美商藝電 (EA) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the Electronic Arts third quarter fiscal year 2008 earnings conference.

Today's call is being recorded.

For opening remarks and introductions, I'd like to turn the conference over to Ms.

Tricia Gugler, director of investor relations.

Please go ahead.

Welcome to our third quarter fiscal 2008 earnings call.

Today on the call we have John Riccitiello, our Chief Executive Officer, Warren Jenson, our Chief Financial and Administrative Officer.

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

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

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

Non-GAAP measures exclude charges and related income tax effects associated with: Acquired in-process technology; amortization of intangibles; certain litigation expenses; losses on strategic investments; restructuring charges; stock-based compensation; and the impact of the change in deferred net revenue related to packaged goods and digital content.

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.

These non-GAAP measures are not intended to be considered an isolation from, a substitute for, or superior to our GAAP results, and we encourage all investors to consider measures before making an investment decision.

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

All references to current generations include the Xbox 360, the PlayStation 3 and the Wii.

We're now referring to the PS2, the Xbox, the GameCube as legacy systems.

We have also included our industry hardware estimates and our trailing 12-month platform shares in a supplemental schedule on our website.

During the course of this call we may may 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 can cause our actual results to differ materially from those discussed today.

We make these statements as of January 31, 2008 and disclaim any duty to update them.

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

Thanks, Tricia.

Before I turn the call over to Warren, let me take a few minutes and comment on our holiday quarter and our fourth fiscal quarter.

I would characterize our Q3 performance as solid but mixed.

On the positive side, we delivered on the top and bottom-line guidance we provided for the quarter.

Our top-line revenue of $1.73 billion, excluding deferral, was the highest in EA's history and represents the single biggest revenue quarter for any third-party publisher in our industry.

We were very pleased are our European results, which came in stronger than expected, even excluding the impact of foreign exchange..

Titles like FIFA, Need for Speed and the Simpsons all charted in the top ten in Europe.

Our copublishing and distribution business delivered big.

Revenue in the quarter was $372 million, ex deferral, up more than seven times that of last year.

Rock Band, Orange Box and Crysis all exceeded expectations.

EA Partners is a core part of building our business from segment shares.

We closed 2007 as the number one-third party publisher on quality as measured by Metacritic and we were pleased with the progress on several titles including FIFA '08, NBA live '08, NHL '08 and Skates, and the recently published and launched Burnout Paradise.

Finally, we closed calendar 2007 as the number one publisher across all platforms, with an 18% share in North America and 19% in Europe.

On the downside, while we're not -- while we're the third-party quality leader, we're not satisfied with where we are.

We did not have any internally-developed breakaway titles and no one of EA's internally-developed titles reached the Metacritic rating 90 or greater.

This hit us particularly hard in North America, where EA faced tough competition on a number of fronts.

In North America, excluding EA Partners, our business was essentially flat in a very robust market.

As anticipated, our calendar year shares were down.

In both North America and Europe we lost three share points.

Although we hit our numbers in an anticipa -- we hit our numbers and anticipated our share losses, losing share is just not acceptable.

Rebuilding share is a top priority.

Lastly, while we made progress in arresting our head count growth in our internal studios, we're still not quite where we want to be in terms of operating leverage.

Now, looking ahead to Q4, when I came back to Electronic Arts I made a commitment to investing quality, both because I believe it is the right decision for the long-term financial health of the Company and because it is what our consumers have a right to expect.

This is an important principle, even if it results in short-term pain.

We have made the decision to move Battlefield Bad Company and Mercenaries II into fiscal 2009.

Both titles are looking great, and we believe with additional polish we will build a better consumer experience and thereby maximize our economics.

However, our Q4 bottom-line guidance be will be negatively impacted.

Finally, I look forward to seeing you in two weeks at our analyst day.

We will discuss our long-term strategies, focusing on the four priorities we have shared with you during each of our calls this year.

First segment shares.

We'll outline our strategies to expand our shares.

Two, cost efficiency and productivity.

We will share our goals for operating profitability at the peak of the cycle.

Three, expanding our digital revenue streams.

We will outline plans for expanding our many digital revenue streams and the impact the new revenue sources can have on our operating margins.

Fourth, smart M&A.

We will outline our strategic priorities and focus.

With that, I would like to turn the call over to Warren.

Thanks, John, and good afternoon, everyone.

We'd like to begin with a few highlights.

Our Q3 financial performance met our expectation.

For the quarter, GAAP revenue was $1.5 billion, up $222 million despite a $231 million sequential increase in net deferred revenue.

Revenue, ex deferral, was a record $1.73 billion, up 35% or $453 million.

Excluding the impact of foreign exchange, revenue, ex deferral, was up 28%.

GAAP diluted loss was $0.10 a share versus earnings per share of $0.50 a year ago.

Non-GAAP diluted earnings per share were $0.90 versus $0.63 a year ago, up 43% year over year.

A few highlights.

Need for Speed was our best selling title in the quarter, selling over 5.5 million copies with over 65% Internationally.

Although we would never call this performance a disappointment, units and revenues were down year over year.

FIFA '08 continued to perform, selling over 4.5 million copies in the quarter.

We had a strong North America launch with units up more than 25%.

On a year-to-date basis, FIFA is EA's best performing title.

The innovation in this game is outstanding.

The Simpsons had a terrific debut, selling four million copies, exceeding our expectations.

We are pleased to have another successful and global entertainment franchise in our portfolio.

Madden NFL '08 sold over 2.5 million copies in the quarter, and year-to-date, Madden has sold more than seven million copies, down 13% year over year.

NBA live '08 sold over two million copies.

Rock Band had a strong debut, selling 1.5 million copies, meeting our expectations even with supply constraints.

Several titles did well against direct competitors.

Skate, a new and highly-rated IP from our Black Box Studio, outperformed an entrenched competitor.

Despite the fact we launched on three fewer platforms, we realized a 55% revenue share in North America.

On current generations systems, Skate out sold Tony Hawk nearly two to one.

Rock Band has redefined the music category.

Despite a supply-constrained launch, Rock Band had 16% unit share and 27% dollar share in North America.

Rock Band has quickly become the critic's favorite, claiming eight awards, including game of the year from Xbox magazine and consumer publications like Wire..

We look forward to its launch in Europe and the global Wii launch in Q1 '09.

NBA live '08 was turned the corner on quality and is getting back on track.

It garnered over 60% dollar and unit share against NBA 2K 8 and is the top selling current gen basketball game.

Looking ahead, we expect even better results next year.

FIFA '08 really hit the mark this year and is taking share from a well-established competitor.

We estimate FIFA '08 had a 56% dollar share, up seven points year over year.

We continue to see growth in digital.

On a trailing 12-month basis, our digital revenue reached a record $170 million, up 47%.

Our Pogo business delivered $95 million of revenue on a trailing 12-month basis.

And finally, we closed the acquisition of the BioWare and Pandemic studios and welcome their teams to EA.

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

First, I'll cover our Q3 financial results, second, I'll go over our outlook and financial guidance, then following my comments, John and I will open the call to your questions.

Q3.

Revenue, ex deferral, was $1.734 billion, up 35%.

Excluding the impact of foreign exchange, revenue increased 28%.

Revenue was driven by Need for Speed ProStreet, FIFA '08, Rock Band and the Simpsons.

Need for Speed ProStreet, Rock Band, the Simpsons, Half-Life 2: Orange Box, Sims ii Castaway, NBA Live '08 and Crysis all went platinum in the quarter.

Year to date we have 23 titles that have sold over one million copies, up from five a year ago.

We released 37 EA SKU's versus 41 last year.

Console revenue, ex deferral, was $876 million, up 19%.

Current gen revenue offset the declines in legacy console.

Current gen revenue, ex deferral, was $548 million, up 126%.

The PS2 continued to be the most significant platform over the holidays, with revenue at $324 million.

For the calendar year, our segment share on the Wii was 15% in Europe, up 11 points, and 12% in North America, up three points.

Mobile phone revenue was $38 million, up 9% due to growth in Europe.

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

-- excuse me -- Hand-held revenue, ex deferral, was $235 million, up 21%.

NDS was our best performing hand-held platform, with revenue of $122 million, over 2X that of last year, driven by MySims, Sims Castaway and the Simpsons.

Revenue, ex deferral, from the PSP was down 6% due to fewer SKUs.

PC revenue, ex deferral, was $153 million, down 30% due to last year's strength of the Sims and Battlefield franchise.

Copub and distribution revenue, ex deferral, was $372 million, up over 7X from last year due to our strong line-up of titles; Rock Band, Half-Life 2: Orange Box, Crysis and Hellgate London.

Internet licensing, advertising and other, ex deferral, revenue was $60 million.

Geographically, North America revenue, ex deferral, was $861 million, up $224 million or 35%.

The increase was primarily driven by EA Partners.

Current gen revenue was $288 million, up 79%.

Legacy systems declined 45% year over year.

International revenue, ex deferral, was $873 million, up $229 million or 36%.

Excluding an $85 million positive impact from foreign exchange, international revenue, ex deferral, would have increased 22%.

Europe revenue, ex deferral, was $792 million, up $209 million or 36%, driven by Need for Speed, FIFA, the Simpsons and Crysis.

Excluding a $77 million benefit from foreign exchange, Europe revenue, ex deferral, would have increased 23%.

The increase was driven by the PS3, copublishing and distribution, Wii and the NDS.

Legacy systems declined 23% year over year.

Asia revenue, ex deferral, was $81 million up $20 million or 33%.

Moving on to the rest of the income statement...

GAAP gross profit in the quarter was $721 million, down 11% due to the revenue deferral.

GAAP gross margin was 48% versus 63.3%, down 15.3 percentage points as a result of the revenue deferrals and due to a higher mix of copublishing and distribution revenue.

Non-GAAP gross profit was $959 million, up 17%.

Non-GAAP gross margin was 55.3% versus 63.9%, down 8.6 margin points due to a higher mix of copublishing and distribution revenue.

Please remember that while EA Partner revenue will pressure our gross margin, it does contribute importantly to our bottom line.

OpEx, marketing and sales.

Marketing and sales expense, excluding stock-based comp, was $208 million, up $48 million, primarily due to higher advertising spend.

As a percentage of revenue, ex deferral, sales and marketing was 12%, consistent with last year.

G&A.

G&A, excluding stock-based comp, was $84 million, up $3 million.

R&D.

R&D, excluding stock-based comp, was $300 million, down $10 million due to lower incentive-based compensation.

R&D head count was 5,800, flat the last year and down 300 sequentially.

Head count in high-cost locations dropped by 400 or 8% year over year.

Today, approximately 17% of our R&D head count is in a low-cost location, up from 11% a year ago.

We expect BioWare and Pandemic to add roughly $30 million of R&D in Q4.

Restructuring.

Our previously-announced reorganization plan resulted in $77 million of restructuring related to our facility closures, contract termination and staff reduction.

GAAP diluted loss per share was $0.10 versus diluted earnings per share of $0.50 a year ago.

Non-GAAP diluted earnings per share were $0.90 versus $0.63 a year ago, up 43%.

The $1 difference between GAAP loss per share and non-GAAP EPS was due to: The change in deferred revenue, $0.61; restructuring, $0.22; stock-based compensation, $0.10; loss on strategic investments of $0.04; and amortization of intangibles, $0.03.

Our trailing 12-month operating cash flow was $267 million versus $520 million for the comparable period.

The decline was primarily a result of the timing of our sales.

We expect our cash flow for the full fiscal year to rebound and be approximately $400 million, consistent with last year.

Now, on to the balance sheet.

Cash and short-term investments were $2.6 billion, up $400 million from last quarter.

Marketable equitable securities and investments in affiliates were $866 million, up $117 million sequentially.

In our equity portfolio, we had approximately $500 million of net gain, comprised of a $588 million gain on [UBsaw] and a $100 million loss on Neowiz and [Deny].

Of the $100 million, we recognized the loss of $12 million in the P&L this quarter.

Depending upon market conditions, further write-downs could be required.

Gross accounts receivable were $1.089 billion versus $779 million a year ago, an increase of 40%, primarily due to the growth in revenue, ex deferral, and the timing of our release schedule.

Reserves against outstanding receivables totaled $259 million, up $31 million from a year ago.

Reserve levels were 10% as a percentage of trailing six-month net revenue, ex deferrals, down one point.

As a percentage of trailing nine-month net revenue, ex deferral, reserves were 8%, also down one point.

Inventory was $178 million, up $106 million from last year, primarily due to Rock Band inventory that was in staging or in transit, and also due to the growth of our business.

Deferred net revenue from packaged goods and digital content was $595 million, up $231 million sequentially.

Now, our outlook.

Before we get into the numbers, let me share our thoughts on the year ahead for the industry and for EA.

First on the industry..

We expect that software sales in North America and Europe will be up in the low double digits for calendar 2008, driven by a Three-Horse Race on console, continued strength in the hand-held market and another great year for software.

You can find our hardware sections on our website.

Second, on EA.

Let me say from the outset that we do not intend to give fiscal 2009 guidance on this call or at our analyst day.

We're in the process of finalizing our operating plan and it 's just too early to get specific.

That said, we want to share some color on our fiscal 2009 line up.

We expect to launch over ten new titles, including Spore, DeadSpace, Battlefield Bad Company, Dragon H, Boom Block, Monopoly, Mercenaries II, [Uafa Soccer], Lord of the Rings, Mirrors Edge, Tiberium, Sim Animals, Saboteur, and Facebreaker.

On the Nintendo platforms, we plan to continue to improve our position.

In fiscal 2009, we expect to shift 20+ titles for the Wii and over 15 NDS titles.

In on -line we expect to launch Warhammer in North America, Europe and Asia, and Battlefield Heros in North America and Europe.

We also have several midsession games in the works for Asia, including People on Line in China, and NBA Street for Taiwan.

In EA mobile, in addition to our existing franchises, we expect to launch four MySims and a healthy offering of Hasbro titles.

Now our guidance for the fourth quarter.

As John mentioned, we're lowering our bottom-line estimates for the fourth quarter.

This is a result of some ups and downs.

First, two high-margin titles, Battlefield Bad Company and Mercenaries II, are now shifting in fiscal 2009.

Second, we now expect Rock Band to ship in Europe in Q1 '09.

Third, on the positive side, we anticipate more Rock Band revenue in North America in Q4 versus our prior estimates due to significant demand.

The results of all of these changes is that our revenue guidance remains largely unchanged but our bottom line will be negatively impacted by the shift in product mix, more copubs and distribution revenue and less high-margin owned IP.

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 estimates include the projected impact of the BioWare and Pandemic acquisition.

For the quarter ending March 31, first our GAAP guidance.

For the quarter we expect revenue to be between $925 million and $1.05 billion, loss per share to be between $0.52 and $0.33, gross margin to be between 60% and 62%, and basic share count to be 316 million.

Now, our non-GAAP guidance.

For the quarter, we expect revenue, ex deferral, to be between $775 million and $850 million, non-GAAP earnings per share to be roughly breakeven, non-GAAP gross margin to be between 52% and 54%, basic share count to be 316 million, and diluted share count to be 325 million.

Overall, we expect our non-GAAP EPS to be roughly $0.35 to $0.49 better that you 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 a credit of between $0.52 and $0.38; acquisition-related charges of $0.65; stock-based compensation approximately $0.14; amortization of intangible assets roughly $0.05; and restructuring charges of approximately $0.03.

In Q4, from our EA studios we expect to shift 16 SKUs compared to 27 a year ago.

To date we have shipped: Burnout Paradise on to PS3 and Xbox 360, which is coming in with a strong Metacritic review.

Compared to Burnout Revenge, our first weeks sell through at retail is up over 20% year over year; NFL Tour on the PS3 and Xbox 360; Sims Carnival for the PC -- Sims Carnival Bumper Blast and SnapCIty for the PC.

In addition, we plan to launch: Beat the Street III on three platforms; Army of Two on the PS3 and Xbox 360; Need for Speed ProStreet on the PSP; Command & Conquer 4: Kane's Wrath expansion pack for the PC; the Sims 2 Free Time for the PC; the Sims Castaway Stories for the PC.

From our EA Partners business we plan to ship Ninja Reflex for the Wii and NDS.

In addition, we're unbundling Orange Box and releasing separate PC SKUs; Half-Life II, Episode II, Portal and Teen Portrait.

We're also launching three games for the MAC; Metal of Honor Airborne, Need for Speed ProStreet and the Sims Castaway Stories.

For wireless, we plan to launch eight games; Tetris 3D, Command & Conquer, Sims Pool, Sims Castaway, Monopoly Here and Now, FIFA Manager, Merv Griffin Crossword, Asteris at the Olympics.

Full year guidance.

For the full year, we expect revenue to be between $3.462 billion and 3.587 billion as compared with our previous guidance of between $3.35 billion and $3.65 billion.

Diluted loss per share to be between $1.67 and $1.48 as compared with our previous guidance of between $1.60 and $0.91.

Gross margin to be between 50% and 52% and basic share count could be 317 million.

Now, our non-GAAP guidance.

For the full year, we expect revenue, ex deferral, to be between $3.875 billion and $3.950 billion.

You'll notice we have tightened our range toward the high end of our previous guidance.

Non-GAAP diluted earnings per share to be between $0.93 and $0.98.

We tightened our range in this case to the lower end of our previous guidance.

Non-GAAP gross margin to be 55% to 57%.

Diluted share count to be 322 million.

Overall, we expect our non-GAAP EPS to be roughly $2.46 to $2.60 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 $0.92 and $1.06; acquisition-related charges of approximately $0.65; stock-based compensation approximately $0.41; restructuring charges approximately $0.27; amortization of intangible assets roughly $0.15; and loss on strategic investment $0.04.

The difference between diluted and basic share count approximately $0.02.

With that, we'll be happy to take your questions.

Thank you, Mr.

Jenson.

(OPERATOR INSTRUCTIONS) Our first question will come from Edward Urban with Bear, Stearns.

Good afternoon.

Thanks for taking my questions.

I was wondering if you could talk about how you expect revenues to be split across the four labels this year on a percentage basis, and then perhaps generally how you expect that to trend over the coming fiscal year?

And then secondly, acquisition-related charges ticked up slightly from the prior call, just wondering if you can talk about that increase?

Thanks.

This is John on the first part of the question.

I'll let Warren pick up part two.

In terms of the split, we have to save some surprises for the analyst day, so we will be providing individual presentations from each of our labels.

I will tell you that our largest business is EA Games followed by EA Sports, Sims and then Casual, with strong growth in both Sims and Casual, some neck and neck competition there, but we'll be providing further detail on that breakout in two weeks time..

Good.

I can give you a little bit of color that we've talked about previously relative to fiscal '07.

We have EA Games, call it roughly $1 billion, Sports, approximately $1.3 billion, Sims in the neighborhood of $400 million, and Casual at $230 or so.

Ok.

Great.

And then the acquisition-related charges?

The acquisition-related charges -- I'm sorry -- are a function of things like IP R&D , they're various tax charges and other things that are really associated with many of our

Right.

And the slight increase from the prior call?

Had mostly to do with just adjustments and completing the valuation, so as you know, we just finished the VGH transaction to close right after year end, and really you're just in full gear to get all evaluations complete before you can make the final call as to what the charges will be.

Ok.

Thanks.

Thank you.

Next we'll hear from Shawn Milne with Oppenheimer.

Thank you.

John, you'd mentioned on your introductory comments that you weren't where you needed to be in terms of leverage.

I wondered if you could just expand on that a little bit.

It looks like R&D in the quarter actually was pretty well controlled.

We have an uptick next quarter with the BioWare acquisition.

If you can lay out where you think R&D goes from there?

Thanks.

Sure.

In terms of overall leverage, I think our Q3 is actually a little difficult to read because of the strength of our publishing business through EAP, which brings a lot of strong revenue to the business but it does distort some of the ratios.

In terms of giving you a better sense of guidance around F '09, we're not prepared to do that, in part because our teams are spending time this week, actually, aligning the forecast on the individual titles.

This is where we,pull out the last of the titles that we no longer want to pursue and/or kill in process in order to hit the numbers we're seeking to hit.

That's taking place this week.

But in summary, I would put it this way.

We continue to intend to make strong progress on the cost side.

On the R&D line, I think there's three broad factors that influence the rough level of expenditure in F '09; our core business, our Hasbro business where we're making strong investment, and the addition of BioWare and Pandemic.

We're looking to see leverage and we're after it.

Just a quick follow up.

Given where the head count is right now, once you've added the folks from BioWare and Pandemic, do you think that's the right kind of head count going forward?

Well, we established the head count ranges for Electronic Arts bringing down the edge of our western markets when we closed our Chicago and Chertsey facilities.

And as Warren commented in his discussion, we've been moving more and more heads offshore and actually bringing heads down.

BioWare and Pandemic is incremental.

It brings us ten separate teams and a series of brand new intellectual properties and as a stand-alone business within Electronic Arts, it's a profitable addition.

So, I don't think that I would try to mix those two and draw any conclusions.

We're taking the core EA in the right direction.

We believe BioWare and Pandemic brings us a lot of strong additions in terms in head count that's very productive and profitable.

Thank you.

next we'll hear from Douglas Creutz with Cowen and Company.

Thanks.

It seems to me one of the minor things of last year was that a lot of publishers had difficulty completing PS3 titles on time, and I wondered if you think that you're at the point now where the PS3 development process has caught up to the 360 development process and we're less likely to see those kind of delays in 2008?

Thanks.

Not quite, so there's no doubt that Electronic Arts along with many publishers had some challenges essentially meeting the technical specifications effectively on the PlayStation 3.

Games where we essentially led development on the PS3 platform, like Burnout, which is doing well in the market today, we had no issue at all.

But in circumstances where we either led with the Xbox 360 or we ran parallel to production, for the most part, we're still experiencing some delay on the PS3.

It's a little bit more challenging a development environment for us.

If the problem was of a certain size as much as nine months ago, it's probably a third as great a problem today as it was then, but there still remains some catching up to do on the engineering side for the PS3.

Great.

Thanks.

We'll move on to Bill Lennan with Broadpoint.

Hi.

On your software forecast for the year, can you tell us what hardware price cuts, if any at all, are baked into that assumption?

And the second part is does your forecast include what Sony said this morning.

Their numbers weren't great and I'm wondering if that's your numbers or was that them?

Got it.

This is John and I could barely hear what you're saying, but I think I got it so I'll try to respond.

If it is not quite on target, maybe you could rephrase or speak up with your question.

First off, we don't spend a lot of time studying the press releases of the first party when we make our forecast.

We look at their actual sell throughs.

We've got carefully programmed algorithms to take where they've been in pricing and project that into the future.

So, when we put up our forecast for calendar 2008, it was based on actual sell through in each of the geographies through December 31st of 2007.

So, my sense is that we were reacting to the same thing they were reacting to when they made their adjustment, we just didn't have to make one because we weren't out there with public relations relative to Sony.

In terms of pricing, it's -- we try to make it policy here not to prognosticate the pricing moves of our competitors and/or our business partners, and we think it's a good business practice so we'll stick with it.

I believe it's fair to say that there's been a long-standing pattern of cost-reducing hardware and bringing costs down, typically in the summer and the fall as people prepare for the holiday season.

It would not surprise me to see that happen in each of the next few years, but we're not going to make specific forecasts.

Ok.

You did hear my questions correctly.

Thank you.

We'll hear from Mike Hickey with Janco.

Hey, guys, thanks for taking my question.

On Warhammer on line, can you update us on the number of beta testers there and then do you have a sense on the conversion of beta testers to actually paying subs when that game goes live?

And then the second question, for current generation hardware, are you looking for unit growth in calendar year '08?

I haven't seen the supplement yet.

You know, it's funny.

There's debate in the room as to what the exact number is on beta testers here.

We're certain that it's over 500,000, but I haven't had an update in awhile.

What I can tell you is I played the game myself.

I was out in our Mythic studio in Arlington with [Frank Shabo], the head of the Games label, and the software looks great.

In terms of the conversion to paying subscribers, I've frankly seen so many different outcomes where we've seen high or a large number of beta users and a low number of subscribers in the reverse.

What I can tell you is one of the early claims from the team is they were pleased that the pickup on the beta was comparable to World of Warcraft at a similar point in time.

I don't view that as a solid or even indicative predictor.

What we're looking at is the quality of the software and the quality experience and how unique it is, and right now it feels strong on those fronts.

Okay.

And then for -- I guess my second question was a tie into your software growth assumptions for '08 being low growth single digits -- I think you said low.

That seems a bit conservative given that the unit growth in hardware we saw in calendar year '07, so I know you've given more color into that.

In terms of your hardware assumptions for unit sales in calendar year '08, are you looking for growth there on the current gen or are you factoring in any sort of macroeconomic concerns into your estimates?

In terms of macroeconomic concerns, I think if you were to go back as we have and plot a 30-year trend for the industry, what you'd see is the industry moving up and to the right in what appears to be a sign curve, meaning that you get a big pickup in hardware each time when we see a technology transition.

And there'is a one-year lag on -- one to one-and-a-half year lag on software.

That seems to be a much more powerful relationship than anything that short-term economic hiccups introduces.

In terms of our guidance for next year, you will note that our total next gen console guidance was actually from half a million units fewer in 2007 to a couple million units above 2007.

So, what we're indicating here is in terms of hardware sales, another strong year.

The reason we put a range on it is because no one can be certain, so we've covered -- we weren't purposely trying to cover a down and an up scenario.

It's basically flat to up is what we've been forecasting.

And then just one clarification.

We did say low double digits, just to be clear in terms of software growth, not single digits.

Again, low double digits.

All right, thank you, guys.

We'll move on to Brent Thill with Citigroup.

Thanks.

John, you mentioned you were somewhat disappointed with internally-developed breakaway titles or lack thereof.

Can you just walk us through how that's changing in the next couple of quarters and what you're particularly most excited about?

Well, sure.

I think actually, as we speak, when I was referring to a lack of breakaway titles, the closest thing we had to breakaway titles, I believe, in 2007 -- and breakaway's a hard word to define, but I think it means if it's meeting our expectations and generating absolute year-over-year growth when it is a sequel.

And meeting that standard in a good way were Skate and FIFA for us.

But generally, we've had more titles doing that for us, propelling the Company forward, and we did not have it in 2007.

As I speak today, it is every indication we're standing right on top of a breakaway title with Burnout Paradise.

So, obviously one week doesn't a hit make, and so we're watching that one carefully, investing to drive the growth.

Frankly, in terms of excitement, 2008, to me, feels like a very, very strong slate for Electronic Arts.

Whether we're talking about Spore, which I think has been maybe talked about for a long time.

Personally played the software.

It is very impressive.

DeadSpace [Forcenter] in the horror genre.

Obviously with two titles we moved back, Battlefield Bad Company and Mercenaries II, doing so for quality reasons and those are big, big franchises for us.

Titles out of our partners at BioWare, like Dragon H feel very strong.

People are very keen on a title we're developing through our Dice group in Sweden called Mirrors Edge.

Anything with Sims written on it always feels good and we're coming out with a very innovative new title called Sim Animals.

That's very strong.

The Sports group is getting some incremental nonlicense business in Facebreaker.

I could actually go on for awhile, and the FY '09, or if you will, the calendar '08 title plan from Electronic Arts feels very good to me and it's really the first slight that's being influenced in a material way by the new label structure.

So, a strong slate.

Thanks.

We'll hear from Jeetil Patel with Deutsche Bank.

Great.

A couple of questions.

John, you were talking about calendar '08 on the VGH side, can you talk about, I guess, what was the revenue contribution that you had indicated when you made the acquisition for calendar 2008 on that acquisition?

And second, you've talked about product quality looking pretty good, but the units haven't performed and you still have improvements to make.

I guess you have the same developer -- development teams in house.

How are you changing the way you approach your development process, producers, et cetera, story boarding that improves the game play that gets you back into the unit growth mode as you look at the rest of the cycle here?

Well, you -- that's a bit of a war and peace question if we want to go long on it, but the simple answer is when we made the announcement, we told people we expected about $300 million in revenue in fiscal '08 -- or excuse me, fiscal '09 from BioWare Pandemic, which was approximately $ 200 million already inside of EAD through partnerships that had existed between Electronics -- EA Partners and BGH and $100 million that was incremental for titles we hadn't yet signed.

In terms of what we're doing, is it the same teams?

It's very much the same teams, but we've done a lot to shift within the organization around the label structure.

There are a number of disciplines -- and perhaps we'll talk more about these on the 2/12 analyst day -- but think of them this way) Greater tightness around preproduction so we know what it is we're building before we scale the team to build it.

More time and polish, so relative to an alpha to final cycle, where ll we're doing is squashing bugs, we've built in time for the F '09 titles to both squash bugs and add material polish, something that the market is clearly rewarding, both in higher Metacritic scores and in terms of higher sell-through on the titles that achieve those scores.

There are a number of things that I think also come out of the pure label structure in terms of focus.

As much as I admire the great people that managed our studio under a prior management structure, frankly, managing the large scale of Electronic Arts under one roof was just too much.

We couldn't get the focus on the titles and focus is critical.

We are not in a widget business.

We're making things that are every bit as rich and complicated as a Hollywood movie or a major novel, and paying attention to it is something that makes a serious difference.

The difference will probably most be seen in preproduction and finaling process and the time allowed for the finaling process, and I think that'll yield the dividends we're looking for.

So are you -- have you are replaced these folks and brought in new folks to actually manage the process to --?

We had four label heads.

All four of them were not involved in managing the production process at Electronic Arts prior to the change in structure in July.

So, Frank Gibeau was in a publishing role/ [Cathy Raybeck was doing the process of having just left Activision running their business.

.

Peter Moore was managing the Microsoft business.

And Nancy Smith actually was in a somewhat comparable position and I don't think it's just coincidental that the Sims label is performing as strongly as it has with that focus.

So, the top people in each of the responsibility areas are in a label structure where they weren't previously.

That's a dramatic change.

If I knock it down one level from there, and start talking about the business processes around, I could give you a long list of names that are different than people you've known before and a number of them that are the same, but either have narrower and deeper responsibilities or are different in some way that I believe will make a

Quick follow-up.

If you look at your 360 business, it grew in the mid teens.

I guess you underperformed the industry in calendar '07.

Do you think you gained share in calendar '08, since that is the leading platform as we go into this upcoming year?

Look, I think it is really clear.

My part of the script, we pointed out we lost three market share points, even though we were the world's largest publisher in both North America and Europe.

We lost market share.

We're not happy with that.

We've been talking about it for three quarters.

The runway for new products and the kind of things that drive market share in an industry with a 24 to 36 month gestation for new titles doesn't happen in three quarters.

We've been focusing on a number of things, including cost management.

You've asked about what we're doing in '09 with titles, previous question came up.

I've listed many new ones.

That's what we're hanging our hat on.

I think we can move on to the next question.

Next question will come from Justin post with Merrill Lynch.

John, a couple of questions.

On the R&D, you've already started to make some changes.

Where are you in the product efficiency process and the improvement there?

Do you still think you have some efficiencies still to come that we might see over the next couple of years?

And then as you look at your slate next year, got a lot of new IP coming.

It looks like some of it was preannounced in the press and you've talked about it here.

Do you think it will be a really good year for a new IP?

It looks like you're banking some of the EA's fortunes next year on that and you think maybe sequels won't be as popular next year.

Let me break this into two questions.

Warren will take one piece and I'll take the second.

I'll start with the second half of the question and I'll ask Warren to come back and talk about production efficiencies relative to the percentage of heads that are offshore in low-cost locations, the high-cost locations.

That's an initiative Warren was actually driving before I came back and has come full flower over the course of the last nine months with some real progress.

So, Warren, if you'll prepare for that, I'll address the new IP question.

I would argue that what we're doing in terms of driving growth in calendar '08 or fiscal '09 is dependent on really two things.

I would say one major piece of it is the new intellectual properties that I've listed a few times in the Q&A process and we believe strongly they'll -- the bulk of those will perform for us, whether it's Spore or it's Warhammer or DeadSpace or it's Mirrors Edge, we feel like we've got a great slate.

But the other key, and perhaps equally important, is getting very tight and clear designs around our sequel titles so there's a significant reason for the consumer to come back and buy them again.

We made great software with Need for Speed this year, but the ProStreet concept wasn't crisp enough or unique enough for the consumer to want to come back and buy the product moreso than they did the year before.

I'm not picking on the team.

That's a combination of business issues and marketing issues and design issues to bring a title to market that can perform.

And that's actually one of our best performing teams in the history of Electronic Arts and the history of the industry, and we bring forward in the coming year design that will help us generate better sales on that franchise.

So what we're trying to do is apply that type of discipline to the sequel, again so there's a clear hook you can hang your hat on in terms of explaining why the consumer should buy it.

We call that an ax in Electronic Arts -- we'll talk about that a little bit more in our 2-12 analyst meeting -- and then as you mentioned the new intellectual properties and a strong slate coming.

On the productivity side, I would highlight two points of focus.

John alluded to the first.

The first is quality, so to the extent we can deliver better properties, obviously that increases R&D leverage.

The second thing is really how we do it.

And just as you've seen, this quarter we said that 17% of our heads in our studios are, in fact in, low-cost locations; that's up from just 11% a year ago.

Our objective will be to continue to increase that but prudently.

What I can tell you about offshoring from personal experience and using low-cost locations is it takes time.

You have to learn how to get good at doing it and to work in a distributed environment and it doesn't happen with the flip of a switch.

It takes experience, it takes training and it takes know-how and the proper set of systems.

Each of our studios, each of our production teams are looking at ways to continue to do more outside and continue to do ways more cost-efficiently.

Then the final thing I'd mention on the cost side is really looking at how we become more variable and less fixed.

Again, looking for ways to use other people's capital to help produce our gains.

Thank you.

Thank you.

Next question will come from Edward Williams with BMO Capital Markets.

Good afternoon.

Just a follow-up a little bit on the context of the questions that have been asked thus far, but can you give us an idea as to what the percentage of revenues from owned brands is and that you're targeting for FY '08 and how that was relative to FY '07 and directionally, how you see that going into FY '09?

It will be from our owned IPs, still in the low 40s, and our objective as we move into FY '09 and beyond is to increase that.

Okay Then then obviously the games that John has alluded to are some of the key drivers as far as increasing the percentage?

It's absolutely part of the stair step process to increase that percentage.

Okay.

Then just to follow up on that, the EA Partners revenue in the March quarter, what are you expecting out of that given the success of Rock Band?

I would put just rough terms -- just to scope EA Partners for -- and I'll put it for the year, Ed.

I'd put in a total for the year somewhere around -- I'd call it $500 million.

Okay.

Great, thank you.

Thank you.

We'll hear from Ben Schachter with UBS.

Thank you, guys.

I jumped on the call late so I apologize if you discussed it, but I was wondering if we can get an update on your efforts to date with the free-to-play models in Korea and other parts of Asia?

And then also, just talking about the Wii NDS, aside from distribution, how does your size and scale really help you win share there?

Thanks.

We have winning share in Asia or winning share --

On the Wii NDS.

On Wii NDS.

That was a separate question about Wii NDS.

So our experience, frankly, is been limited on the first question to FIFA in Korea, which is an incredibly well-chronicled story here.

Our experience is going to expand dramatically in the coming couple of quarters, as we increase the geography for FIFA on line, we add NBA Street, we push across the region with a number of two titles -- number of titles including Battlefield and CNC which are sort of that free-to-play model across Asia all hitting multiple geographies.

So far in a very limited geography of Korea with one title, our ARPU per consumer is very, very high and it's a profitable business.

But frankly, we've been talking about that for awhile and we've got so many new initiatives coming that I think this time next year is a better time to ask that question.

In terms of Wii NDS, I connected your question to Asia and to on line, but frankly, the big issue on Wii NDS is making titles that pop through for that particular consumer, as we most recently have done with MySims.

We've a number of titles coming out.

We mentioned on the call Boom Blocks, which we think is going to perform very, very well against the Wii.

These are custom-designed intellectual properties for these consumers that take best advantage of the Wii and/or the DS platforms.

There are a number of those coming in F '09 and as I said we'll talk more about those on the 12th when we get together with the analysts.

Next question.

We'll hear from Tony Gikas from Piper Jaffray.

Mr.

Gikas, your line is open.

Hearing no response, we'll move on to Colin Sebastian with Lazard Capital.

Good afternoon, thanks for taking my questions.

Just a follow up on some of the product questions.

Given the performance of Need for Speed, I'm wondering if you're taking a fresh look at that franchise at all for the coming year?

Also, in regards to Spore, what is your confidence level in terms of the release and the progress being made there?

And then separate from that, I'm just curious, I believe, John, you mentioned the peak earnings in the cycle.

I'm curious which fiscal year do you foresee peak earnings falling?

Thank you.

The easy thing to answer is the last question first.

We have every intention of having the peak earnings being each year from this point forward being much better than the year prior.

We're actually talking about (inaudible) we're going to describe our business over the next three fiscal years.

In terms of Need for Speed, I want to be absolutely clear.

It's my view that the team at Block Box that produces the game is probably one of the best three or four development production teams that exist within the game industry.

They have generated well north of a five million unit seller annually for several years in a row, and I think it's a virtually unprecedented performance in the history of our industry.

What we're talking about is indexing down a millionish units versus where they were.

And so that's an issue that is, I believe, something we can help by bringing together all of the right publishing resources and the right development resources to bolster their effort.

This is also the team, by the way, that created and launched Skate in the last 12 months, so we put an awful lot on their shoulders, including creating a spectacularly new IP that, frankly, took it to one of our leading competitors.

So, it's a great team, we're adding resource to it, and we think that's going to generate great returns for them and for the organization as a whole.

In terms of Spore, I wasn't sure exactly what you were getting at.

Just the progress of the title since it's still in development and your confidence level for the release?

It's high confidence.

It's -- we're not announcing dates for any of our titles.

We will tell you it's going to be before the holidays.

This is one of the titles we pay enormous attention to for all of the obvious reasons and we're very, very bullish.

Great, thanks.

And we'll hear from Tony Gikas.

He's back.

Mr.

Gikas, your line is open.

You might want to check your mute button.

Again, hearing no response, we'll move on to Evan Wilson with Pacific Crest.

Thanks for taking the question.

On Rock Band, it seems like MTV games is being more aggressive as it relates to digital song distribution.

Can you talk about what the opportunity is for selling expansion packs for these types of games over the next few quarters?

And then also relative to the delay of Rock Band in Europe until the June quarter, can you talk about whether or not that's related to the broken guitars we've seen here in the U.S.

market after the launch?

Thanks.

So, there's a couple of implied questions here.

Let me hit the hardest one first about broken guitars.

We've had single digit complaints around the guitars and other parts of the package and single digit percentage of consumers that have acquired them.

One of the things I'm very proud of is the partnership between Electronic Arts and MTV.

It was frankly an unprecedented customer service support replace them unbelievably quickly and all of the data that I've got suggests the consumers are very happy.

In terms of pacing the next few quarters, you're probably well aware of the more than $2.5 million music downloads that have occurred on Rock Band and that's a good part of the business.

But what's probably the most interesting pieces right now is the coming launch on the Wii, the continued sale of the core platforms in North America, and then the fiscal '09 launch across Europe against all of the skids.

So, frankly for the balance of our Q4 and the first half of fiscal '09, Rock Band's a key focus.

Next question?

Next question will come from Heath Terry with Credit Suisse.

Great, thank you.

This will tie in a little bit into Rock Band, but I was wondering if you could give us an update on what you're seeing on the downloadable content side, what kind of attach rates your a seeing for your games like Rock Band that actually have downloadable content offered, and what that's doing to your plans to include that as a bigger part of your business model on your console and PC business going forward?

Well, let me start by saying that I think the best follow-on sale model in the history of the game industry is the Sims.

We've launched Sims 1 and Sims 2 and I believe we've averaged north of six or seven expansion packs per consumer that's bought them, so that's been a spectacular business and a model that we'd like to emulate as often as we can.

In terms of downloadable content that follows on PC, we've had success with a number of our titles like CNC and Battlefield in the past and we continue to promote that business.

In fact, we have an expansion pack for CNC in the current quarter.

In terms of Rock Band, we've seen I believe it's 2.5 million downloads.

We've sold through approximates 1.5 million units through December.

So one could argue thats one and three -- one and two-thirds titles per consumer or just shy of two each, so that's clearly a strong business.

It obviously attaches to a business like Rock Band.

Frankly, I think you're on one of the best ways for us to expand the revenue per consumer that exists for Electronic Arts.

The advent of broadband and the number of consumers that have broadband today suggests that we'll be able to add business models incrementally to our package, because -- not only on our PC business but on console as we can use the hard drive and/or both on hard drives to the consoles in years to come.

So, it is an area of great focus for us and when I said earlier on my comments that we would address the many ways we can grow digital revenues in years to come, this is one of the key focus areas.

Heath, I would just add to put a little bit of quantification around digital downloads in the quarter and these are still small numbers, but in Q3, the holiday quarter, we had $12 million of digital download revenue from our EA downloader and the year before was about half that.

A little bit less than that.

Great.

Thank you.

Operator, we'll take one more question, please.

Thank you.

Our final question will come from Arvind Bhatia with Sterne, Agee.

Thank you.

Two quick ones.

One, what were the catalog sales in the quarter?

And then second, can you comment on the Sims franchise, what that did versus last year in terms of percent of change?

On catalog it was pretty consistent.

It was 38% this year, Arvind, versus -- it was 36% this year versus 38% a year ago.

Okay, and then on the Sims question?

It's up but I don't have the exact percentage and I know that our European business performed more strongly than our North American business, but marginally so.

Up in both geographies.

I have to get to the exact statistics though, which is not immediately findable, apparently.

I know you do with big numbers in previous year's December quarter, I think had you mentioned something like ten million units of the franchise.

Actually, we're lifetime to date 95 billion units on the Sims franchise, which is what I was referencing previously in terms of the combination of the core package good with the expansion pack yielding a very, very, very attractive number, so --

While you're looking for that, let me just -- again one more and that is on the R&D question, I'm not sure if you gave any color on next year's outlook, but can you give us a general sense whether we should be looking for single-digit growth, low double-digit growth, any early feedback on that?

Arvind, we're not going to give specific guidance for FY '09, but I'll reiterate a little bit what John said earlier today.

I kind of think about R&D this way, and again put this in the context of our being preliminary in our planning process, our team spending this week actually aligning the titles, deciding where we're going to double-down stuff we're going to do and things we're not going to do, but I'd put it in three buckets.

You have core R&D, which would resemble basically our fiscal '08 R&D plus one quarter of VGH.

There's one bucket.

Second bucket is you know we're going to have three quarters -- we're going to have a full year of VGH next year where we had just one quarter this year.

And then the third bucket will be incremental investment in order to build our Hasbro franchise.

So, that's how we're thinking about it internally and the evaluations that we're making.

Okay.

Good.

Let me thank everyone for joining us for the call today.

We look forward to seeing everyone in a couple of weeks at our analyst day.

Thank you.

Again, that does conclude today's conference call.

Thank you for your participation, and have a wonderful day.