美商藝電 (EA) 2010 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Electronic Arts second quarter fiscal year 2010 earnings conference call.

Today's call is being recorded.

For opening remarks and introductions I would like to turn the call over to Mary Vegh, Manager of Investor Relations.

Good afternoon.

Welcome to our second quarter fiscal 2010 earnings call.

Today on the call we have John Riccitiello, our Chief Executive Officer, Eric Brown, our Chief Financial Officer, John Schappert, our Chief Operating Officer, and Frank Gibeau, President of the EA Games label.

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

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

Please see the supplemental information on our website for our trailing 12 month segment shares, additional GAAP to non-GAAP reconciliations.

A summary of our FY '10 financial guidance and our title play.

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

We caution you that actual events and results may differ materially.

We refer you to our most recent Form 10-Q for a discussion of risk factors that could cause our actual results to differ materially from those discussed today.

We make these statements as of November 9, 2009, and disclaim any duty to update them.

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

Thank you, Mary.

Earlier today EA announced strong Q2 FY '10 results.

Our non-GAAP revenue for the quarter was a record for Q2 and we delivered our largest quarter for direct digital revenues in EA's history.

Our Q2 revenues exceeded Street expectations in a sector that has struggled for growth in recent quarters,our on-GAAP revenue is up 13% fiscal year to date.

So far this fiscal year EA has outperformed on share in a down retail market.

EA is performing.

We attribute this to strong execution and great product quality.

Our aggregate packaged goods share is up 4 percentage points in the first half of the fiscal year in North America and Europe combined.

In both Europe and North America EA was the number one overall publisher in the quarter.

Number one on the PS3, Xbox 360 and PC.

And number two o Nintendo and the Wii.

We have improved marketing and we are seeing continued growth in digital revenue streams.

We are aggressively managing costs.

Although we performed well in the first half of the year we are cautious on the second half of the year.

Industry packaged goods software sales are down approximately 12% year to date.

We believe October was another down month.

Retailers remain cautious and report that foot traffic remains slow.

In a tough economy the consumer is not showing up at retailer consistently as we would like.

EA's PNL is highly dependent on Q3 and Q4.

Addbacks while positive for our revenue reporting does not fall through to our operating margins.

Taking these considerations into account we have decided to add a bottom ranges to our guidance.

While we have not given up on our $1 EPS target we believe it is prudent to guide FY '10 non-GAAP revenue between $4.2 billion and $4.4 billion and non-GAAP EPS to between $0.70 and $1.

Looking more closely at the industry we see a tale of two sub sectors.

Various digital sectors are performing well.

Packaged good sector is under pressure.

Retail data services don't tell the first story.

For the global industry including online and mobile we expect growth in 2009 with gains on the digital side more than offsetting temporary weakness in the packaged good sub sector.

Calendar year-to-date packaged good software sales are down 12% in North America and we estimate minus 13% in Europe.

While the recent price reductions are driving higher console sales the improvement is not enough to get the industry back to flat software sales for the calendar year.

We now expect packaged goods software to be down mid to high single digits in North America and Europe combined.

This is well below our initial expectations for the year.

We do not believe that calendar '09 packaged goods weakness is a permanent condition.

Two factors give us confidence.

We believe there is room on the console price points.

In the last cycle the bulk of console sales occurred at $149 or below.

Secondly the console add-ons coming in 2010 will bring new consumers to the market.

These factors will drive growth and extend this cycle.

EA's definition of the game industry also includes digital businesses such as mobile, micro transaction subscription and advertising.

As recently as five years ago we estimated that digital was less than 10% of the global industry.

Today we estimate digital is 35% of the total.

Our sense is that the various digital businesses will grow at 20% higher than this year than for the next several years.

When we combine digital growth and the packaged goods business we expect that the total sector will grow no 2009 and the years beyond.

Given our long-standing view on the evolution of our industry EA continues to transform itself from being nearly entirely packaged goods dependent to being a leading player on the digital direct side of the industry.

I would now like to turn to two bold steps we are taking towards that transformation.

The first is a targeted cost reduction which will allow greater investment on our hit titles and digital businesses.

The second is acquisition of gaming leader Playfish.

This year we have had success putting more resources behind fewer packaged goods titles.

We have decided to narrow our spike further in preparation for FY '11.

We are implementing a thoughtful targeted action that will reduce titles, close several facilities and decrease head count by approximately 1500 positions, of which 1300 will be included in a restructuring plan.

Laying off employees and closing facilities is never pleasant.

We have a lot of compassion for those impacted but these cuts are essential for transforming our Company.

Our operating expenses will be reduced by at least $100 million compared to our current run rate.

Second, our acquisition of Playfish which is an exciting and fast growing company focused on the social network games area.

They have the number 2 position on Facebook and have built a reputation for making the best games among competitors in the space.

Their management team is strong and will assume leadership for EA's global push into social gains.

We see it this way.

Playfish will continue to be Playfish.

And they will have the added benefit of EA's powerful intellectual property and access to EA's resources globally.

Two bold steps.

The first a narrowing of focus and cost reduction to enable investment and hits in digital.

The second a strategic M&A investment from the digital direct side.

EA is playing offense, positioning ourselves for the future.

With that I will turn it over to Eric.

Thank you, John.

For Q2 we delivered non-GAAP net revenue of $1.147 billion and non-GAAP diluted earnings per share of $0.06.

We came in slightly better than we expected on the bottom line with lower costs driving the upside.

In a down quarter for the packaged goods sector EA's revenues were up year over year and ahead of Street expectations.

Our non-GAAP net revenue is a record for Q2 driven by FIFA 10, Madden NFL 10, the Beatles Rock Band and Need for Speed 2.

All selling north of 2 million copies in the quarter.

On a GAAP basis net revenue is $788 million and GAAP diluted loss per share was $1.21.

EA's segment share has risen this fiscal year to date.

Across all platforms our packaged goods business has 21% share in North America and Europe combined up 4 points year over year.

Excluding distribution, we picked up 4 points a share year over year in North America.

In our digital businesses we achieved an all-time record quarter with $138 million in non-GAAP net revenue up 23% year over year driven by Battlefield 1943.

Subscription revenue was $32 million.

Wireless revenue is $50 million up 9% from a year ago.

Primarily due to revenue generated on the iPhone.

I will now review Q2 in more detail.

Please note all of the following references to Q2 results are non-GAAP unless otherwise stated.

Non-GAAP net revenue is $1.147 billion up 2% year-over-year and driven by the growth in digital revenue.

At constant currency rates net revenue increased 6%.

Front line non-GAAP net revenue was $609 million, flat with courier.

For the first half of the fiscal year our revenue was up 13% year over year.

Moving to the rest of the income statement, non-GAAP gross profit margin in was 48.4% versus 50.9% a year ago down as expected due to less wholly owned IP revenue and more distribution revenue from the Beatles Rock Band.

Operating expenses, non-GAAP operating expenses were $536 million down $72 million or 12% year over year.

We ended the quarter with 8,828 employees versus 9,671 a year ago.

21% of our employees are now located in low cost locations.

Non-GAAP operating income was $19 million versus an operating loss of $35 million a year ago.

Below the operating income line non-GAAP other income and expense was positive $7 million consistent with a year ago.

Currency gains partially offset lower interest income year over year.

On a GAAP basis we recorded a tax benefit of $27 million primarily due to a reduction in deferred tax valuation allowance related to the purchase of our headquarter facilities.

We haven't recorded any other 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 $1.21 versus a diluted loss per share of $0.97 a year ago.

The increase in GAAP loss year over year was primarily the result of higher deferred revenue associated with the deferral of Xbox 360 revenues starting in FY '10.

Non-GAAP diluted earnings per share was $0.06 versus a diluted loss per share of $0.06 a year ago.

In Q2 we generated $6 million of operating cash flow versus an outflow of $124 million a year ago and in the first half of fiscal '10 our operating cash flow improved by $93 million versus last year.

Turning to the balance sheet.

Cash and short term investments were approximately $1.6 billion a quarter down approximately $200 million from last quarter primarily due to the purchase of our corporate headquarters at the expiration of the synthetic lease.

Marketable equities securities in the quarter $387 million down $53 million from last quarter primarily due to a decline in the value of our Ubisoft investment.

At quarter end we had $241 million of net unrealized gains.

Gross accounts receivable were $840 million up $125 million from last year or 17% due to the timing of our release schedule.

Reserves against outstanding receivables totaled $194 million up $26 million from a year ago.

Reserve levels were 10% of trailing six month non-GAAP revenue up 1% from a year ago.

As a percentage of trailing nine month non-GAAP revenues reserves were 8% up 2 points from last year.

Inventory was $250 million, down $78 million from a year ago.

Ending deferred net revenue from packaged goods and digital content was $792 million up $368 million from a year ago due to the additional deferral for all console and PC online enabled games.

Now for outlook guidance.

First I would like to provide more details on the cost reduction program.

These changes will make us more efficient in our core package goods business while allowing us to focus investment on our key titles and to expand our digital direct initiatives.

We expect this program will reduce our current annualized expense run rate by at least $100 million.

We are eliminating a total of approximately 900 positions in development, 500 in publishing and label support and 100 in corporate functions.

Now for guidance.

Revenue on a GAAP basis we expect revenue of 3.6 billion to $3.9 billion.

On a non-GAAP basis we expect revenue of 4.2 billion to $4.4 billion.

We expect an increase of four-year revenue of at least $100 million due to changes in foreign exchange versus our original FY '10 assumptions.

This increase is more than offset by the sector softness and packaged goods particularly the Wii and NDS platform.

As noted earlier we expect packaged goods to be down mid to high single digits for the calendar year.

While we have added a bottom end to our revenue guidance we expect that our digital revenue will be up year over year.

We also expect that our distribution revenue mix will be up versus what we thought last quarter.

Gross margins.

We expect GAAP gross profit margins of approximately 49.5 to 52% and non-GAAP gross profit margins of approximately 57 to 58%.

Operating expenses.

We expect GAAP operating expenses to be approximately $2.5 billion and nonoperating of approximately $2 .1 billion.

Operating expenses are being reduced as a result of our cost containment but increasing as a result of the weaker US dollar.

Below the line we expect GAAP diluted loss per share to $1.20 to $2.05.

We expect non-GAAP EPS of $0.70 to $1.

We expect that non-GAAP other income and expense will be approximately $15 million.

On taxes we expect a GAAP tax benefit of approximately 30 million to $40 million for the year.

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

For share count please use 324 million shares to compute the GAAP loss per share and 326 million shares to compute non-GAAP EPS.

I would also like to emphasize a point we made when we first provided guidance for fiscal 2010.

Manage the quarters differently in prior years and planned titles outside of Q3 in favor of Q2 and Q4.

The result so far has been to deliver the highest second quarter revenue in EA's history even in a down market.

As we look forward to the second half of the year we have strong emphasis on Q4 with plans to release several major titles including Mass Effect 2, Dante's Inferno, Battlefield Bad Company 2 and Army of 2 the 40th Day.

This will result in substantially more revenue in Q4 compared to prior years.

Of our remaining fiscal year revenues we expect roughly 60% to fall in Q3 and 40% to fall in Q4.

Please note that the guidance does not reflect the Playfish acquisition.

The FY '10 non-GAAP EPS impact of the Playfish acquisition is essentially neutral.

There will be a diluted GAAP EPS impact in FY '10 of approximately $0.15 to $0.25 per share.

In fiscal '11 Playfish will be non-GAAP EPS accretive to EA.

The total transaction size consist of approximately $275 million up front cash plus approximately $25 million in retention equity in the Playfish employees and up to $100 million earn out over the next two years based on the achievement of certain performance milestones.

Playfish will operate as a stand alone unit and will lead EA's worldwide efforts in social gaming combining EA IP with the high quality IP that Playfish has built and deployed today.

This concludes our guidance an outlook commentary.

And with that I will turn the call over to our Chief Operating Officer, John Schappert.

Thanks, Eric.

As John said, EAs performing well.

Two years ago EA put a stake in the ground and promised consumers that product quality would improve.

Calendar year to date we have shipped 17 titles rated 80 or higher versus 13 a year ago at this time and five two years ago.

No other game Company can match our track record for quality.

Let me also note that none of our major titles have slipped their ship dates this fiscal year.

We also vowed to improve marketing execution.

Great quality, long marketing ramps and big campaigns create blockbusters.

In Q2 we saw that strategy pay out.

FIFA '10 we shipped this game the last week of the quarter in Europe selling 4.5 million copies.

The sell through at retail in Europe is 31% ahead of last year's FIFA '09 on a comparable period basis and we are out selling Pro Evolution Soccer 4 to 1.

FIFA has the highest quality rating for a sports game on this generation of consoles and is EAs biggest European launch if history.

Madden NFL 10.

We sold 3.9 million copies in the quarter.

After a disappointing August that had Madden down 19% sell through in September grew 8% year over year.

More than 60% growth on the PS3 according to NPD.

Madden sales are now up 5% year over year on the Xbox 360 and PS3 combined.

Need for Speed Shift.

We sold over 2.5 million copies on consoles in the quarter.

And Dragon Age Origins.

Last week we launched Dragon Age Origins with a great campaign backed by robust downloadable content.

The early read on sell through is strong.

Next we set a goal to improve our share on the Wii platform.

Fiscal year to date EA is the number one independent publisher on the Wii with share of 21% in North America and we estimate 14% in Europe.

Up 8 and 10 points respectively.

Our non-GAAP Wii revenue is up 50% year over year.

While we have hit our share goal for the Wii business revenue is well below expectations due to under performance of the Wii platform.

EA also set aggressive goals for growing our digital business.

In Q2 or digital revenue was up 23% year-over-year driven by innovative hit titles like Battlefield 1943.

A digital game for Xbox Live Arcade and PlayStation network, as well as strong performances from EA Mobile, Pogo and ad sales.

EA Mobile has seven of the top ten games on the iphone and eight of the top ten games on Verizon.

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

Pogo posted growth.

Revenue registrations and subscriptions were all up versus last year.

Ad sales were up almost 10% in Q2 and almost 15% fiscal year to date.

Great performance from our ad sales team in a challenging advertising market.

The digital business is very complementary to our packaged goods business.

Digital downloads allow us to sell additional content to players and keep our titles fresh at retail.

In short, downloads extend the life .

Profitability of our games.

In addition we are seeing success in mobile with many of the same properties that are working in packaged goods which helps us leverage IP and marketing budgets.

Our final goal was to aggressively manage costs.

We have been successful to date and have recently undertaken further measures to improve our operating leverage in the future.

We can't control the economy but on the things we can control on cost, on quality and marketing on the Wii and digital on the goals we defined at the start of our fiscal year EA is performing well.

I would now like to touch on Playfish.

Playfish is one of the leaders in the social gaming space with a terrific team and great games.

They have three of the top games on Facebook with Pet Society, Restaurant City and recently launched Country Story.

They have 10 Facebook titles in total with over 60 million monthly active users up over 96% from June.

The team will join EA interactive, our group that is focused on games for the web and mobile platforms.

We are excited to welcome Playfish to the EA family.

With that I will now turn the call over to EA Games label President

Thanks, John.

Good afternoon.

Today I will provide a quick update on the progress we are making in the EA Games label and an overview of the plans for the second half of the year.

Q3 and Q4 is where the EA Games label will deliver its biggest games of the year.

All of our titles are going to be high quality and are tracking on time.

Now I'd like to walk you through the key components of our plan.

First, we are revitalizing our blockbusters.

Need for Speed is one of EA's most powerful and globally recognized franchises but in recent years we failed to put adequate resources behind this franchise and as a result quality suffered.

I'm happy to say that we fixed that.

This year's game, Need for Speed Shift launched six weeks earlier and posted a quality rating 22 points higher.

We have already shipped 2.5 million units in the quarter.

In September it was the number 1 title in Europe and in the top 10 for North America.

Next year's Need for Speed has been under development now for some time at our award winning Criterion Studio.

In the months ahead you will hear more about our plans to revitalize core IP including the Medal of Honor franchise.

Second, we are expanding into new genres.

EA has never been a player in RPGs but now Bioware set to launch three of the most anticipated games in that genre.

Dragon Age Origins, our new fantasy RPG blockbuster was just launched last week.

Review scores are averaging 90 and initial sell through is strong.

The game also has a very ambitious downloadable content for keeping players engaged long after release.

Mass Effect II is the stunning sequel to one of the most critically acclaimed games of 2007.

It is coming out in Q4.

We expect this to be rewarded with very high quality scores and benefit from built in audience appeal.

In addition to the two RPGs in this fiscal year Bioware is collaborating with Lucas Arts on the development of an epic MMO in the Star Wars universe.

Star Wars the Old Republic.

We couldn't be happier with the vision and commitment to quality at our Bioware studio.

They are simply best in class.

Third we continue to deliver the hits through the EA partner's division.

This group combines EAs global publishing reach with the best of the best independent studios.

Two launches will be top of mind with consumers this holiday.

With Left for Dead II Valve has created what critics say is one of the hottest games of the year.

Preorders are tracking significantly higher than last year for this extraordinarily innovative single player and multiplayer online experience releasing on November 17.

Also from our partners at MTV Games and Harmonics comes the Beatles Rock Band, a music game with incredibly broad appeal.

According to NPD the Beatles Rock Band has outsold Guitar Hero V by 2S in revenue.

We are extremely released with the results so far and are excited about the upcoming holiday for this mass appeal title.

Finally we are launching three strong titles based on original EA ITs.

Army of 2 the 40th day from EA Montreal is the sequel to the multimillion unit seller of 2008.

It is set to re lease this January with a big jump in quality and innovative new ways to play Co-op in a shooter.

In February we will release a brand-new IP from our Visceral studio.

Dante's Inferno.

An epic story about a hero's decent into (expletive) to save his beloved wife.

This M rated action game is receiving great critical reception and is finishing very strong.

Earlier this year Dice Studio released Battlefield 1943.

A console downloadable game that became the best selling Xbox live Arcade and PlayStation network game ever.

In March Dice will release Battlefield Bad Company 2 with all new destructible environments, expanded vehicular combat, and deep new online play with dedicated server support.

We believe this will put Battlefield in head-to-head competition with Call of Duty for quality in online game play.

Revitalizing blockbusters, new genres with Bioware, new titles from EA Partners and great original IP all are tracking to be very high quality and just as importantly on time.

EA games is performing well.

Thanks, Frank.

In summary EA had a strong quarter.

Our title slate for the second half is on track and we are taking the right steps now to set ourselves up for the future.

We remain cautious in our outlook over the next few quarters.

We are making tough but right calls on cost enabling us to invest in our hits and digital growth.

We are delivering products that reviewers and consumers alike recognize for their quality.

I'm proud of our teams.

They are executing well.

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

(Operator Instructions) Our first question does come from Heath Terry with FBR Capital Markets.

Thanks.

John, and then this goes I guess is more directed to John -- to John Schappert.

John, you have made some comments back in October when the Playfish acquisition was first being rumored that really kind of compares the social gaming landscape as it stands now versus the mobile landscape back when you guys bought Jam Debt.

I was wondering if you could flush that out and give us a sense of how you expect this space to evolve relative to what we saw in mobile over the last few years?

Sure, Heath.

What I said was I think when you look at the social gaming space I think you see a lot of new IP and original IP and not a lot of established brands.

I think you haven't seen brands make their way into that space yet and it was very reminiscent of when we acquired Jab Debt and what was great about that was they were able to take their own original IP, continue working on that but then capitalize on EA's IP and when you look at their performance now, seven of the top 10 games on Verizon, 8 on the iPhone you can see a bunch of EA IT in there.

You see Madden, FIFA, you see Command and Conquer.

I think when you look at social gaming we are very happy with the original IP that Playfish is bringing to bear.

We are also excited and so are they at the large portfolio of IP that EA owns that they are going to be able to capitalize on in that space as well.

Next question, please.

Thank you.

Our next question is from Justin Post of Banc of America, Merrill Lynch.

Thank you.

Just overall, John, your strategy when you started was really to build up the title pipeline and really build out a bunch of titles and kind of going back from that strategy a little bit and just focusing on what you consider the hits and the best opportunities.

Just to get that margin level up from the 7 to 10% currently.

Do you think you still need to have some titles selling north of 2 million to 3 million units, some new titles and do you think that that's achievable as you look out to next year?

Do you have some real opportunities to maybe surprise people and come up with some titles that really drive the top line in margins next year?

Well, first off, just for clarity sake.

I don't think we ever talked about increasing the number of titles at EA.

Even going back to when I first joined on my first earnings call.

We talked about driving quality.

What we felt we were lacking at that point was title had the potential to deliver 5 million units or better.

And we didn't feel that we had the strength particularly in the EA games labels where some of our IPs had become a little stale and where we didn't really have a pipeline of new intellectual properties I'm happy to say that Frank and his teams have really addressed that.

When you think about intellectual property franchises like Battlefield, Need for Speed, what we have with Mass Effect, Dragon Age, et cetera.

I think we have really got a strong portfolio title that can deliver probably not annually for all of them but for several of them and put us where we need to be in terms of margin structure an that was exactly what we talked about.

I would say we are sort of halfway through the process realizing that outcome.

In terms of guidance on F-11 titles I would say that I'm very pleased with the slate we have coming together for F-11 but we are going to reserve time on the February call to talk more about the specific titles.

I will point you though at least to the near term to the first quarter of calendar '10.

And in the games label alone we have got Army of 2, 40th Day, we have Dante's inferno, we have Mass Effect II which promises to be a blockbuster and Battlefield Bad Company II which as Frank mentioned in his commentary.

I think has every right to see itself as a rival to the number one FPS game that one of our competitors is releasing next week.

We are feeling really good about it.

Thank you.

Our next question is from Brian Pitz of UBS.

We all know that sales of Nintendo consoles especially new ones have been weak but there is currently an install base of over 50 million consoles out there.

Can you talk about what you can do to actually reinvigorate sales among this install base?

Thanks.

To be honest with you, I think the Wii platform has been a little weaker than we had certainly anticipated and there is no lack of frustration to be doing that at precisely the time where we have strongest third party shares.

I think driving revenues up on that platform from where we already are which is up substantially from where we are a year ago, we are reaching out to Nintendo to find ways to partner to push third party software harder.

I frankly think they need more beats in the year than they get out of a first party slate to be able to have the Wii software platform perform as well as they would like and we are building the products that are I think the most highly rated on the platform and at this point in time generating the most revenue of any third party platform.

I would point out by the way that the 50 million number of course includes Asia or Japan and I don't think any of the Western companies are likely to participate much at all on the Wii platform in Japan.

So the addressable market we see is just a little bit below 40 million but it is still an important opportunity.

Just as a follow-up.

Is there anything specifically that you would change in your marketing strategy to maybe address this market that's changed a little bit versus your previous expectations?

Well, one of the things I think we have learned is when we really tackled it exclusive major league marketing we can create a gargantuan hit as we have with EA Course Active.

I would say one of the things we have been disappointed with on the other hand is I would personally tell you that I think the Wii anchor this year Madden is very, very strong.

But absent Wii Madden is actually up as a franchise year over year.

Wii is where we are missing it.

So I really do think that the opportunity exists to find different ways to partner with the first party in this case, to help establish in the minds of the consumer legitimacy of some of these other brands when they're pulling our multi platforms.

Because very very very few multi platform titles are succeeding on the Wii so far.

Collectively Electronic Arts and Nintendo need to tackle that.

I would also point out that being the market leader on the Xbox 360 and the market leader on the PS3, a relative shift in that direction isn't exactly a bad day for us.

Great, thanks.

Thank you.

We will take our next question from Sean McGowan with Needham & Company.

I was wondering if you would be a little bit more specific about what areas we would see the reduction in titles.

Are you pushing that genre wise or particular types of games?

This is John again.

We sort of thought about how we were going to answer that question on the call and we were going to tell you about the just over a dozen unannounced title we were cutting.

But that seemed to be challenging in the way of communication because we haven't previously communicated to you which they were.

I think the better way to look at it would be that Electronic Arts has a core slate of games labels and sports franchise that we will iterate on a either annual or biannual basis.

I think you know what those major titles are.

All of them are selling or have sold in their most recent edition 2 million units or more.

After that we've got the Sims and Hasbro.

And frankly, anything that doesn't measure up to looking like it can pencil out to being a very high profit contributor and high unit seller got cut from our title slate from this point going forward.

Really in a way if you could array our title slate up knowing what we did about what we would have otherwise brought to market we cut the bottom third of it.

Great.

That's helpful.

Thank you.

And our next question is from Eric Handler with MKM Partners.

Thanks for taking my call.

I'm just trying to reconcile the guidance.

Your guidance range of 4.2 billion to $4 billion compares to last quarters expectation of $4.3 billion.

Yet the low end of your guidance of $0.70 would suggest that margins could contract significantly.

Where would that come from?

This is Eric.

The important point to keep in mind here is that we believe we are going to pick up at least $100 million of additional revenue this year compared to the assumptions that we started off with.

This is a function of the US dollar getting weaker and weaker.

And so the way to think about this is that the high end of our guidance at 4.4 is equivalent to the 4.3 that we previously stated and 4.2 at the low end is effectively 4.1 starting from that baseline.

We have a lot of nonUS dollar denominated operating expenses and Canadian dollar and Europe GBT.

So although we are getting the uplift of say $100 million in FX on the top line there is no flow through to bottom line EPS.

So net the take away on the bottom end of the range is working off the original $4.3 billion subtract up to $200 million of revenue on an equivalent basis and that is what produces the $0.70.

Just to help expand on that a little bit.

Without jumping sort of hard on the Nintendo platform bandwagon the entirety of that decline for us would be in missing our expectations on those platforms while hitting our market shares.

Or put another way, I think it is -- we are pointing to the issue that the risk in our numbers on the down side bracket are numbers at this point in time is more market performance.

Our shares are at or above our going in expectations and our costs are well contained.

We are hitting what we expected to hit and we are looking at the head winds in the last couple of quarters and saying if we see in the next two what we have seen in the last couple it is going to cause us to miss on a couple of core platforms which will fall-through to the bottom line.

Great.

That's very helpful.

Thank you.

Thank you.

Our next question is from Ben Schachter with Broadpoint AmTech.

On the Playfish acquisition can you talk about the whole build versus buy and how you got to buying?

And then also, there has been a whole lot of discussion around the whole lead gen space related to that.

I was wondering how much of that played into it and did that actually impact your offer at all?

And then finally just a housekeeping?

You didn't mention Saboteur.

Is that still coming this year?

Thanks.

What was the last part?

Saboteur.

I think we have got me, John and Frank on this one.

In terms of build versus buy we think where Playfish and their team are with 60 million monthly active users growing at frankly a staggering pace in an interesting sort of ways takes build versus buy off the table.

They have got such a strong lead and i's something we think when we look at it, the returns, IRRs, any number of measures, we are stronger with them than we are clean start on a build basis.

John might want to talk about the complexion how we saw them differently from say the two leading competitors, since the quality of revenues, quality of games how we got to this particular selection.

I think the Playfish folks have set themselves apart in the space by delivering some of the best quality games in the social gaming space.

And we look at combining their high quality publishing model, development model with our great brands and we think they are going to be a great fit for EA interactive which already has success on the Mobile platform and certainly with Pogo.

So when we looked at the time it would take for us to kind of try to achieve the same success that they had it would take a very long while.

So good opportunity to be able to bring Playfish on board with EA.

I also wanted to note about revenues.

So there has been a lot of talk about revenues in the social gaming and where they are coming from.

Playfish has held a very high standard in terms of revenues and the majority, in other words, almost 90% of their revenues come from nonoffer based models.

So direct to consumer transactions is how they make the bulk of their money which also impressed us.

And then with regards to your question on Saboteur it's on track to hit ship date in Q3.

We are very excited about this open world action game and introducing a new IP to the marketplace.

So that's on track.

Can we go to the next question, please?

Our next question is from Tony Gikas with Piper Jaffray.

Hey, guys, good afternoon.

I was wondering if you could just maybe share the current revenue run rate of PlayStation, maybe give evaluation metrics and what the revenue expectations are in the next fiscal year since you have incorporated that into the plan now?

This is Eric.

In terms of rough numbers as we look at Playfish's forward revenue for F11.

We think we are paying 3 to 4X times revenue, that's a rough number.

We won't parse it any further than that.

We do believe that in F11 Playfish will be EPS accretive on a non-GAAP basis so that's a positive contributor to our business overall.

Thank you.

Next we will next go to Daniel Ernst with Hudson Square Research.

Thank you for taking my call.

My combined question involves mobile.

If you look at growth in the mobile business how much of that is coming from what I would call Jam Debt classic versus core EA games like Need for Speed, Tiger, and FIFA that have been really facilitated by the new larger screen devices like the iPhone.

That question in mind, do you look back at the Jam Debt question and maybe the other ones like Bioware Pandemic, as you look at Playfish, have you been able to secure a positive ROI on those fire deals as you looked at metrics for this new deal?

Thanks.

Let me parse that a couple different ways, John.

You want to tackle the mobile piece to start?

Sure.

This is John Schappert.

On mobile the bulk of the revenues from our mobile division while they certainly have standard handset and iPhone revenues, the bulk of them come from standard handset devices.

And if you look at -- I cited 7 of the top 10 Phone games and 8 of the top 10 on the Verizon deck.

When you kind of go through that list on iPhone for instance you see Madden, you see Need for Speed, you see The Sims 3.

You see Scrabble, Monopoly which are part of our Hasbro license.

Rock Band is right at the top.

And we just launched Command and Conquer after this list was created and that is doing very very well.

On Verizon you see similar titles.

You see Madden, you see Sims, you see Scrabble, you see Rock Band.

I think our IT is playing very very well on these platforms.

I might let Frank speak quickly to the Bioware transaction, stretch about our M&A and I'll give you a little bit more of a historical perspective after Frank talks about Bioware.

Your question on VGH is a good one.

Right now we are tracking right on the deal model that we put together for that transaction.

The recent release of Dragon Age and with Mass Spec 2 and Star Wars right in front of us it appears that we are going to hit our goals for what we signed up to in that acquisition.

Generally speaking, when we do M&A at Electronic Arts, and this goes back to the mid-like 90s when I was working on these things under let it grow.

We had always set aggressive goals for IRR being typically in the high teens or 20s or higher and for being accretive and for being probably more important than anything else strategically additive to the Company.

Additive through intellectual property teams for strategic leverage.

When we review our deals which we do on a regular basis I'm happy to say that we're pretty darn pleased with our track record.

I joined when the Company was concluding Macfest.

That's been a home run for us.

From there major deals.

Jam Deck without a debt.

Very pleased with that transaction.

At this point in time it finally looks like a great deal.

Number one in the space.

Dice brought us Battlefield and the underlying technology for a number of games.

That's been exceeding our expectations.

If we look, Frank just touched on Bioware and MX a little earlier.

We -- Criterion.

successful given simply a price on what we did with Burnout alone.

At this time Mythic, we specifically reference that.

Probably a little under our model that we just acquired on the basis of.

But in general I would say that we have a very high batting average for having these things work.

Thanks for the color.

Our next question is from Jeetil Patel with Deutsche Bank Securities.

You talked about 1500 positions on the restructuring.

I guess you talked about a third of your titles being eliminated or at least in question on development.

I guess can you just give us a sense of what kind of annualized revenue that would represent?

I guess kind of by our math it looks like about $0.5 billion to $600 million.

I guess it doesn't seem like it seems like enough of a head count reduction to kind of, given a third of the lineup going away or at least being put on hold.

I guess can you elaborate a bit more about the restructuring and how much more there could be left to go or kind of the revenue impact?

Thanks.

I think you've actually got the math a little off but that's a function of the fact we haven't given you enough details to do it.

In general we have titles that range from staffing of 4 to staffing of 250.

Generally speaking and title count as it relates to head count percentages isn't really a valid way to do things.

Most of the things we cut were smaller titles and/or titles that were in a different stage of development and/or not multiplatform, full support.

We were trying to beef up Madden.

So I think -- we believe we are in exactly the right place.

We think the cuts we have made are very, very aggressive.

We have cut teams, we have cut corporate, overhead.

We have cut publishing but not to the point of hampering ourselves.

We think we are a strong Company going forward and our goal from here is to grow profit.

Is there a general rule of thumb, ex million units or ex hundred thousand units and below you're not doing and above a certain threshold you will do?

I think that's hard to say right now because on the packaged goods side I think that we could give some rough guidance on that but we haven't done so so far.

But when you think of the cost of publishing a flash game or putting something up on the Xbox Live Arcade where the costs can be very, very modest I don't know that you want to apply a general rule of thumb.

What we have applied was both an absolute size and a percentage profitability.

Again, numbers we are not putting out today.

We will probably describe them more fully on our F 11 guidance call.

But we are very keen on driving our margins up and doing so aggressively as we scale.

So that's what was behind the thinking.

We also felt that we wanted to position ourselves better to drive our titles to the very tops of the charts.

It is nice to be number one.

We would like to be number one by a wider margin and do so with fewer titles.

Last question but just a housekeeping number.

But how many titles this year fiscal ' 10?

We have a little challenge on some of the definitions of what's in or out.

I think in rough numbers mid-60s would have been the way to think of it last year.

The way we are looking at it right now.

Approximately 50 this year.

And something in the high 30s next year.

So when you consolidate this thing it is about a 50% cut over two years.

Thank you.

We will move on to our next question from Colin Sebastian with Lazard Capital Markets.

First of all, John, I'm curious if you attribute any of the slowdown in the console side of the business this year due to more time competition from platforms such as Facebook, Facebook games?

Or do you view the opportunities with Playfish as largely incremental?

Then, Eric, baked into your revised earning assumptions have you made any changes to the bonus accruals?

I'll take the first part of that, John.

This is John Schappert.

So with respect to some of the softness in the market and the social gaming maybe taking some of that.

I think that there is -- I think the economy is affecting the foot fall at retail which we are seeing some of the softness there.

I think people are still playing games, they're still buying games but they are being a little more selective.

I think the nice thing about Playfish and social gaming is it opens up the doors to a whole bunch of folks that aren't specifically console gamers today.

And I think that's the big win that we get there.

Facebook has over 300 million people and Playfish has had over 150 million installs of their software with 16 million monthly active users.

So I think the nice thing is we have got great packaged goods and console market share and lineup and now we have got a great new social gaming division.

So you want to play games on the XBox 360 or the Wii or the PS3 we've got the great games for you.

Number one publisher, independent publisher on all of those platforms.

If you want to play games on the mobile phone we are there for you and now thanks to Playfish, if you want to play games on the social network we're also there for you.

So I think it will be nice and accretive for us long term.

Colin, this is Eric, with regards to the second portion of your question, guidance and the interrelationship about the bonus accruals?

At the high end of the guidance $4.4 billion revenue to dollar EPS we expect to fully fund the bonus pool.

At the low end of 4.2 and $0.70 non-GAAP EPS, we fund half or maybe a little less of the bonus pool.

So there be a sliding scale between the two end points.

Thanks.

That's helpful.

Thank you.

Our next question is from Shawn Milne with Janney Montgomery Scott.

I just want to follow up on -- you talked about the run rate of Playfish but if you look at, John, if you look at the growth in your digital services business and you look out into next year, it seems like you're probably going to be on pace to be around $750 million in revenue.

Can you give us a sense for where the margins are going to be tracking?

I know you talked about a big investment over the last couple of years but any color on that would be helpful then secondly back to the guidance.

You talked about lower end in the revenue.

Eric, can you give us a sense for what kind of catalog sales you're expecting in the third quarter and specifically you gave out initial shipments on Need for Speed but I'm assuming you've got that title down a fair amount year over-year?

Thanks.

Maybe we'll -- that's a lot of stuff there.

Why don't we figure out if we can still remember all the questions while we get through the first few.

Vis-a-vis the digital streams for Electronic Arts I'm not going to confirm or deny your estimations for next year.

I would tell you it is the most profitable part of our business right now and it is something we are very pleased with.

I would also tell you that we have ambitions for discontinuity in the revenue growth stream for digital.

Thinking about launches of major MMOs.

Launches of product like Need for Speed online, Battlefield online and a Global Western Marketplace.

It is something we have been investing in when we started at the beginning of the fiscal year there was a lot of frustration in fiscal '09 it was a lot of frustration in fiscal '09, it was a net investment business and it wasn't aggregating up for profit.

We explained to the people this year it would be strongly profitable.

We turned the corner on all of our investments.

Only some of them are fully coming to market this year.

We have got strong ambitions for growth here.

With regards to your question about guidance assumptions and catalog.

As we look into the back half of the year it is important to recognize that we have one title for example, Need for Speed ship out six weeks early in the year and up 22 point in terms of its meta credit rating.

So we will have the benefit of selling that throughout the second half of the year.

We have had our best Q2 ever.

So we have a better position in terms of catalog mode.

And we had a call out on our Q4 revenue and so Q4 last year was a bit more about catalog versus front line for us.

Our fiscal Q4 is about front line, we mentioned four AAA front line titles coming from the games label in fiscal Q4 and so as a result we have less dependency upon catalog in Q4 with that high quality slate of titles.

Thanks.

Thank you.

Our next question is from Doug Creutz with Cowen & Company.

Hi.

We are seeing it looks to me like some pretty aggressive discounting on price in the UK.

I wonder if you could talk about what you think is going on there and how that might be affecting your results.

And then also if you look forward to the holidays here in the US do you think that there is going to be some aggressive moves on price in the video game space we have seen in some of the other consumer verticals like movies and books?

Thanks.

We have seen channel discounting led by retailers both in North America and in Europe as retailers really skirmish for market share.

I think what you're referring to is some pretty agressive stock at (inaudible) retail in the UK on FIFA.

Programs that are like these that are often funded by retailers or are funded by retailers.

We like them to use it because it can drive some short term results.

Our clear summary of where we are was it did not sort of pull things into Q2 in any sort of way and will affect in any negative way Q2 and you can see basic retail specifically in the US they work a lot with second sale.

We have got some pretty aggressive programs out for some third party titles that we compete with.

Again, funded.

They are seeking market share.

Beyond that, at least looking backwards, front line pricing in this industry has held better this cycle than last, held longer this cycle than last.

And as we go into the holiday retailers are pretty competitive.

I don't think will is anything new there.

I don't really see a shift from where we are today to where we have been in days or years gone by.

Thanks.

Thanks.

Operator, we have time for one more question.

Thank you.

Our final question will come from Atul Bagga with ThinkEquity.

Thank you for taking my call.

Congratulations.

Couple of questions on the -- clearly social gaming has been growing at a very fast pace.

I wanted to understand what is your opinion how long this fast growth can be maintained organically and with Playfish addition to EA what kind of leverage, what kind of activity will we see in terms of growing top line using ITs and what kind of ideas could be taken on the social gaming?

And a related question on that, do you guys have any concerns or rather how would you handle any concerns regarding diluting IPs when you are putting these games for free to play.

Thank you.

Well, with respect to social gaming, lots of questions there on social gaming.

We think that this segment is going to continue to grow exponentially for some time.

We are very excited and bullish on the segment.

And we think not unlike our acquisition of Jam Debt how we were excited about that segment and acquired Jam Debt a market leader and continued to grow them and they are a very meaningful part of our business now and a big part of the growth we see the same thing happening in social gaming.

With respect to franchises that are relevant.

I'm not going to name names, obviously, but again, I'll refer you back to looking at the top mobile games that we have.

And with that, I think Frank has some more color to add too.

I think your point about does the free to play version of an IP dilute the equity or perception of quality and I think actually the way I look at it is it actually opens up an access point for people to come into the IP and experience it in new ways and potentially up sell them to a more deep and larger product.

We recently ran an experiment where we created a game called Dragon Age Journey which is a free to play web based flash game that was a great entryway for people to understand what dragon age is all about before it's released.

We generated significant number of plays and very high level of customer satisfaction and we actually went and looked and saw people could unlock things in the web game and put it in the console game.

So I think in general at EA we see it as an opportunity to open up access our IPs by putting that in free to play models as well as continuing to maintain the blockbuster model or more connected means.

Thank you.

Thanks, Atul.

Thanks, everyone, for joining us today.

This concludes our second quarter earnings call.

We look forward to speaking with you soon.

Thank you.

Again, that concludes our presentation.

Thank you for your attendance.