date, and we're feeling really good about the momentum behind the title and the launch.

We believe the product quality is extremely high and the buzz right now based on how we're reading the market is tremendous.

We won Best Sports Game at E-3 which we think will help give us a boost over the finish line here.

We're on track to deliver well north of over half a million preorders, and we don't get too specific on the exact total.

We feel really good about that number and it is going to be the biggest launch of the year so far.

With regards to NC2A, we're in the market.

We're doing very well on next gen platforms, quality of the game is very high.

We had a little competition in the market.

Looks like we're significantly out selling them.

In terms of how the product is doing across the board, like I said, the next GEN platforms are selling nicely.

We have a little softness on the PS 2.

We think potentially that will be a pricing issue we will address and look at longer term.

While I am talking about football, I would like to talk a little about sports.

We recently launched NASCAR which is up double-digits against expectations in the market.

It is off to a tremendous started, and we've got FIFA after NHL staged to have very good launches as we finish up the quarter.

I would point out one thing that's new for EA Sports across the board this year is we added a family play feature John mentioned in the script.

We can that's going to really help us drive share on the Wii because it really opens up the accessibility of those franchises to the new customer.

Thank you.

We'll take our next question from Tony Gikas with Piper Jaffray.

Good afternoon, guys.

A couple questions.

John, you talked a little about restructuring efforts.

I was wondering if you can focus a little more on the product development group.

Should we expect some head count changes in that group or compensation plan changes over the course of the coming months and longer term, where would you like to be with respect to comp there?

Second question, with Halo and Grand Theft Auto coming over the next few months, has that impacted your release plan?

Do you feel pretty confident about your product launches around those two significant launches, and then my last question, are you expecting growth with the Madden franchise this year given that we're in kind of a questionable transition period?

A lot of stuff.

We can spend a good amount of time on these questions.

First off, what we announced as a reorganization in labels which gives us a much stronger focus on the product development side, essentially aligning four executives against tacks previously assigned to one.

We think that focus is going to pay dividends in a big way, and to be clear we did not announce a restructuring.

I think there they're somewhere close to each other in the dictionary but not exactly the same thing.

Secondly in terms of compensation system, we in fact do plan to make some adjustments in our compensation systems.

Our head of HR, myself, and the rest of the executive team are working through this.

We think there is an efficiency to better align the incentives with our studio and label personnel for the profitability in the franchises.

We think there is upside for it in the teams, and we think it will get the kind of focus we need on the gap between expenses and revenue which is what we need to build.

In terms of Halo and GTA, oddly enough, I will not tell you it is a mixed blessing.

I think said a double positive for us and the industry.

Great software sells hardware.

Every analysis we do suggests if these are in fact going to have a dramatic impact on sell through on both the Xbox 360 and PlayStation 3, we feel great about that.

We think we are a net beneficiary of it.

I will also tell that you we're a little careful in the dates we select to put our titles in the marketplace.

It would be very easy to inappropriately drop a title one week or two either side of these when they're near competitors.

The titles to the franchises are too strong.

We wouldn't make that mistake any more than I would launch an animation company in the shadow of a Disney Pixar film.

It is not the smartest thing to do.

These are great and strong franchises.

What's nice is kind of things that go out in similar windows for us but things like Sims City Societies which speaks to an entirely different audience and will sell very well in a similar window.

In terms of Madden, I will let Frank pick that up, but we're very, very bullish.

This may be the strongest product we have seen in the Madden franchise for some time, and we're expecting it to be bigger than prior.

Madden does very well on a Murderers Row year, and we anticipate that we're going to grow that business this year, and we have all the indicators are in line for us to be able to do that.

That's great.

Thanks, guys.

We'll take our next question from Heath Terry with Credit Suisse.

Great.

You mentioned the 2 million units that you sold with Harry Potter.

Can you give us an idea of what the mix is like there, particularly relative to the Wii title that I know you did some extra promotion around?

And then you also talked about how or over the next few quarters, you have kind of an out sized release schedule relative to what's normal for a variety of reasons.

When you look out at the product lineup longer term, how long do you think that outside schedule lasts before we return back to kind of what you at least see as being the normal SKU count for a given year?

This is Frank.

I will take the Harry Potter question.

Right now the Wii version is doing extremely well for us as you cited.

We did do dedicated marketing and focused media on that, and we're seeing a very strong sell through on the Wii version of Harry Potter both in North America and in Europe.

I am half guessing what you're referring to in terms of outside SKU plan.

You might be referring to the fact that there is approximately 130 SKUs on EA's title plan this year and in the past we've been in the 105 to 110 range.

If that's what you're asking about --

It is.

I would make a couple of observations.

One is, you tend to see SKU count rise when you're in the midst of transition because you're covering some old platforms and in new platforms, and frankly that's precisely where we are.

The second factor that tends to bleed into this is something that I said jokingly in the past, which is we went into the transition with 3 platforms and came out with 10.

The reality is that there are three valid next gen platforms we develop against.

It has typically been 2.

Handheld is a much more meaningful business than it has been in the past.

The Nintendo DS is strong, additionally, the PSP and the GBA are real businesses.

In general you are seeing us push more platforms for title, and if you tease out our P&L you will discover as the cycle progresses that's actually a very profitable strategy for us.

Great.

Thank you.

Thank you.

We'll take our next question from Arvind Bhatia with Sterne, Agee and Leach.

Good afternoon.

I just wanted to understand Sims a little bit better.

I think you mentioned 65% international.

I think you indicated that franchise continues to grow.

Anything going on that's more internationally compared to last year and you did $0.21 in EPS last year on 12% lower revenue and guidance this year is $0.10 to $0.20, and wondering if you can provide more color kind of how the bottom line is -- the top line is not giving us as much leverage, and if you could take a shot at the new revenue streams, a few years out what they could represent for you top line and bottom line?

I only allow two questions in ten minutes three.

Tackling the first one and I will turn it over to Warren for the second part, that far and see if we have time for the third.

In terms of the Sims, it has long been a franchise that performed particularly well internationally with something very pleasing to us.

One of the things to remember about Sims is it is mostly a PC business.

Europe has a higher percentage of its total business on the PC than North America does.

North America is more of a console business.

Probably the biggest drive factor for why the Sims performed better internationally than domestically is is tilts towards the PC.

The second key issue that I believe lives with Europe, it hasn't been as much in North America, is the way products get introduced in Europe.

The marketplace outside of the U.K.

is largely a retail-driven business where merchandising at the point-of-sale or huge point differentiation.

For three years now, European retailers have merchandising the Sims as a section onto itself where North American retailers tend to look at the Sims as a collection of individual titles being merchandised in our launch window.

One of the reasons we're getting such strong Sims catalog in Europe is that exact merchandising presentation that's so strong in Europe.

What's great about our label focus is Nancy Smith is bringing that exact focus to North America.

She has been across our major retailers, gained positive reception to the Sims section for North America, so we're pleased that it's stronger internationally.

It is mostly platform mix driven.

It is secondarily merchandising driven, and the merchandising kicker we're getting in Europe we're now going to get in North America if you push that strategy here.

And, Arvind, I think it is pretty straightforward and John talked about this in the opening.

We need to get more leverage out of our cost structure.

At the end of the day why is our earnings down?

Our costs are up.

It is going to be our ability to drive productivity and throughput that will change that.

And new revenue streams?

I would say and Frank can jump in or any one of us.

I think we're pretty optimistic on what we're seeing on new revenue streams.

Just to add a little bit of color to the discussion that was had on advertising, we've said this year that our digital revenue streams should pass through $175 million for the year.

That's up from $127 million.

If you look at both static and dynamic advertising for E A this year, that could be upwards of 30 to $35 million, and if you were to include all advertising, including that which we're doing on Pogo, we're pushing a $60 million business.

Add to that Warhammer which is a subscription business, the strength we're seeing with FIFA Online in Korea, which we're pushing to China, the other titles as Warren mentioned in the script are pushing there are micro transaction driven.

The fact that we're selling $27 per person that participates either in the gem, buying precious jewels online as represented in pixels which we are very pleased in terms of its margin structure.

Lots of growth in lots of different areas.

Unfortunately, one of the things we don't actually manage them as a single revenue stream.

We manage the Pogo business independently from managing the FIFA business.

I think in general we're seeing more robustness in people paying for content than any other part of our, if you will, secondary or new revenue streams.

That bodes well for us because we're a content company.

We make differentiated content.

Thank you.

We'll take our next question from [Doug Hoyt] with Cowen and Company.

Thank you.

Can you talk a little bit about how development of Spore is coming along?

Is that a title you still feel good about for Q1 fiscal '09?

Thanks.

This is John.

Frank and I are both dying to take the question because we're both playing and enjoying the product a great deal, so I would say the great news is what we've got now is coming together as one of those breakthrough products that might come across from the industry every three, five, seven years in something being so distinct, so compelling with a sweep of broadly across game play and sort of the underlying and intellectual property that you rarely, rarely see, so we could not be more bullish about the potential for the franchise than we are right now.

Right now, as we mentioned in our call the last time, it is sort of squarely targeted against March, April, May of next year.

Intellectual properties like this and games like these are so large and so complex that we chose not to put it in our fiscal year guidance because these days are pretty hard to predict, and the outcomes can be volatile.

We will make the choice of shipping a better game than on-time game given the high potential for this franchise, so our best guess right now is Q1 of next fiscal, but we're not actually providing guidance for next fiscal at this point.

Operator, I will make one comment and we'll take one last question today.

The comment I would like to make for everyone, I think a lot of you have been asking us about our plans and communication.

We do intend later this year to host an analyst meeting.

We will get back to you in the course of the coming weeks with this specifics of the date.

We have not locked on date and location yet, but we wanted to make you aware we would be hosting a meeting later this year.

With that, we will take one last question.

Our final question will come from John Taylor with Arcadia investments.

Hi.

I have a couple of questions if I can.

Just two.

We're not surprised.

Yes, really.

So, Frank, I want to follow up on your comment about NCAA and PS2 a little bit.

If there is a little bit of weakness in demand on PS2 and you're looking at price, talk about how that increases the complexity of trying to plan launches as you go into the meaty part of the season by platform?

I am wondering if you're playing with any new variables on that front as a result of what you're seeing.

That's the first question.

Maybe, Warren, for you, I wonder is it worth talking about or let me ask the question.

What do you think the gross addition to deferred revenue is going to be over the course of fiscal '08 and how much are you going to bring back in to result in those net numbers that you've given us?

Thanks.

This is Frank.

The issue on NCAA, we're really isolating on the $39 versus the $49 price point and talking to retailers about how best to position that product against which price point and obviously we take the feedback and weave that into the rest of the launch this is year.

We're tracking a lot of variables with regards to our launches this fall, everything from product quality to marketing budget to release windows to competitive.

I just think we're looking at a very complex set of variables.

in the case of NCAA, price is always one we look at.

This happens to inform us a little more carefully this early on that platform on PS2.

Does the weakness on PS2 suggest maybe as you look into launch plans for October/November releases, et cetera, that you might shift some of the SKU mix towards one of the next gen machines or elsewhere?

I don't think we'll shift the mix too much.

I think in this case we're looking at a market that $49 as held on that platform for a very long time and held longer than most people thought, and I think what you're seeing is that killer antibiotic front line titles like Madden and Gods of War and those types of product hold $49 and it is probably more of a judgment call on other titles.

So you're going to mess with price more than mix?

We always use price as a weapon in terms of how we think about the marketplace.

That's about all I can say at this point.

Great.

J T, I don't have the detail of the gross additions by quarter on deferred revenue, but would be happy to pull it up and give it to you.

We're basically, I would say, within our guidance of $3.50 to $4.50 net for the year.

I can't answer the question, however, indirectly a custom of ways.

First, recognize that we amortize the revenue typically over six months, so the month following, we begin amortization and whatever is deferred starts the next month and amortized over six months, and then the the second part of the question, which I think everyone is aware is that every dollar we defer impacts our bottom line $1.

Yes.

I understand that.

So it is not going to be -- when did you start deferring?

Remind me of that maybe and when do you bring in dollar one off of the balance sheet?

For anything that happens in a given month, let's take the month -- we sell a title in August.

We begin amortizing the revenue into -- we begin deferral or amortizing the revenue into our income statement the following month, amortized over a six-month period.

I got it.

Okay.

There is technically a month following the date of sale.

Okay.

All right.

Recognize that can change more micro transactions and things like that that may have longer deferral periods, could be shorter depending on the length of the service obligation, but for the big nugget meaning the packaged goods it starts the month after the date of sale, and amortized on average in six months.

Right.

And of course we're just kicking the system in.

After we're up, 12, 18 months into the process, every month or every quarter will be a combination of ins and outs and won't feel so dramatic.

Right now it feels dramatic because we're phasing it in as we get into Q4 of this year, it is going to feel a lot more natural to us, and it won't feel like it is such a if you will, a one-way slough.

And let me have a follow up since this is the last one I guess.

So your revenue guidance increased by 100, but the deferred only by 50.

Is there an implicit revenue mix shift in that away from online enabled games to maybe a non-online enabled platform?

There is a mix shift, and what I would call it as opposed it a shift is just continually refining this.

I think the meta point which is one that John made is that this is the first quarter in which we've been dealing with this.

Now as we move into Q2, we're really into it big time because of the sports title, and I would look at it as it is just going to be an ongoing process of refining what that estimate is, but you are absolutely correct in saying that one of the things that will move that number is mix, and your estimate for unit sales on those platforms.

Right.

So implicit is this a higher mix of handheld maybe or --

J T, I just won't get into that level of detail again I am going to call it a refinement and in the context of 350 to $400 million net deferral.

There are going to be $50 million movements up and down just in the normal course of doing business and in the normal course of our making estimates.

Okay.

Okay.

Great.

Thank you.

Great.

Thanks, everyone, for your time today and thanks for joining us.

Ladies and gentlemen, this concludes today's teleconference.

We do appreciate your participation.

You may now disconnect.

Have a wonderful day.