美商藝電 (EA) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Electronic Arts first quarter fiscal year 2010 earnings conference call.

Today's call is being recorded.

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

Tricia Gugler, Vice President of Investor Relations.

Please go ahead.

Welcome to our first quarter fiscal 2010 earnings call.

Today on the call we have John Riccitiello, our Chief Executive Officer; Eric Brown, our Chief Financial Officer; and joining us from the UK is Peter Moore of our EA Sports label.

Before we begin, I would like to remind you that you may find copies of our SEC filings, our earning release, and a replay of this 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.

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

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

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

Please see the supplement information on our website for our trailing 12-month segment shares, additional GAAP to non-GAAP reconciliations, a summary of our fiscal 2010 financial guidance and our Q2 10 slate.

Please see the supplement information on our website for our trailing 12-month segment shares, additional GAAP to non-GAAP reconciliations, a summary of our fiscal 2010 financial guidance and our Q2 10 slate.

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

We caution you that actual events or 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 4, 2009, and disclaim any duty to update them.

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

Thanks, Tricia.

Earlier today we announced our Q1 FY 2010 results.

We slightly exceeded our expectations on the top and bottom line.

Our results were driven by improved execution against our core priorities.

First, [drive pitch].

We are particularly pleased with the quality ratings of our games.

Similarly, our plan for providing better marketing and longer lead time for our titles are paying dividends.

The marketing campaigns behind The Sims 3 and the EA Sports Active were particularly well planned and executed.

Second, the Wii.

We are seeing success in our campaign to improve segment share in the popular Wii campaign.

We had a number of good launches, most notably, EA Sports Active, which Peter will discuss shortly.

Year to date, we are the number one third party publisher on the Wii.

Third, managed cost.

Our restructuring is essentially complete.

Eric will discuss this in more detail.

And fourth, Digital Services.

We're making significant steps forward in our Digital initiatives.

During the quarter, non-GAAP revenue was up 38% year over year.

Overall Q1 was a good quarter, and I'm pleased with our execution.

Let me discuss a few points on the balance of the year.

First, outlook on the industry and Retail environment.

This year through June, Packaged Goods Software sales were down 12% in North America, and we estimate minus 10% in Europe.

Even though we expect tough compares in the June quarter, software sales were softer than expected, due in part to fewer hardware sales.

In addition, we saw significant declines in the Music category, which was down 52% with Rock Band have a particularly tough compare.

As a result, for the calendar year, we now expect Packaged Goods Software to be flat year over year in North America and Europe combined.

We expect the Packaged Goods sector to grow in the back half of the year.

This growth will be fueled by great titles, hardware catalysts, and easier compares.

It's worth noting the industry overall, inclusive of Digital Services, is up year-to-date and is expected to be up the full year.

With that context, let me talk about the remainder of our year, the positives as well as the challenges we see today.

On the positives, we had a good Q1 driven by strong executions, titles like The Sims 3 and EA Sports Active should continue to do well throughout the year.

Our title plant is holding together.

We aren't aware of any significant potential slips.

Looking in to the Development organizations, we see continued strengths.

The teams are hitting their milestones.

Our quality is tracking well.

Calendar year to date we have nine 80-plus rated titles, and our major titles are tracking well against our quality assessment metrices.

Our marketing execution has improved.

We have been effectively using our long-lead metric to manage and monitor our pre-launch progress with the consumer, and have implemented longer lead time marketing around key titles.

We've planned our launch windows better this year.

As you know, we moved the Sims 3 into Q1 to give it the best chance of success, and we have reduced title count in Q3, adding to Q4, to provide select key franchises better windows.

In Q4 we have four major titles launching, versus just one a year ago.

We also pulled forward Need For Speed to late September, giving it additional time of the shelf and a cleaner window.

And finally, given some recent competitor title shifts, we believe the back half of the year is less competitive than originally expected, creating opportunity for EA.

On the challenges, the industry is weaker than we originally expected, and we remain cautious on the macro environment and its impact on consumers.

Retail continues to be cautious on opening orders and inventory.

Lastly, the marketing metrics for a few of our titles are not as strong as we would like to see it at this point.

In order to improve this trajectory, we've decided to allocate some additional marketing dollars to these titles to better position them.

We are making cost cuts in other parts of the Business to fund these initiatives.

In summary, we are pleased with our Q1 results and the way our title slate is coming together.

We remain cautious due to weaker Industry Packaged Goods sales year to date, retailer conservatism, and some marketing metric flags on a few of our titles.

We feel good about our execution and our ability to adjust quickly to changing circumstances.

Based on a balanced assessment of these factors, we are reconfirming our non-GAAP guidance today.

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

Good afternoon.

For Q1 we delivered non-GAAP revenue of $816 million, non-GAAP gross profit margin of 61.2%, and non-GAAP diluted loss per share of $0.02.

We came in slightly better than we expected on the top and bottom line, with costs and fazing driving most of the upside.

Our Q1 non-GAAP revenue is driven by The Sims 3, EA Sports Active, and Fight Night, Round 4, also resulting in higher non-GAAP gross profit margins.

This performance is offset by lower distribution revenue.

We continued to manage expenses both in absolute terms and timing, yielding the positive impact in Q1.

On a GAAP basis, revenue was $644 million, and GAAP diluted loss per share was $0.72.

Key titles in the quarter were The Sims 3, selling 3.7 million copies with 59% of sales internationally.

We estimate the sell through at retail The Sims 3 is outpacing The Sims 2 by over 25%.

EA Sports Active, our new fitness platform sold over 1.8 million copies on the Wii.

It was the number one third party title on the Wii for the quarter, in both North America and Europe.

Fight Night Round 4, the winner of the The Best Sports Game category at E3, sold over 1.7 million copies, shipping in the last two weeks of the quarter.

It is our highest-rated title so far this year.

In addition, Tiger Woods PGA Tour 10, Godfather 2, and Harry Potter and the Half Blood Prince each sold over one million copies.

On segment share, we had 19% share in North America, and we estimate 18% in Europe, up five and eight points year over year respectively.

Excluding distribution in North America, we picked up seven points of share year over year.

On the Wii, we had record share of 21% in North America, and 13% in Europe, up ten and nine points respectively, with our revenue more than doubling year over year.

In our Digital Services businesses, we generated $124 million in non-GAAP revenue, up 38% year over year, driven by digital content, full game downloads, and micro transactions, was $31 million in the quarter, up more than 2X from last year, primarily due to our FIFA Ultimate Team service offering.

Subscription revenue was $36 million, up 33% year over year, due to Warhammer Online.

Wireless revenue was $50 million, up 14% from a year ago, primarily due to revenue generated on the iPhone.

During the quarter, we launched 12 games for this platform, including The Sims 3, which quickly became the number one paid game.

EA Mobile continues to be the number one publisher of wireless games.

We executed on our cost reduction plan, and are largely done with our announced restructuring as of the end of Q1.

Approximately 92% of the headcount reductions were completed, and we ended the quarter with 8,948 employees, versus 9,106 last quarter.

In addition, 20% of our employees are located in low cost locations.

I would now like to discuss Q1 in more detail.

Please note that all of the following references to first quarter results are non-GAAP, unless otherwise stated.

Non-GAAP revenue was $816 million, up 34% from a year ago.

At constant currency rates, revenue increased 45%.

Front line non-GAAP revenue was $480 million, up 158% year over year, driven by a broader slate and more revenue generated by title.

This increase was partially offset by declines in distribution.

During the quarter Catalog non-GAAP revenue was 18% of total non-GAAP revenue versus 28% a year ago.

Moving to the rest of the income statement, non-GAAP gross profit margin was 61.2%, versus 52.1% a year ago, up nine points year over year.

The increase is attributable to a higher mix of revenue from owned IP, and less overall distribution revenue.

Operating expenses.

Non-GAAP operating expenses were $510 million, down $9 million year over year, as a result of our lower bonus expense, and our cost reduction program, partially offset by higher variable marketing for key releases during the quarter, and EA partner [R&D] Advances.

As expected during the quarter, we recorded no bonus expense for FY 2010 performance, versus approximately $24 million a year ago.

Excluding costs like variable marketing that tied to title launches and the timing of bonus and advances for EAP titles, our expenses are down approximately 10% year over year, on a like-on-like basis.

During the quarter, we recorded $14 million of total restructuring expense.

Below the operating income line, non-GAAP other income expense was $3 million as compared with $15 million a year ago, due to a decline in interest income as a result of lower interest rates.

On income taxes on a GAAP basis, we recorded a tax benefit of $24 million, primarily due to the release of certain tax reserves in connection with an audit settlement.

We have not recorded any net benefits for US deferred tax benefits, due to the valuation allowance.

On a non-GAAP basis, we reported taxes at 28%.

GAAP diluted loss per share was $0.72, versus diluted loss per share of $0.30 a year ago.

Non-GAAP diluted loss per share was $0.02, versus a diluted loss per share of $0.42 a year ago.

Our trailing 12-month cash flow used in operations was $25 million, versus cash generated of $239 million for the prior period.

Turning to the balance sheet, cash and short-term investments were approximately $1.8 billion at quarter end, down approximately $300 million from last quarter, primarily due to cash used in operations.

Marketable equity securities were $440 million, up $75 million from last quarter.

During the quarter, we recognized a pre-tax loss of $16 million on the P&L related to our investment in the nine.

At quarter end, we had a net unrealized gain of $282 million on our Ubi Soft and Neowiz investments.

Gross accounts receivable were $565 million, up $110 million from last year, or 24%.

Reserves against outstanding receivables totaled $190 million, up $4 million from a year ago.

Reserve levels were 13% of trailing six-month non-GAAP revenue, up one point from last year.

As a percentage of trailing nine month non-GAAP revenue, reserves were 6%, consistent with last year.

Inventory was $215 million, down $8 million from a year ago.

Ending deferred net revenue from Packaged Goods and Digital Content was $433 million, up $241 million from a year ago, due to the additional deferral for all console and PC online-enabled games.

Now for our FY 2010 guidance.

We are reconfirming our non-GAAP guidance for revenue and EPS.

Revenue on a GAAP basis, we expect revenue of $3.7 billion to $3.85 billion, consistent with our prior guidance.

On a non-GAAP basis, we are reconfirming $4.3 billion of revenue, up 5% year over year.

From a revenue mix standpoint, we're continuing to plan our Front Line and Digital Services revenue to be up year over year, and our Catalog and Distribution revenue to be down year over year.

In FY 2010 we expect to ship FIFA 10 in Europe, and Need For Speed SHIFT at the end of Q2, versus Q3 and the prior year.

Gross margins.

We expect GAAP gross profit margins of approximately 51% to 53%, and non-GAAP gross profit margins of approximately 58% to 59%.

We expect our non-GAAP gross profit margins to expand nine to 10 percentage points year over year, due to a higher mix of revenue from wholly-owned IP, a lower mix of distribution revenue, and lower SRA.

Keep in mind our non-GAAP gross profit margins will fluctuate quarter-to-quarter, depending on the mix of revenue.

For Q2 we expect our non-GAAP gross profit margins to be down year over year, due to a higher percentage of our revenue coming from distribution, most notably, The Beatles Rock Band.

In addition, we expect a lower percentage of our revenue to come from owned IP, due to the lack of a front line PC title to comp the Spore launch in the prior-year period.

In the second half of the year, we expect non-GAAP gross profit margins to expand by at least 10 percentage points year over year, due to a higher mix of owned IP, in a comparison to a period when SRA was particularly high.

Operating expenses.

We expect GAAP operating expenses to be approximately $2.4 billion, and non-GAAP operating expenses of approximately $2.1 billion.

Below the line, we expect GAAP loss per share of $0.85 to $1.35, adjusted from our previous estimate of $0.85 to $1.45.

We are reconfirming our non-GAAP guidance of $1.00.

We expect that non-GAAP other income and expense will be roughly $15 million, down from what we estimated last quarter, as a result of declines in interest rates.

On taxes, we expect our GAAP tax rate to continue to be volatile, but on an absolute dollar basis, and subject to changes in the business or the tax laws, we expect a tax benefit of approximately $25 million.

Keep in mind, we continue to expect GAAP losses in FY 2010, creating additional valuation allowances on US deferred tax assets.

On a non-GAAP basis, we expect to report taxes at 28%.

For share count, please use 323 million shares to compute the GAAP loss per share, and 325 million shares to compute non-GAAP EPS.

Foreign exchange.

As compared to our original guidance assumptions for FX, rates have fluctuated modestly, but not enough to cause us to change our overall guidance.

This concludes our guidance and outlook commentary.

With that, I'll turn the call over to Peter.

Thanks, Eric.

Good afternoon, everyone.

I'm happy to join you from the UK to talk about our progress at the EA Sports label.

We're pleased with the performance in Q1, in particular, EA Sports Active, and Fight Night Round 4.

Congrats to our teams in Vancouver, who developed both of these titles.

Today I would like to discuss our focus on the Wii platform, titles coming soon on core platforms, and some ground-breaking Digital Service initiatives.

Let me start with the Wii.

We have successfully launched a brand new [IT] for this platform, EA Sports Active.

We are thrilled with the consumer response to this new interactive fitness product.

EA Sports Active is EA's best selling Wii title ever, and it continues to perform well week after week.

EA Sports Active has captured a whole new segment of consumers, expanding our Sports brand beyond our traditional audience.

We have done this with an unconventional marketing campaign.

Active has been featured on the Ellen Show, on QVC, and in other media outlets popular to this consumer.

In addition, we expanded our distributions beyond our traditional retail outlet, including Dick's Sporting Goods, Costco, and Sam's Club.

Given the success of EA Sports Active, we have decided to launch an expansion pack this holiday.

We are using development resources from our tennis team on our EA Sports Active franchise.

As a result, we are delaying the 360 and PS3 Tennis SKUs.

We believe this is a good swap, and expect this decision to yield positive results.

Also in the quarter, we Launched Tiger Woods PGA Tour and EA Sports Grand Slam Tennis, bundled with Wii Motion Plus, both doing well on the Wii charts.

Tiger charted at number three, and Tennis at number 11 in North America.

In Europe, Tennis was number four, and Tiger will be picked up in the July data.

Later this quarter, we have Madden and FIFA on the Wii.

Both titles are designed specifically for the Wii platform, and this is our best effort yet to deliver a unique experience with exclusive controls, modes, presentation, and packaging.

Now on to games for the core platforms.

We came out of the gate strong with Fight Night Round 4, which launched late in June, with an 89 Metacritic rating, putting it at the top of the quality charts, thanks to the new fighting engine and jaw-dropping graphics.

NCAA Football 10 launched in July, and is again a strong product, with a Metacritic rating of 83.

Our first two weeks of sell through is weaker than expected; however, as you all know it's still early.

College football season has not yet started, and we will continue to monitor the situation.

We think our web-based innovation, Team Builder, will drive more engagement in our NCAA title as we approach the start of the college football season.

On NBA Live, last week I was in Vancouver and got my hands on the latest build of the game.

The team knew they had to step up the quality, and boy, have they delivered.

And most importantly, we have our two cornerstone products, FIFA and Madden.

FIFA [streets] on October 2 in Europe, which is in our fiscal Q2, and on October 20 in North America.

FIFA 10 will feature more realistic shooting, passing, and control mechanics, as well as improved goal-keeper intelligence.

A new 360-degree dribbling system gives players finer touch on the ball, enabling them to find more space between defenders.

FIFA 09 earned 25 international gaming awards, and the talented team at EAC is making all of the right moves to build upon that, and even further enhance the most complete and intelligent soccer simulation game.

Madden NFL 10 will launch on August 14th.

This year, you will have unprecedented control over the outcome of every play, fighting for fumbles, steering game tackles, and driving receivers for first downs with the new ProTac Animation Technology.

Also new this year is a ground-breaking digital service feature, Madden Online Franchise, featuring real NFL scheduling, live drafts, player transactions, and real time NFL stats, all manageable by the consolee, a web browser, or even an Apple mobile app.

Our commitment to core game play, online innovation, and authentic broadcast presentation make us very confident that Madden will significantly raise the quality bar as we enter the 21st year of this franchise.

Now shifting gears to Digital Services, we're working on exciting initiatives, building on the success we enjoyed last year.

In March, we launched the FIFA Ultimate Team, which has been a big success, generating $12 million from consumers.

For those that don't know, it allows you to create your own virtual teams, trade players, and compete head to head.

This is a feature that is applicable to other games in our portfolio.

Earlier this year, we took the award-winning NHL Game Engine and developed the NHL 3 on 3 Arcade.

It was simple to pick up and play and launch as a fully downloadable game for the consolee months after NHL 09 had launched.

We will follow this approach with Madden Arcade later this year.

In Q3 we are launching Tiger online, taking a whole new approach to our PC Sports offerings.

The game is browser-based and requires no installation, no disk, and no additional peripherals, and will be monetized by subscriptions and micro transactions.

We have got other franchises in development; much more to come on this.

In Asia, FIFA Online 2 continues to expand.

Today it is running in seven countries with over 10 million registered users.

NBA Street is live in Korea, and in beta in China.

All in all, I couldn't be more pleased with how our teams are executing.

We came out of the gate fast this year, and we're seeing great momentum in our core games, the Wii, and on our Digital Service initiatives, and I'm especially excited for next week's launch of Madden.

Now let me turn it back to John.

Thanks, Peter.

A few closing thoughts.

First, I'm very happy with how the EA team has stepped up execution.

Second, we continue to believe this will be an extended hardware cycle and that we will continue to see robust growth in Digital Service businesses.

Both trends are positive for [publishers] position to exploit them.

Third, we have the right priorities, drive hits in the core, focus on the Wii, expand our Digital Services, and control costs.

This will allow us to grow margins in FY 2010 and beyond.

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

Thank you.

(Operator instructions) We'll take only one question per caller.

And the first question comes from Mark Wienkes with Goldman Sachs.

Great.

Thank you.

Just wondering have you seen the same slowdown at Retail for catalog titles as have been cited by a couple of the other publishers?

Is it fair to say that the tight inventory management at Retail will continue through this holiday season, are you seeing that already, I guess, and then how does that shape your strategy to sell more catalog in this holiday year?

Well, a couple of thoughts.

First off, catalog came in pretty much spot on our expectations in Q1, so we're not seeing sort of a different or more negative trend than we had seen previously.

In terms of retailer sentiment in general, our experience so far in the last quarter has been that retailers are more cautious on opening orders than quick to reorder, basically choosing not to take risks where they don't have to.

But the quick to reorder is a positive sign for titles, for example, we had good experience with The Sims 3 and the [H4] Tactic in the last quarter.

So it's not really shaping a shift in our thinking, given that it is performing almost exactly as we had anticipated so far this year.

Okay.

Thank you.

And the next question comes from Brian Pitz with UBS.

Thanks.

Can you talk about your views on console price cuts, and how they particularly play in to your guidance for the back half of the year?

Thanks.

Brian we try not to comment too much on plans that others get to decide and implement, and it's our view that we're at a pretty particularly interesting point in the cycle.

If we've got approximately 75 million consolidated installed base against the major platforms in Western markets, where the total install base on Last Gen is about 125.

In other words we sold a lot more at high prices than we did in the last cycle, and we think pricing will move hardware, and anticipate price cuts at some point.

And we would like to see price cuts later in the year, but we can't really speculate beyond just thinking that something would be welcomed in the marketplace.

In terms of our own guidance, we take knowledge that we can lean under NDA and bake that into our guidance, but we can't disclose it on the call.

Okay.

Great.

Thanks.

Moving on to Justin Post with Merrill Lynch.

Yes, hi.

This Ryan Gee filling in for Justin Post.

Looking out to your holiday quarter, you have four new big new IP titles, mainly Brutal Legend, Dragon's Age, and Dante's Inferno, and I'm sure the economics for each title are different, but I'm wondering if you could help us think about what type of unit sales you would need to really break even on each of those titles?

And maybe if not a unit figure, then how would those titles track versus last year's Mirror's Edge and Dead Space?

Thank you.

This is John.

A couple of thoughts for you.

First off, Dante's was previously announced to be in our Q4 not Q3, so I just want to clarify that fact.

The second thing is, on lifetime unit, both Dead Space and Mirror's Edge are solid businesses for us; they just didn't meet the expectations we had fiscal '09, sort of on the upside given their strong Metacritic reviews.

And on the call when we were describing the Christmas quarter last year, we basically explained how there was a very difficult retail environment, and how we had managed to put these right on top of some very strong competitive launches, and we were less than pleased with our marketing execution.

So we're addressing all of those issues with each of these titles this year, in particular with Brutal and Dragon's Age.

With regards to Dragon's Age, it's a title coming from BioWare; it's got a built-in audience, given the strong reputation of BioWare, and Brutal Legend is one of the most unique franchises I have seen in a very, very long time.

So we're stepping up marketing, we're going at it aggressive.

I can't tell you what the break-even units are for these, as we don't disclose that information, and we'll certainly be talking more about these titles on our next call, because we're [right in front of] the launches.

Great.

Thank you.

The next question comes from Arvind Bhatia with Stern Agee.

Thank you.

I was wondering if you can talk about your longer term operating margin goal, now that a lot of the cost cuts are behind you, maybe sometime in the next 12 to 24 months, where could you see the margins going?

And my quick second question is somewhat related.

You said 20% of the employees are in low-cost countries, is there a nearer term or medium term goal that you might have on where that percentage might go?

This is Eric.

I'll take the first portion of that question.

We're not in a position to give guidance beyond the current fiscal year in terms of our operating margins.

We're focused on getting to the dollar for the full year and the 10% non-GAAP op margin associated with that.

Clearly we aim to do better than 10% over the long term.

In terms of the low-cost employee composition, yes, it's at 20% as of the end of the quarter.

We're looking to increase that a bit over time.

We're finding that for certain areas of our business, for example, Mobile, lends itself well to having headcounts at lower-cost locations, given the diversity of platforms, so that has worked out extremely well for us in that business, and it's a success that we look to replicate further.

One insight I might add to Eric's answer, we're specifically not trying to provide guidance for F11 and beyond today.

I will tell you that the management team is exceptionally strongly focused on margin expansion and on the opportunity to drive our business ahead aggressively.

We're already in to F11 planning, so that we can affect both the cost and revenue lines with early decisive moves, so it's something that we spend a lot of time on, and we're ambitious.

Thank you, and good luck.

Next question comes from Daniel Ernst with Hudson Square Research.

Yes, good evening, thanks for taking my call.

On the Sports franchise, Peter, can you talk about the year over year performance, on a comparable period basis for TIger?

Did you see growth in that franchise?

And then, while it's not a lot of data, what you are seeing on NCAA so far, and how do you think that impacts your view for Madden, are you still expecting that to be still down year over year?

Did you have any comments on the relationships between NCAA and Madden launching next month?

Thanks.

So, Daniel on your first question, I think the real excitement right now around Tiger is obviously the Wii version with the Wii Motion Plus.

We've seen tremendous growth year on year.

As I said in my prepared remarks, we bundled it with the Wii Motion Plus year in the US, as well as in Europe, and had very strong sell throughs in the early going here, and we expect with the Wii Motion Plus peripheral now selling very well, for Nintendo themselves to be able to take advantage of that with Tiger.

With regard to the NCAA, we're monitoring that, and again as I said in the prepared remarks, it's still early days.

One of the things that we are looking at is whether the real excitement, which is very strong now around Madden, is actually in some way negatively impacting NCAA.

But I think the key here is that we're still two to three weeks away from the college football season starting.

We've got TeamBuilder, now over 250,000 teams have been created.

It's a web-based application that allows you to create your own team and then import it into the game itself.

There's a lot of season showdown, which is allowing students from each of their colleges to use NCAA as a competitive tool against their competitive colleges.

So a lot still to come with NCAA, and a tremendous amount of excitement with Madden, as much as I have seen here in the few years that I have been here.

So fingers crossed on Madden.

Great optimism that we can start seeing some improved numbers on NCAA, and very proud of what is going on with Tiger.

Great.

Thanks for the answer.

Thank you.

And the next question will come from Edward Williams with BMO Capital Markets.

Good afternoon.

Couple of quick questions on downloadable content.

How do you see it trending in the North American market at this point, and how is that performance relative to what your thoughts were.

And what sort of stumbling blocks do you see in getting that category to grow a little bit faster at this point, looking at the Asian market as a proxy.

So, a couple of thoughts, and Eric may jump in here, because I can see he is looking at something, but the starting point, we've had a great success recently with Battlefield 1943 on the Xbox Live system.

It has generated greater sales than any kind that we've seen on the platform, and I'm hopeful it will end up being one of the best-performing titles on Xbox Live in the history of the platform.

So that feels really good.

A download is at a $15.00 price point; a lot of content for your money.

We have seen some really interesting aspects of our business developed inside of the Sims 3.

It's something I hadn't expected to pick up in a strong way initially, because there is so much content that's shipped on disk with the game, but we have seen approximately two thirds of the users of the game register in order to be able to purchase additional content.

And while initial purchases are still relatively modest, the fact that it's already exceeded our relatively modest internal plans makes us feel good..

I think a broader point would be this, is that at this point in time, most consumers in the West that participate in, if I would describe it as direct to consumer content, get it one of two ways, subscription off of the PC in titles like Warhammer World of Warcraft in prior years, Ultima Online, and others, have the lion's share of that, and then Mobile.

So those are the two models the consumer is used to.

And beyond that, there is casual PC in the form, in our case, of Pogo.

Asia, it dominates the landscape.

It is the way consumers buy products out there, and we expect to see it take continued steady progress.

A lot of people want to believe that micro transactions is going to be the lead business model in the West.

I'm not so certain of that.

We are prepared, whether it turns out to be micro transaction or subscription or some combination.

We are seeing good micro transaction results on Pogo, but I do think there is a difference between the way that consumers buy and consume content in Asia, versus the way they buy and consume content in the US.

And for reasons that would be too long to get into for this call, I'm probably much more bullish on subscriptions than some might otherwise be.

And on balance, I think it could be a combination of all of the above.

The other point I would add is that, when you look at downloads, extra content for console and other titles, I mean that portion of our business within Digital, it basically tripled year over year this quarter, so the take rate has been good.

We called out FIFA Ultimate team great innovation for the franchise.

It's a concept that we're exploring for other franchises as well.

And we have had a chance, as we take a look at our SKU planning, to make sure that we are building dev time plans for more digital content into everything that we do.

So it takes some time to get that additional content built into the dev plans and roll it out, but we're encouraged by some of our early success in this area.

Great.

Thank you.

Moving on to Heath Terry with FBR Capital Markets.

Great.

Thanks.

With all of the product delays that we have seen from your competitors, how would you gauge the environment this holiday season at Retail versus what we have seen in previous years, and to what extent is that impacting your expectations for the individual titles that you are launching?

So, yes, we have seen a number of announcements about delays, and we're very pleased that our slate seems to be holding together well.

I'm proud of our own development teams.

Q3 looks a little less crowded than we had originally anticipated for the holiday quarter, and Q4 looks a little bit more crowded than we had initially anticipated.

If anything that's unbalanced, probably a opportunity for us, but it's very hard to measure or define.

One point I would make in addition to that is when we wrote our FY 2010 plan, one of the learnings we had from FY '09 is we bunched up too much into the Q3 quarter.

Not only were some of our titles crowded out by competition, they were crowded out by other EA titles, and so we purposefully, if you will, created a four-quarter plan.

We have Need For Speed and FIFA, at least parts of them really, they ship in September in Q2.

A year ago when we had one major release in Q4, we have four mayor releases in Q4.

And so we really, if you will, put together a plan that is designed to take advantage of the fact that there are in fact 12 months of the year, and we think we can actually do better with our key titles by spacing them out, and we have done so in our plans.

Great.

Thank you.

And next question will come from Atul Bagga with Think Equity.

Hi, guys, thanks for taking my call.

Can you talk a little bit about your online strategy.

Seems like this is one area where you guys are putting all of (inaudible) behind.

Can you talk about how big this opportunity could be for your guys?

What is your current market share, and internally, where do you target in terms of your market share, where you guys could be in let's stay, two or three years down the line?

First I have a couple of thoughts.

In terms of online, we more broadly define it as direct to consumer, we have yet to put out to the analysts, or any other public audience our definition of what is included.

It's a big definition, though, including micro transaction games, subscriptions games, et cetera.

And by our own internal measures, it's high double digits or low double digits market share, depends on what we include or exclude, but it's a big and fast-growing industry, and we have high ambition to be the clear leader in this space.

One of the reasons that we brought John [Shappard] in, our Chief Operating Officer, is he has great credentials and operating skills that will be brought to bare to help focus our strategies and focus our execution against the broad opportunities that we see.

You know, beyond that, I think that it would be premature to give you too much specifics around market share goals and [like] define the market for you, so we'll place some added commentary on this in future calls.

The other point I would add is we set out at the beginning of the year with the goal of growing our total Digital Services portfolio at about 25% year over year.

We can report growth of 38% in the first quarter, so we seem to be trending well thus far in the fiscal year.

Part of that is timing.

We're not guiding to an upside there.

Next question, please?

Next question will come from Jeetil Patel with Deutsche Bank.

Great.

A couple of questions.

Can you talk about first of all, on the dollar and EPS guidance for the year, I guess, what does your free cash flow target look like against that?

And what does the general quarterly trending look on cash flow by quarter, just directionally?

And then second, can you break out what the affiliate revenues were in the quarter, and which titles are you stepping up marketing on as we look at thinking through the plan for the next several quarters?

I'll take the first portion of that question.

We didn't provide specific cash flow guidance, but what we are expecting in terms of full-year GAAP operating cash flow is approximately $400 million for the full fiscal year.

We're obviously cash flow negative here in the first quarter given the strong front line.

It's going to fluctuate.

We'll probably have a negative working capital impact in fiscal Q3, as we have historically, with very strong cash collections in fiscal Q4.

With regards to your question on affiliate titles, I'll pass that to John.

By affiliate I assume you mean what we include under the heading of EAP.

That business was relatively modest for us in Q1, no major releases.

A big release in the current quarter, with The Beatles title that we're putting out jointly with Harmonics and MTV, so we're expecting a lot there, big marketing.

It's funded by MTV Harmonics, however, not us.

So each quarter moves up and down depending on the specifics.

A big title that we have slated for Q3 is Left For Dead, which is coming out in partnership with Valve, a title that we have high expectations for.

One thought I would bring back to you though is, when we set up the guidance for fiscal year 2010, and we outlined our track to $4.3 billion, we had specifically outlined how this business was going to be down approximately $400 million versus prior year, so as confident or as positive as I am about the specific releases here, we're still expecting that outcome, so we're not adjusting our guidance on the strength of these titles, although they are very strong.

And moving on to Ralph Schackart with William Blair.

Good afternoon.

Can you talk a little bit more broadly on industry pricing trends, both for new and catalog titles, and how you think that will play out for the holiday season?

And then more specifically on the GI Joe pricing, at sort of $50.00 across the platforms, is that what you were always planning on, or is that in response to the competitive environment?

Thanks.

So in terms of pricing, I think you are going to hear from me pretty much what you've heard from the folks at THQ recently, which is that great titles hold price well, and it's something that I think we have been saying on the last several calls.

We're not in a position to give you any sort of guidance as to our expectations on price in the future.

There's a lot of reasons why we didn't get in to that.

But primarily price is subject between us and our retailers, and not something that we are broadcasting beyond that more limited audience.

In terms of GI Joe, the pricing that's out there, again we released yesterday, the pricing that we put it out at is exactly as we had it planned.

Great.

Thank you.

Next question will come from Eric Handler with MKM Partners.

Hi, thanks for taking my question.

Just curious, are you still being able to bundle Tiger Woods Wii SKU with additional motion sensors, and can you also along those lines, live the breakdown of what the percentage of Tiger Woods unit sales were by Wii, versus the other SKUs?

As for the first question, no, that was a one-time arrangement with Nintendo to bundle to help them get going.

Of course they've more recently bundles with Wii Sports Resort, and now the Wii Motion Plus is now pretty much available for sale as a free-standing peripheral just about every in the world now.

I tend not to be able to break down off the top of my head the individual platforms.

I can tell you that certainly, as I previously said, that the Wii version has done incredibly well, particularly on a year on year basis.

But the next gen versions of PS3 and Xbox 360 are also holding up well, and I will point as well to the fall when we go with Tiger on a brand new platform, which is Tiger Online, which I spoke of in the prepared remarks, but we think allows us to be able to expand the Tiger franchise on yet another platform, and of course, that's the PC.

Thank you.

Thanks.

And next question is from John Taylor of Arcadia Investments.

Great.

I have got two, if I can.

One, you have had great success with the Active Sports and with Tiger on Wii, on the other hand, it doesn't seem like Potter has done that well.

And I just wonder if that observation is correct, or however you want to put it, but what is your learning about the Wii customer based on the reception for those two things?

And the second one is, I wonder if you could compare and contrast sort of the presales for Need For Speed on Madden as of today, versus about same time last year?

Thanks.

(Inaudible - multiple speakers) Peter in is the UK, so it's going to be a little bit hard to coordinate.

Do you want to take the Tiger/Madden?

Yes, I think the key J.T.

that we've learned is two things here.

First of all, certainly the EA Sports Active franchise has been a great success for us and continues to sell well.

What we've learned is there is a consumer out there that is very, very open to the concept of interactive fitness.

But building it, as always, from the ground up, which we've we talked about for the last few years, has been key.

Secondly, with Tiger, the concept of authentic sports motion that's been captured not only with Tiger, but also with tennis, when you are actually replicating the natural movement of the sport with the Wii Motion Control, that has been the key.

And I'll let John talk about Harry Potter, but certainly from our perspective, the three titles that we shipped that are really dominating the Wii charts right now are Active Tennis and Tiger all have the basis of being built from the ground up, and in the case of Tiger and Tennis, have this authentic one to one natural sports motion, which we think we can continue to capitalize on going forward.

So couple of thoughts on Harry Potter.

First off it is a very good title.

I finished it with my daughter on Saturday, and pretty compelling software.

In terms of its sales trends, we had always anticipated the title doing well at the launch of the movie, but probably more importantly, Harry Potter always enjoys a very important holiday period.

So mid-November to December is probably the most important buying season for us, so it's a little bit early to call.

We did release it before the movie, so, that which is reported in some of the publicly available data both in the Europe and the US, tend to show it pre the launch of the movie, and consequently, you get a little bit less sell through at that point in time and then it pick up strongly with the launch of the movie.

In terms of Need For Speed, I think it is misleading to talk about presells, given that we've moved the titles forward, and so I don't want to be in be a presell brag-rights program, but I would point out that we tracked a number of metrics, presell is one of many, buzz metrics, awareness, conversion to purchase, et cetera that we use to shape our marketing programs, and we're feeling very bullish about Need For Speed.

The recognition the title got at E3 and in subsequent shows, where people have come to play the game, get hands-on with it, and see how much better it was than our prior entry, that's been very positive.

Peter, before we sign off on this question, you might want to touch briefly on Madden presells.

Yes, back to your question J.T., in fact about an hour ago, I got the latest presell numbers from Madden from the weekend, and we're now marginally ahead year on year with about ten days to go.

You'll recall the Q1 call last year, we had an in-depth conversation about presells and whether they were really a key indicator anymore of what the strength of the title was going to be out of the blocks.

But, I can tell you that we're marginally ahead, and obviously the buzz that we are now starting to feel for the title is starting to build; we're 10 days away.

Interestingly we're shipping on a Friday; we're capitalizing on a preseason game on Thursday night, between the Steelers and the Cards, which of course is a recap of the Superbowl, and will be a tremendous amount of marketing both at halftime and around the game on that, and hopefully we'll have a very strong launch at 12:01 a.m.

on August 14.

But all of the metrics are very, very positive right now for Madden, J.T.

Great.

Thank you very much.

And the next question comes from Mike Hickey with Janco Partners.

Thanks guys.

Great job on your quarter.

John and Peter, I was wondering if you could update us on your thoughts on Microsoft's Netal technology, and maybe your game development philosophy for this potentially new platform next year?

And then Eric I hoping that maybe you could give us a little bit of insight into the sales mix for the quarter, and I think John you said no changes for the year, but is there any changes within the label mix?

And then Eric did you touch on Q2 sales if you are comfortable with Street consensus, if you could clarify that?

I think that was more than one question, but we'll try to tackle it.

First off, thanks for the comment on the quarter.

On Netal, I think for at this point in time, I would rather lump that up with what is going on with Sony with their new motion-based controller, and the answer is we're really positive on both.

Our view is that motion-based gaming is something that is both going to drive install base, drive interest, and drive growth, so we're positive overall.

And yes, we're planning to support both.

We haven't yet announced our plans to do so, but we shall do so at the right time frame for that, which is likely to be early to mid-2010.

So you are sort of jumping the gun on that.

Eric do you want to pick up the next piece?

Sure.

In regards to some Q2 comments about mix, as you'll recall when we gave the initial guidance for this year, we said $200 million net increase in revenue, [up] plus six in the labels, X any distribution, and minus 400 in distribution, so that overall map still holds today, with the distribution of the 600 being still, roughly 200 games, 300 in Play, and 100 in Sports.

So no significant change there as far as that goes.

Other things to keep in mind for Q2, we called this out on the opening remarks, was that in the gross profit margin for Q2, we're expecting a non-GAAP basis to be down a bit versus Q2 last year.

We have our strongest distribution title launch, Rock Band Beatles in the quarter, and we're also comping against Q2 by last year, we had the Spore PC launch.

That's a 90%-plus gross profit margin product.

We don't have that same type of product recurring, so I look at the assumptions out there, and I think it's important that the gross profit margin be revisited very, very carefully in light of what we believe.

Thank you.

And next question comes from Colin Sebastian with Lazard.

Thanks for taking my question.

Peter, I think this will be for you.

You mentioned quite a few Digital products and services coming down the line, and I'm wondering if you also foresee full console game loads, downloads as part of those initiatives?

Colin, not right now.

We certainly have a tremendous suite of different services and offerings, particularly in Sports.

We started looking at obviously, as you know, subscription models, micro transactions, ultimate team modes, all of these things have helped us in the last quarter and the last previous fiscal year even.

We looked going forward at downloads of games along the lines of arcade-style games.

You'll recall last year we did NHL 3 Versus 3, and we're going to have a version of Madden available this year as well for a download, but certainly not a full game.

Obviously this is a decision that is primarily gated by the platform holders, but we're not building that into our plans for this fiscal year at least anyway.

Okay.

Thanks, Peter.

Thank you.

Moving on to Tony Gikas with Piper Jaffray.

Good afternoon, guys.

Could you describe the need for and the specific incremental marketing efforts for some products that you mentioned earlier in the call, and maybe the timing of those efforts?

And then second question, if you don't mind, last year hardware sales were about 35 million units here in the US, was that the peak year, and I'm sorry if I missed it on the call, but did you give your hardware estimate for 2009?

So we have stopped providing specific guidance on hardware in terms of numbers by platform and overall, so, I think I continue to shy away from that.

I think that the determination is whether it's a peak year or not, it's going to depend entirely on pricing this year.

Sharp pricing action could yield upside; a lack of it we probably won't lap last year in a positive way.

I think good knowledge of that is baked into our forecast.

Coming to your question on marketing, we have identified an opportunity for us to invest a little bit more in marketing in both Q3 and Q4, and have allocated the dollars to do so, and we have found offsetting savings in other parts of the business, the majority of that being in R&D.

Okay.

Thanks, guys.

Good luck.

Moving to Ben Schachter with Broadpoint Am Tech.

John, in the past, you've talked about the EA games label needing to have a good number of [sequelable] multi-million units selling franchises.

I was wondering, do you still feel that that's a core focus area for you, and do you have those this year?

And then separately, do you see any meaningful change in the importance of online retailers, not digital distribution, but just online retailers, selling package products?

Thanks.

Yes, I continue to believe that our games label having multi-million unit [sequelable] franchise is critical for us, and I believe when I mentioned that the first time, I highlighted titles like Need For Speed being one of those, which is why we invested so heavily to bring it back, how Battlefield was rapidly becoming that, and did so, subsequent to that, with our Bad Company release, and we've got Bad Company 2 coming later this year.

We described our Army Of Two would be on that list, and we have Army of Two coming out this winter.

So there is a number that we already have in our Q4.

We have Mass Effect 2, which is a title we feel strongly in, and can do very, very well.

And of course, there are a number of other titles that have that potential, whether it be Dragon Edge or Dead Space or others in our portfolio, and somewhere out there is Metal Of Honor, which we're not yet in a position to describe specific plans, but we will do so in due course.

Online retailers, I would tell you that there's a couple of categories of online retail.

One is packaging it up and mailing it to the consumer, and the other is downloads.

The mail out to the consumer category would include a number of our current retailers, but also Amazon and others, and that business is growing.

We're seeing growth across that pretty much globally.

Download basis, we're also seeing growth.

Partnership for certain online retailers, [Steam], our own website are seeing sharp growth.

So overall I think in particular the PC consumer, is very used to using their home PC to buy software.

All right.

Thank you.

And we'll take the next question from Sean McGowan with Needham & Company.

Thank you.

I was wondering if you had seen, in terms of retail feedback, any difference in the rate of sell through according to a genres, specifically are casual games holding up any better or any worse in the current economic climate than some of the higher priced more hard core games?

Well, as a starting point, Music did not get out of the gate strong this year.

And as I mentioned in an earlier comment, in particular, our own business with, Rock Band had a particularly tough compare for the first half of calendar '09 over calendar '08.

One of the things that I tend to caution against, though, is sort of genre analysis.

The Sports business does particularly well in Q2, and I have often gotten the question about why that is?

And the answer is because that's when Madden ships.

One of the issues that I think pushes our industry around a lot are the specific releases.

The Shooter business was up.

Open World Action Adventure was up last year.

Reasons for like that titles like GTA shipped.

We saw the Sports category come out of nowhere, and it established a very strong presence on the Wii last year.

That wasn't a category movement as much as it was the release of Wii Fit, and we took advantage of that.

Through genre, we created EA Sports Active and brought it out.

So I tend to be more cautious about describing sort of micro move between say First Person Shooter, versus Action Adventure, versus Sports.

But having given you that caveat, I would bring up a couple of thoughts, Music down, Casual sports up.

We have definitely seen a sharp positive move in and around Casual in general, and that started to leak and go negative, particularly in things that are not fully priced [ritz] games, titles that were originally launched in the $19.00 and $29.00 range, have performed less well over the last four to six months.

I think those are probably the best broad trends I can give you.

Thank you.

Operator, we'll take one more question.

Certainly, and that will question will come from Brian Blair with Wedge Partners.

Hi, thank you.

Can you just finish by talking about what your expectations are for the Mobile side, maybe for the balance of the year?

We have obviously seen strong unit growth for the iPhone, and you guys have had some great properties there.

But can you talk about how you see that business trending for the back half of the year?

Sure, and Eric may pipe in on this a little bit too.

We had a strong first quarter.

It's a business that, in many ways is hitting on as many cylinders as we might hope for.

We're seeing some really interesting innovation there.

Cost play between social networks and iPhones, cross play between SmartPhones in general and the PC, and we have got a number of great products out there.

Apple broke their new TV ad today, featuring Scrabble, and the business popped immediately, so we see that it's ad sensitive in ways that you might not otherwise see.

We have seen sequential growth where our competitors haven't.

We continue to believe that will be the case going forward, and we're lapping last year very well.

Eric anything to add?

No, I would just say that Mobile is part of our overall Digital strategy, and we talk about growing that composite book of business by 25% overall in the year.

Mobile is tracking well year to date, and the iPhone has been a bit of a platform opportunity for us, and this business, we have scale, and we operate highly efficiently in this business.

We noted how Mobile has the best mix of low-cost offshore R&D and labor for EA and operates at a margin better than our composite margin.

So we feel quite good about our Mobile business.

(Inaudible - multiple speakers )

Certainly from an EA Sports perspective, from our normal business of course, the things like Tiger and Madden, on the platform itself, we're also seeing in particular Apple Mobile platforms has great extensions with applications from our core games.

Most notable will be next week when Madden Online franchise goes live, and you'll be able to check your franchise from your Apple Mobile apps, as an extension of the core console game.

So it is becoming a big part of our business as well in EA sports.

Great, I'll look forward to seeing that app high up in the application store on the iPhone.

Great.

Thank you, again.

Okay.

Thanks, all.

It looks like we're out of time.

Thank you for joining us today.

And that does conclude today's conference.

Thank you for your participation.