美商藝電 (EA) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to the Electronic Arts' third 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 to Mary Vegh, Manager of Investor Relations.

Please go ahead.

Thanks, Justin.

Thank you, all, for joining us this afternoon.

Welcome to our third quarter fiscal 2010 earnings call.

Today on the call we have John Riccitiello, our Chief Executive Officer, Eric Brown, our Chief Financial Officer, and John Schappert, Chief Operating Officer.

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 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 supplemental information on our website, for our trailing 12 month segment shares, additional GAAP to non-GAAP reconciliations, a summary of our financial guidance and our title 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 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 February 8, 2010, and disclaim any duty to update them.

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

Thank you, Mary.

Earlier today we announced our Q3 results, which were in line with the update we provided on January 11.

We also provided our FY 2011 guidance, which at the midpoint of our range, translates to more than a 40% increase in non-GAAP EPS.

On today's call, I'll begin with brief comments on our progress.

Eric will review the Q3 results, and review our guidance in detail, John Schappert will provide an operations update, and then we'll take your questions.

Let me start with an update on EA's execution, framed against the four strategic initiatives we have identified as crucial to our long-term growth and profitability.

First, product quality.

In calendar '09 we shipped 19 titles with a Metacritic rating of 80 or better, the next-best third-party publisher shipped only six.

We also just shipped Mass Effect 2, with a metacritic rating of 96, one of the highest-rated games ever released on the Xbox 360.

EA is clearly the quality leader among multi-platform publishers.

I believe this is a significant driver, in the fact that EA has gained share fiscal year to date.

Second, creating hits in core packaged goods.

We're very proud that both Madden and FIFA remain at the top of the charts again in calendar '09.

We are also pleased that we have established two new IPs as sequel ready successes so far this fiscal year, in Dragon Age and EA Sports Active, and that our recent win with Mass Effect to get these three titles can be sequeled successfully in the future.

Third, our investment in digital revenue stream is meeting and in many cases exceeding our own high expectations.

We achieved a record $152 million in quarterly non-GAAP net revenue in Q3.

This brings us to 30% growth in digital revenue fiscal year to date.

Our overall digital business is now at scale, over $0.5 billion annually, growing very rapidly and profitable.

Lastly, operating efficiencies.

In the past two years, we have dramatically lowered headcount, despite acquisitions and the addition of multiple digital business models.

Our operating costs are expected to be down in FY 2010 versus FY 2009, and down even further in FY 2011.

With that I will turn it over to Eric.

Thank you, John.

First, EA's Q3 together with our guidance for Q4 is at the lower end of the range we guided on January 11.

While we are very pleased with the performance of our titles so far in the fourth quarter, we remain cautious in the packaged goods market that remains soft overall and hit driven.

Second, our guidance for F 2011 is framed by three major considerations.

While we see reasons for optimism for the packaged goods sector, we believe using a minus 3% rate for the sector is a better planning assumption.

We have made the call to de-emphasize low-margin distribution in our FY 2011 guidance.

This reduces top line revenue, but has limited effect on earnings.

While there may be the occasional distribution deal that meets our criteria going forward, part of our mantra of fewer and bigger is the recognition that tighter focus will yield better results.

Lastly, we note that we have built a plan around an expense base that is approximately $100 million lower in F 2011 than F 2010, and like on like, adjusting for foreign exchange, bonus, and play fish run rate, is approximately $200 million lower on a non-GAAP basis.

By driving down expenses aggressively, we were able to guide to non-GAAP EPS growth of 40% at the midpoint of our guidance range, while maintaining a realistic stance on the packaged goods sector.

I will now provide industry comments, and then turn to EA results.

For western markets overall, the packaged goods sector was down 9% in the quarter versus expectations of a flat quarter.

Both North America and Europe were down 9%.

Europe's biggest market, the UK, was down 16% year-over-year.

In the quarter, Sony PS3 hardware sales increased 48% year-over-year.

Wii hardware sales decreased 2% year-over-year, while Xbox 360 hardware sales declined 21% year-over-year.

Hardware sales responded to price promotions, particularly the Wii in North America, with Wal-Mart promoting the Wii at an effective $149 price point.

In North America, concentration of sales in the top titles continued with the top 20 titles in calendar Q4 '09 representing 48% share in dollars, versus 37% share in calendar year Q4 '06.

For the global market including Asia, we estimate that total packaged goods represented approximately 60% of the overall software market for calendar 2009, while total digital, consisting of mobile and online, was approximately 40%.

While packaged goods were down 9% in calendar '09, we estimate that total digital increased by approximately 28%, growing the combination of packaged goods plus digital by 3% year-over-year.

EA's fiscal third quarter results were in line with the update we provided on our January 11, 2010 call.

Non-GAAP net revenue was $1.346 billion, short of our going-in expectations due to a soft December for EA, and the weak overall packaged goods sector.

We also experienced product mix shift to lower margin distribution titles in the December quarter in North America.

On a GAAP basis, net revenue was $1.243 billion.

At constant currency rates, net revenue decreased $435 million, or 25%, year-over-year.

The primary cause of change year-over-year was the greater number of front-line titles, like Need for Speed, Mirror's Edge, and Dead Space in Q3 fiscal '09.

In our packaged goods business, FIFA 10 sold through over 7 million copies at retail in the quarter for Europe and North America combined, and launched with the metacritic rating of 91 on the PS3 and Xbox 360.

In Europe, it was the number two title across all platforms in the quarter, and the number two title in calendar '09.

Madden NFL 10 sold through for over 2.3 million copies at retail in the quarter.

In North America, Madden NFL 10 charted number four overall in calendar '09.

Year-over-year, Madden sales on all platforms combined continued to close the gap in North America from minus 17% through Q2, to minus 6% through the end of Q3.

Our core platforms, PS3 and Xbox 360, are up 15% on a cumulative basis.

Dragon Age Origins was a key front line title for the quarter.

It sold in 2.7 million copies worldwide on the PC, PS3 and Xbox 360 platforms, and received a metacritic rating of 88 across all platforms.

In our distribution business, Left 4 Dead 2, in partnership with Valve, exceeded our expectations with 2.9 million copies sold in worldwide on the PC and Xbox 360 during the holiday quarter, and it charted in the top 10 in North America according to NPD.

In our digital business, FIFA 10 with its innovative ultimate team mode, Dragon Age premium digital content, Battlefield 1943, and the Sims Store all performed well in the quarter.

Poe Go continues to be the number one online game site worldwide in terms of user engagement.

We started recognizing Playfish revenue in the fiscal third quarter.

During Q3, we had two of the top 10 facebook games.

We continue to be the number one mobile games provider in Western markets.

We had seven of the top 11 games in December for the iPhone, and four of the top five selling games for 2009.

EA had seven of the top 10 games on Verizon during the quarter, and achieved over 50% of the top 10 games on AT&T, Sprint, and Tmobile.

We had 1.9 million total subscribers in the quarter.

This includes Pogo, as well as massively multi-player online, or MMO, subscribers.

We finished the quarter with 49 million registered users in our central user identify management system, up 16% from the prior quarter.

This includes console and PC users.

Performance by digital business model included the following for the quarter.

We achieved another record quarter, with $152 million in non-GAAP digital net revenue, up 30% year-over-year.

Mobile revenue was $57 million, up 14% year-over-year.

Digital revenue from all other non-mobile sources was $95 million for the quarter, up 42% year-over-year.

This includes full-game downloads, PC and console premium downloadable content, or PDLC, browser games, subscriptions, social games, and advertising.

Moving to the rest of the income statement, non-GAAP gross profit margin was 51.6% versus 47.1% a year ago, this is up from the prior year due to a greater mix of published titles.

Non-GAAP operating expenses were $540 million, down $47 million or 8% year-over-year.

Total bonus accrued as of the end of Q3 is $54 million, compared with $43 million through Q3 last year.

Total variable marketing expense in the quarter was $149 million, compared with $187 million in the same quarter last year, which is in line with a different title plan, where we had more front line releases last year.

Non-GAAP operating income was $154 million, versus non-GAAP operating income of $234 million a year ago.

Below the operating income line, non-GAAP other income and expense was negative $2 million, versus positive $14 million a year ago.

This reduction is due to lower cash balances, and the $7 million adverse foreign currency movement compared to a year ago.

On a GAAP basis, we recorded a tax benefit of $28 million, primarily due to a reduction in our deferred tax valuation allowance related to the change in US tax law for tax loss carrybacks.

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

GAAP diluted loss per share was $0.25, versus a diluted loss per share of $2 a year ago.

Last year we recorded a significant goodwill impairment and tax valuation allowance charge in Q3.

Non-GAAP diluted earnings per share was $0.33, versus diluted earnings per share of $0.56 a year ago.

In Q3 we generated $221 million of operating cash flow, versus $212 million a year ago.

Fiscal year to date, our operating cash flow improved by $102 million versus last year.

We ended the quarter with 8,537 employees, versus 9,760 a year ago, 20% of our employees are now in low-cost locations versus 17% a year ago.

Turning to the balance sheet, cash and short-term investments were approximately $1.466 billion at quarter end, down approximately $159 million from last quarter, primarily due to the acquisition of Playfish.

Marketable equity securities were $318 million, down $69 million from last quarter, primarily due to the sale of the nine shares and a decline in the value of our Ubisoft investment.

At quarter end, we had $179 million of net unrealized gains on investments.

Gross accounts receivable were $762 million, down $335 million from last year, or down 31%.

DSOs were 51 days versus 57 last year.

Reserves against outstanding receivables totaled $267 million, down $36 million from a year ago.

Reserve levels were 8% of trailing nine month non-GAAP revenue versus 9% a year ago.

Inventory was $144 million, down $151 million from a year ago.

Ending deferred net revenue from packaged goods and digital content was $895 million, up $383 million from a year ago due to the additional deferral for all console and PC online enabled games.

Restructuring update.

Our restructuring plan is on track.

During Q3 we recorded $96 million of restructuring expense for our fiscal 2010 restructuring plan of the estimated total amount of $150 million to $155 million.

We closed five locations, and are approximately two thirds complete with position reductions at the end of January 2010.

Now to our outlook for Q4 fiscal 2010.

Revenue.

On a GAAP basis, we expect revenue of $925 million to $1 billion.

On a non-GAAP basis, we expect revenue of $800 million to $850 million.

Operating expenses.

We expect GAAP operating expenses to be approximately $625 million to $640 million, and non-GAAP operating expenses of approximately $520 million to $535 million.

Below the line we expect GAAP diluted EPS of $0.05 to $0.23.

We expect non-GAAP EPS of $0.02 to $0.06.

For taxes, we expect a GAAP tax expense of approximately zero to $10 million, excluding the impact of tax-related charges that may arise in connection with the Playfish integration.

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

For share count, please use 328 million shares to compute both GAAP and non-GAAP EPS.

FY 2011 outlook and guidance.

As we go through our fiscal 2011 guidance, we will refer to three principal lines of business.

First, packaged goods.

This includes higher margin, EA-owned titles, and co-published titles.

PC titles like the Sims 3 can yield up to a 90% gross profit margin.

And owned console products typically yield 60% to 70% gross profit margins.

Distribution.

This includes third-party titles distributed by EA, yielding a net margin typically in the teen percent range.

Digital, this is the aggregation of our online, mobile, and digital products and services.

The business units at scale in our portfolio like Pogo and mobile, have pro forma operating margins of 20% or more.

For fiscal 2011 we are making the following assumptions.

Sector, our guidance is based on an assumption that total worldwide packaged goods will be down 3% in calendar year 2010.

We are projecting continued robust growth in digital of approximately 26%, which is expected to grow the composite sector by 8% for calendar 2010.

While there is a possibility of software catalysts, including, A, a strong industry title slate, B, growth coming from the introduction of Microsoft and Sony motion controllers, and C, growth coming from potential console price reductions in calendar 2010, we are not counting on packaged goods software growth in our fiscal 2011 plan.

Total EA.

We expect to end fiscal 2010 with a total of approximately 8,120 headcount.

We expect to end fiscal 2011 with roughly the same total headcount.

Total low cost location headcount is increasing from approximately 21%, or 1,800 pre-restructuring at the end of Q2, to 2,100 or 26% at the end of fiscal 2011.

For exchange rates, we are assuming $1.43 US to the Euro.

$0.95 US to the Canadian Dollar.

And $1.60 US to the British Pound.

Currency markets are still volatile and our R&D costs will increase if the Canadian Dollar strengthens.

Packaged goods.

Our fiscal 2011 plan currently includes a total of 36 titles for the fiscal year versus 54 in fiscal 2010.

This number excludes expansion packs.

Our top 20 titles for fiscal 2011 are expected to generate approximately 80% of total non-distribution packaged goods revenue.

This compares to an estimated 76% for the top 20 titles in fiscal 2010.

We have included a fiscal 2011 title plan with our earnings press release, which details our principal titles, including digital games for console and PC.

Our total variable marketing and advertising in fiscal 2011 is an estimated $475 million to $495 million, which is comparable to the total amount for fiscal 2010.

On a non-GAAP basis, we expect fiscal 2011 revenue from EA-published packaged goods titles, to be between $2.75 billion to $3 billion, which reflects flat share at the middle of the range.

Distribution.

While we have great relationships with our partners, we are modeling the reduction in our distribution business as we concentrate on higher margin EA-owned titles and digital initiatives.

This will result in a $450 million year-over-year reduction in expected distribution revenue.

Digital.

We are not assuming that we bring a major new MMO to market in fiscal 2011.

We will continue to incur significant development costs as we prepare this title for launch.

In fiscal 2011, we will continue to introduce new service and product features that benefit unique, registered purchasers on PC and console games.

Our most recent example is the Cerberus content network introduced with Mass Effect 2.

We are planning a number of digital launches in fiscal 2011, including Tiger Woods online, going from beta to full launch, FIFA online, and Need for Speed World.

We expect to launch a similar number of mobile and social network games compared to fiscal 2010.

We expect to grow our total digital direct revenue by 30% or more, from approximately $575 million in fiscal 2010 to at least $750 million in fiscal 2011.

The year-over-year dollar growth is expected to be comprised of one quarter from console full games in PDLC, one quarter from PC and browser-full games in PDLC, and one half from game services and advertising, which includes Playfish, social games, Pogo, mobile, and subscriptions.

Q1 fiscal 2011 guidance.

Revenue, on a GAAP basis we expect revenue of $710 million to $750 million.

On a non-GAAP basis, we expect revenue of $460 million to $500 million.

Q1 revenue is down year-over-year, as we are comparing to a Q1 last year that included the Sims 3 and EA Sports Active launches.

The Q1 fiscal 2011 title slate includes FIFA World Cup, Skate 3, Tiger PGA Tour, and a Sims 3 expansion pack.

There is a total of four front-line titles compared to 10 front-line titles last year.

Looking at Q1 year-over-year, World Cup comps active and there are no Q1 fiscal 2011 comps for Harry Potter and the Sims 3.

Below the line, we expect GAAP EPS ranging from a loss per share of $0.05 to a profit of $0.05 per share.

We expect non-GAAP loss per share of $0.35 to $0.40.

Fiscal 2011 full-year guidance.

Revenue, on a GAAP basis, we expect revenue of $3.45 billion to $3.7 billion.

On a non-GAAP basis, we expect total revenue of $3.65 billion to $3.9 billion.

Breaking this down into three components, we expect digital revenue of $750 million or more in fiscal 2011.

We expect approximately $160 million in distribution revenue, which is a $450 million year-over-year decrease.

And we expect packaged goods revenue ranging from approximately $2.75 billion to $3 billion.

Gross margins.

We expect GAAP gross profit margins of approximately 57% to 58%, and non-GAAP gross profit margins of approximately 60%.

Operating expenses.

We expect GAAP operating expenses to be approximately $2.3 billion, and non-GAAP operating expenses of approximately $2 billion.

Absolute non-GAAP operating expenses are down $100 million overall.

On a like on like basis, operating expenses are down approximately $200 million year-over-year, if we adjust for the impact of foreign exchange, the assumption of full bonus, and the impact of the Playfish expenses.

The $200 million savings compares favorably to the $100 million net savings expectations we communicated when we announced our fiscal 2010 restructuring plan.

At the bottom line, we expect GAAP diluted loss per share of $0.60 to $0.90, we expect to be profitable and generate non-GAAP EPS of $0.50 to $0.70.

We expect that non-GAAP other income and expense will be approximately $5 million.

We expense our GAAP tax rate will continue to be volatile, but on an absolute dollar basis, and subject to changes in the business or the tax laws, we expect tax expense ranging from $30 million to $49 million.

We expect GAAP losses in fiscal 2011, 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 328 million shares to compute the GAAP loss per share, and 330 million shares to compute non-GAAP EPS.

Fiscal 2011 revenue phasing.

We currently expect a total of 36 front-line titles shipping in fiscal 2011, versus 54 in fiscal 2010.

By quarter, we currently expect the following number of titles to ship in fiscal 2011.

Q1, four titles, Q2, nine titles, Q3, 14 titles, and Q4, nine titles.

I would like to remind everyone that last year's first fiscal quarter had unusually high revenue due to the launch schedule and the additional week of reported business.

We expect fiscal 2011's quarterly revenue phasing to be more consistent with prior years, with non-GAAP revenue distributed as follows.

Q1, approximately 13%, Q2, approximately 25%, Q3, approximately 40%, and Q4, approximately 20% to 25%.

This concludes our outlook and guidance, and with that I'll turn the call over to our Chief Operating Officer, John Schappert.

Thanks, Eric.

I would like to update you on our titles for Q4 fiscal 2010, and then turn our plans to FY 2011.

I'll start by highlighting three of our biggest titles in the current quarter, Bioware's Mass Effect 2 shipped January 26 on Xbox 360 and PC to record preorders and record-setting quality.

40 critics gave it a perfect 10, and the game launched with a metacritic rating of 96.

We packed it with a big marketing campaign and we are very pleased with both the quality and consumer response on this one.

We announced the shipment of 2 million copies, and the early read on sell through is strong.

Dante's Inferno from our Visceral Studio ships tomorrow, February 9, on PS3, Xbox 360 and PSP.

We have another strong marketing campaign for Dante's, including our first-ever Super Bowl ad, which aired yesterday.

We saw more than three million downloads of our demo, preorders are tracking well, and we are eager for the launch this week.

Battlefield Bad Company 2 from our Dice Studio ships March 2 on Xbox 360, PS3 and PC.

Early feedback from critics has been very positive, and we're very excited about this title.

Now I would like to sketch some of the product highlights for fiscal 2011.

Included on our earnings release is a table that shows you most, but not all of the titles we are planning for the fiscal year, as well as preliminary platform plans and an estimated launch window.

And while this list shows some of our big launches, it does not reflect the large and growing revenue we hope to see from digital opportunities like Playfish and mobile, from online games like FIFA online, or from post launch downloadable content we offer with most of our games.

So while this list can inform your modeling, it is by no means a complete look at EA's overall opportunity.

With that, here are a few highlights, starting with Q1.

2010 FIFA World Cup South Africa.

As fan excitement builds for the world's biggest sporting event, our game will feature all of the teams from qualifying nations, and authentic online tournament mode.

Next, Skate 3 is an award-winning new franchise that has gone head-to-head with an old competitor and won.

This year Skate 3 will include a co-op skateboarding experience, and online features that allow players to form teams and compete against rival crews.

Also in Q1 is Tiger Woods PGA tour 11.

I should also mention that our web based Tiger Woods PGA Tour online game recently went into open beta, and offers a terrific online experience.

And finally, Need for Speed World, is a web based, open world game with licensed cars, extensive game modes, and a massive online environment.

This game will launch in open beta in the quarter.

In Q2, we are laying down some big bets with blockbusters from EA Sports and the EA Games label.

I'll start with the North American flagships, NCAA football 11, and Madden NFL 11.

And of course, the world's most beautiful game, FIFA 11.

We will also be bringing FIFA online to the western world, a totally web based experience that has been extremely popular in Asian markets.

And finally from EA Sports, the franchise that won so much recognition from critics, NHL 11.

My final call out for Q2 is the return of Medal of Honor.

This great franchise is leaving World War II and taking players directly into today's war in Afghanistan.

I saw the demo last week, and this one is shaping up to be terrific.

Now onto Q3, our holiday quarter.

EA Sports Active for the Wii was one of EA's most successful new franchises in 2009.

We'll be back in 2010, but this time across multiple platforms.

Also from EA Sports in Q3, NBA Live 11.

And you'll see the return of our [cade] favorite, NBA Jam.

Next, one of the most anticipated new properties of the year, EA Sports MMA.

Our mixed martial arts game will feature an array of the top fighters and fighting styles.

Also in the holiday quarter, the Sims 3 is coming to consoles.

We are also launching a new Harry Potter title, a new action-based Need for Speed from our Criterion Studio, and several offerings for kids and families from our partnership with Hasbro.

Another game for the holiday is Crisis 2 from our partners at Crytek.

This is a publishing agreement with full EA margins, a shooter based in New York City, and is coming to both console and the PC.

And finally Q4.

Winter of 2011 marks the chilling return of Dead Space, a highly rated wholly owned franchise.

Another big driving simulation from Need for Speed, a new shooter being developed by Epic Studios and co-published by EA, and finally something far-reaching from Mass Effect.

That's a look at some of our big title launches for both packaged goods and online.

In fiscal 2011, every one of EA's releases will have an online component, both downloadable content and online play.

And don't forget that we have a full roster of titles coming from our online subscription site, pogo.com, from our mobile and iPhone group, and of course, our social gaming team, Playfish.

That's a lot of exciting content and revenue opportunities coming through all three of our businesses, packaged goods, digital and distribution.

With that I'll turn the call back over to John.

Thanks, John.

We have an outstanding portfolio of IP that is getting strong with the addition of Dragon Age, Mass Effect, EA Sports Active, and the reinvigoration of key franchises like Need for Speed, Battlefield and FIFA.

And while EA's IP portfolio was described by some as tired a few short years ago, it is now a major competitive advantage.

Our packaged goods business is performing, we have gained market share this fiscal year as a result of great quality and improved marketing.

In fiscal 2011, we believe titles like Medal of Honor, Crisis 2, Dead Space, the Sims 3 on console and others have break-out potential.

We have a profitable scaled digital business that recently hit the half billion dollar threshold.

Our digital business is growing at 30%, and is projected to break through three quarters of a billion dollars in fiscal 2011.

We have programs in place that should take this to well beyond $1 billion in the coming two fiscal years.

John, Eric and I would now be happy to take your questions.

Thank you.

(Operator Instructions).

We'll take one question per caller.

And the first question comes from Brian Pitz with UBS.

Question on the overall industry weakness, and some of the numbers you gave.

With tie ratios down, do you think this is really a cyclical issue, or do you think gamers are starting to become different in terms of their daily behaviors?

Are they more distracted by social apps, games, mobile apps, the iPhone, iPod, iPad, all of the other devices out there, and just having generally less time for games, or is this potentially a more of a secular issue, longer term?

Thanks.

This is John.

First off we do have data and research on the amount of time consumers are spending with games, and increasingly and importantly, they are spending more time with their console than they ever have before.

So I don't think it's a consumer behavior issue, if it's anything at all.

And I do think it's fair to characterize 2009 as being a consequence of a relatively less powerful slate industry-wide compared to 2008.

I think a second factor, and I have pointed to this before, in 2009 was sort of a lack of aggressive pricing on first party.

If you will, a little bit too late with their price cuts.

And frankly, and broadly, the economic circumstance, and if you will, the recession that hit in most western markets, or all western markets.

Net-net, time is up, the market was soft for the reason I just identified.

As we look to 2010, there's nothing to suggest that consumers aren't going to continue to increase the use of their console.

Relative to others that have provided guidance for the year, we've decided to be a little bit more conservative, and frankly, that's a function of the fact that we haven't seen enough data to suggest that the purchase behaviors are there yet in spades.

What makes us feel good about though, there is a strong slate.

We have a strong belief in the new motion controllers, so there's reason to be optimistic.

We have just chosen not to because it's a better planning assumption to be more conservative here.

All right.

So you are going with a more conservative outlook than you have in the past?

That's it.

And it's definitely not time or consumer behavior, to be clear.

While we see growth in digital, I don't see any data to suggest that digital offerings are causing the core gamer to spend less time with their console.

Great.

Thanks.

And the next question comes from Jess Lubert with Wells Fargo Securities.

Good afternoon, thank you for taking my question.

Can you provide some additional insight regarding your pricing assumption for fiscal 2011?

Should we expect to see a greater number of titles at sub $59.99 price points, and does your current guidance assume accelerated price degradation versus prior years, or do you expect the pricing environment to remain relatively consistent.

And then also, you gave a pretty detailed title breakdown for the year.

Could you maybe highlight which of these titles is for Natal, which is for Arc?

Am I right in thinking you won't release a new rock band title in fiscal 2011.

Thanks.

Couple, three questions there.

I think we'll probably split this one up.

In terms of pricing, I would tell you that I really can't give you any insight into our forward pricing assumptions.

As we have said many times on these calls, that's between us and our retailers, and there's a variety of regulatory reasons why we're not able to do that.

If you did want to pick up sort of an interesting analysis, I would encourage you to look at data from NPD.

For example, take 2003, peak of last cycle, to 2009, the most recent year which is sort of a six-year split.

I think you'll see -- when you look at top 10, top 20, top 30, about a $10 to $12 pickup in pricing.

Suggestive of the fact that the top titles sold very well at top prices, and at least on a historic basis, there's very little to suggest that that hasn't been the case nor that it won't continue to be the case.

With respect to the motion-control games, on Natal on Xbox and the Sony motion controller, we will be supporting both of those platforms at launch.

We don't have any titles to announce right now on those, but we will be supporting those titles, and we are hopeful on those.

The last question was on rock band.

We have a -- our deal with Aviacom and Harmonics continues through FY 2011.

At that time, as you can see from our modeling, we have not included the -- a lot of revenue for distribution next year, but we continue to have talks with them and hope that maybe there's an opportunity to continue the relationship beyond that.

This is John, just clarifying.

What John meant was our relationship is defined through FY 2010 for new front-line releases.

We have a strong relationship, and we haven't incorporated it in, because we don't presently have an agreement for FY 2011 new titles.

And Natal and Arc titles would be incremental to the slate provided?

No, they are included in the slated provided.

Okay.

Thanks.

Next question comes from Edward Williams with BMO Capital Markets.

Can you give us an idea as to how much of your R&D budget is tied to games that are shipping in FY 2012 or beyond?

I'm just trying to get a handle around the size of the budget currently allocated to the Star Wars MMO, and how that may differ in FY 2011, and the impact on your P&L versus prior years?

Wow.

I don't know if you can get to the answer to that, Ed, by the answer I can give you on the call.

I think I can give you a couple of indicators, though.

At this point in time, we have got -- there's a lot of different ways to calculate what is allocated to FY, say 2012 titles versus FY 2011.

Typically the games label that has the longest lead on their title, so they'll have the highest percentage.

They typically describe half or more of their budget for the fiscal year following as opposed to the fiscal year current.

And it's a lesser percentage in both sports, which builds annual sequels, and in the play label, which tends to build titles on shorter lead times.

We have provided this indication that is very specific to what you are trying to learn, though, which is, we have a significant investment in our partnership, MMO, the partnership we have with Lucas.

It's a significant number.

I really can't get into more than that, but I think you are going to have to use your best judgment from there.

Okay.

And can you just describe for a moment, what the relationship is like in terms of how the revenue will be recognized by EA on the MMO?

Ed, this is Eric.

We really can't get into it.

We're obviously developing the core product, and you have to operate the online services, in terms of the distribution of packaged goods that are say, that's still to be fully defined.

We have clearly been investing R&D for a number of years, and I think the important point is, as that title goes live, and we're not giving a specific date, we'll move from a net OpEX investment mode to a highly profitable op-income contributor.

So it's a pretty important step change when you compare a year with the MMO active versus the development stage that we're currently in this fiscal year.

Okay.

Thank you.

Moving onto Heath Terry with FBR Capital Markets.

Great.

Thanks.

You mentioned the addition of the service content network, and to Mass Effect 2.

I know it's obviously way too early to tell what kind of impact that's going to have, but can you give us an idea of what you are expecting to see this kind of registration key built into the game.

What kind of impact you are expecting to see that have on the market for that game as a used product, and whether or not there was any testing, focus grouping, whatever, that you guys looked at that -- or even past evidence with other games, that gave you some sense of what kind of impact doing that would have on sales of Mass Effect?

So -- well, I'm glad you noticed.

It was a strong and important strategic initiative for us.

I would point out that we did things very similarly with the Sims 3.

With Dragon Age Origins, when we released it, and we sort of initiated our approach here, originally with NBA Live with dynamic DNA, almost a year and a half ago.

In every case, what we have seen is a very positive response from the consumer, and in each case, particularly starting with Dragon Age, a strong pickup in revenue per user.

By and large, they like the extra content, and we think it's a strong positive move.

And as John mentioned in his prepared remarks, we have similar, kind of strong PDLC programs with each and every one of our titles this year.

John, you want to add to that?

Yes, I think it speaks to our strategy of fewer, bigger hits, too, because consumers are buying top titles and playing them longer.

And what is great about this content is not only is it a great incentive for consumers when they first buy the title, but it also teaches them and shows them that there's additional content online.

And gets them used to that whole ecosystem and market place.

So, for instance, in Dragon Age Origin, we had downloadable content in addition to the pack-in content, if you will, available for purchase on day one.

And in the first week, we did over $1 million in sales on that title.

So, that's just the DLC obviously.

So we're excited about DLC and see it as another area for growth.

And in fact for fiscal 2011, it's up over 100% as we had said before.

So we're bullish.

Yes, the attach rates, too are, although it's early on, we think that the attach rate or usage is about 70% of overall units sold.

So it's obviously much higher for those online registered users, so this indicates broad-based acceptance and usage by consumers thus far.

And to a point you were probably getting at, it is also probably users that may not have bought the product originally.

Next question?

Next question comes from Colin Sebastian with Lazard.

Thanks very much.

I just have a question, Eric, I think you mentioned that digital revenue streams are at about a 20% non-GAAP operating margin level, and if I apply that to guidance of $750 million in revenue, that leaves a pretty slim, maybe a low to mid single digit margin on the packaged goods business?

So I want to clarify if that is the right way to think about the split.

And then quickly on Playfish and the association of networking games, I'm curious what your expectations are for the performance of core brands like Madden, that appear to be planned for for those platforms in the coming year?

Thanks.

Yes, a couple of comments here.

So to be very specific, we have a number of different businesses that are aggregated in digital, and I called out two larger-scale stand alone or semi stand alone business units for pogo and mobile.

And those two specifically operate at 20% or better pro forma in non-GAAP operating margins.

That's not to say, though, that every other line of business within the overall digital portfolio is at 20%, so you can't take 575 for this year, 750 for next year, times 20%, necessarily.

I think it's important to understand the profitability of these businesses as they get to critical mass.

The second part of your question with regards to Playfish, we're not going to specifically mention upcoming titles.

But back when we announced the Playfish acquisition in November, we said quite clearly that, one, we were acquiring a preexisting owned IP portfolio from a great set of developers, so we're expecting games from the Playfish team.

And we're also expecting to have them launch as our social game publishing arm, more EA properties over time.

And we don't have any specific titles to call out here, but we think that there's great synergy from our existing IP portfolio.

Thanks.

I would just add on to that Eric, which is similar to what we saw with mobile.

So if you look at the top charts in mobile these days, you'll see that the top games are mostly big, established brands.

In fact, when you look at ours, mostly EA brands.

So we certainly think there's going to be a lot of room for creativity and innovation, which Playfish leads the way in that space, and at the same time we think that there is also opportunities to capitalize on some of our core brands.

But Playfish folks are doing well.

They just launched two new games, and Gangster City is doing great, and excited to have them on board.

This is John.

I know you don't want one more answer to this.

But I thought I would give you a perspective because I think, Colin, implicit in your question is a little bit about what kind of margin leverage there is in the business.

And I would like to address that a little bit.

So, I think it's fair to say that the packaged goods business, absent breakout hits, is a single-digit margin business, at least the way we see it.

When we study that business very carefully, and look at what we are investing in R&D for our front-line titles, we have a great view of the industry because we see the costs of a lot of our partners, external developers with no corporate overhead, etc.

And first observation is, our costs are very competitive, if not lower for like on like quality.

The second thing is, what is in this business for leverage?

Our goal with fewer but better is to drive to higher positions on the charts.

And I'll give you two reference points.

Same title plan, any one title breaking at an extra 1.5 million units is about $0.10 EPS.

So that's one title breaking can add about $0.10 in EPS.

Or referring to, like, Need for Speed at its peak, that could be as much as a $0.30 to $0.40 EPS delta, given that it had done in the past as many as 4.5 to 6 million units higher.

And that's a key title that we are driving to push up in the charts.

Put another way, same title plan, one market share point.

That's roughly $0.25 EPS.

To give you a sense of the world we're working in, we think we have our costs down tight.

We think our cost per title is very competitive, and again, on the aggressively tight side of the equation, and what we're driving for now is using quality to drive leverage in the P&L by pushing it up further in the charts.

Thanks, very helpful.

Next question.

Yes.

(Operator Instructions).

And next question comes from Andrey Glukhov with Brean Murray.

Yes, thanks for taking the question.

I want to follow up on the pricing issue, especially in light of the fact that you guys are concentrating on bigger hits.

What we've seen last year is, obviously at some of the retailers, particularly internationally, discounted even the top titles quite aggressively, which arguably pressures the value of the title in the mind of the consumer.

Do you guys have any plan to moderate that behavior from some of your retail partners?

Let me come at this another way.

I can't answer your question.

So we can't describe our plans to moderate, influence, or adjust pricing on a pro forma future basis.

We just can't go there.

We are well advised on that front.

What I would point you to, if you want to understand this particular phenomenon better, would be to compare any sort of long-range, top 10, top 20, top 30 -- you pick your top range, and you will see the following things.

You'll see that pricing is higher this cycle than last cycle.

And compared to last cycle, retail pricing is holding at least as well as it did in the last cycle.

If you actually study the individual press announcements, retail price announcements, promotions, et cetera, that were run by major retailers, you would see that we're probably getting to this lower pricing, or the discounting you are referring to.

In a slightly different way than happened in the last cycle.

In the last cycle, what you saw by this point in the cycle is front line pricing for all but the biggest titles already break by $10.

That hasn't happened in this cycle.

What's happened in this cycle thus far is front line pricing is holding, but then once it's in the market place, it's getting discounted more quickly than it did before.

That's a slight difference in behavior.

It can -- I understand how that can make it look like there's rampid discounting.

But again, last cycle what we saw was actually price reductions, so there weren't as many discounts that took place against those price reductions.

All in all, I think the analysis shows, or the data show that pricing is holding pretty well.

Great.

Thanks.

Next question.

And the next question comes from Justin Post with Bank of America, Merrill Lynch.

Thank you.

Couple of questions about fourth quarter.

It looks like some of your titles certainly are selling well and maybe even exceeding your expectations.

I guess what is still maybe missing your expectations or causing kind of an (inaudible) of the fourth quarter.

And then secondly on sports, I know it has been a couple-year period where you are still seeing some units down on some of the key franchises, but is there anything you can do to kind of start growing the sports business again?

I know it has come up a lot with digital initiatives or other things to either grow the top or bottom line in total for the key sports franchises, thank you.

This is Eric.

I'll take the first part of that question.

Versus a month ago when we gave our revised outlook, what we have seen happen is the following.

We think that catalog revenue rolling into Q4 is a bit lower.

Conversely, our expectations for the front line titles, those are really unchanged, we're feeling pretty good about front line.

So it's a catalog story in terms of a revenue decrease in our expectations, and more so in Europe than North America.

We also have a bit of adverse FX movement against us in some phasing differences Q3, Q4, in terms of operating expenses.

And so those would be the cause of change drivers in our current Q4 guidance versus what we had a month ago.

I might add, just quick thoughts to that, before we get to the question about our sports title where I think I'll probably correct a presumption you brought into the question.

One of the things that have sort of been interesting is, we brought forward fairly high-profile marketing programs for both Mass Effect and for Dante.

We advertised on both the AFC and NFC championship games with Mass Effect, and we saw immediate response in terms of almost every metric we track.

And as a perspective, those investments took about 50,000 units to break even.

And while it is very difficult to point to a particular ad, break even against 50,000 units gives us strong results, and so with Mass Effect seems like something that almost certainly occurred.

We did a similar investment yesterday, with Dante's, and we saw a similar spike, but it was our own internal metrics, or metric like, where you stand on the charts on Amazon preorders.

So some really good statistics to suggest these things are working well for us.

And so with Eric's point, front line feels pretty good in Q4.

In terms of the sports franchises, FIFA is, pre-digital is up sharply year-over-year, and Madden as John indicated in his prepared comments, after starting week, has continued to make progress week to week, virtually every week, and it's up on the core consoles.

We have seen a strong performance from NHL this year, and I would make that point sort of independent of digital, which is adding to the totals and adding to the top line.

So we feel pretty good about our sports portfolio.

One area we want to see a pickup in the coming fiscal year, and we'll be talking about that in a later call, is some innovation we have across the range and then in particular in NBA Live, where we would like to make progress versus the competition.

John, I would just add to sports as well, Justin, that for next year we are launching MMA, a new IP, we're taking EA Sports Active, which was wildly successful in the Wii, and bringing that to multiple platforms.

And of course we have FIFA and Tiger Woods online, both of which are new digital downloadable, download to play models on the web.

So I think we're doing a lot of innovation in the sports area.

Great.

Maybe a follow-up, Eric, did sports grow so far year to date versus last year on a calendar basis, or the first nine months.

Do you have that in front of you?

I don't have that in front of me.

I'll see if we can check that throughout the course of the call here.

Thank you.

Next question?

And the next question comes from Arvin Bhatia with Sterne Agee.

Thank you.

Just a couple of questions here.

Number one, I wanted to see if you can give us a sense of the incremental development cost for the motion controller in arc that you are experiencing right now?

Is it meaningful.

And then on the FIFA franchise, when you combine the two SKUs coming out, I assume you are looking for growth in that franchise, despite the stellar performance you had in '09?

And my last question is on the Star Wars MMO, I know you don't want to get into too much detail, but can you give us some broad sense of the normalized operating margins at the Company, without that, so we can at least start to form some expectations beyond fiscal 2011?

Those are my questions.

Thank you.

John, why don't I start with the motion controller question, which is how much incremental deb costs are the motion controllers costing us?

And the reality is, we have a pretty good line up of motion-based games, so what it really affords us is an opportunity to take that portfolio, and look at the new motion controllers that other platforms are providing, and give us, frankly, deb cost amortization.

So we don't see it as a big increase.

In fact we see it as a win in that respect.

And historically, FIFA, typically what ends up happening is in a World Cup year, the World Cup SKUs that we ship are incremental.

And we're on a roll with FIFA in our fiscal 2010 product, and we expect to continue to do really well there in fiscal 2011.

And then in terms of Star Wars -- I believe it was, it may have been Ed that asked a similar question about trying to get a better grip inside that number.

And we really don't think we can go further than we already have, which is it is a significant cost.

MMOs can cost as much as two to six, seven times as much as a front line title, if they are done right.

It is a major investment for us, and as Eric had mentioned earlier, our goal is to reverse out in the future.

Every bit that we have invested and then some.

Let me just try another one then.

On the breakout hit commentary you made on how that can create operating leverage.

Obviously in fiscal 2011, I'm just wondering, John, if you built in a certain number of breakout hits?

Or how should we think about the expectations you have for the various titles?

Are they one or two breakout hit models, or is everything just kind of middle of the range, and then you are hoping for upside to those.

Well, it's a difficult question to ask, how conservative or how aggressive your judgments are.

I think as a starting point, we're probably at the lower end of the range for what most people are going to guide to for packaged goods sector performance in calendar 2010.

Our minus three result though is probably not inconsistent with what is going to happen in January, so at least in January we'll be vindicated.

But there is 11 months to go.

And the lion's share of it is going to take place in the fall.

As I think we mentioned, we see some titles have the potential for break out, but my way of thinking about it is, on a label-by-label basis, sports has got net-plus titles year-over-year in the form of MMA, and a broader base on active against platforms.

The games label swaps one title for another.

It is not -- neither up nor down on a 12-month basis in terms of its title slate.

And the Sims label basically swaps out console for PC launch at the highest level, yes we lose one movie title in the form of GI Joe, that was a relatively modest performer for us in this past fiscal year.

And we're adding a multi-platform, my SIMS title, and then a second Sims title in the year.

So, when we look at that portfolio, we guided that to be flat.

If there are significant break outs, we would see market share grow, but we haven't assumed that in our model.

And if I were to point to things that I think have the potential to break out that are not counted on as break out, that would include sort of Medal of Honor, Crisis, SIMS console, and perhaps a few other titles.

I'm really bullish about Dead Space 2 in the fourth quarter.

And catalog sales for Mass Effect and Battlefield Bad Company.

Yes, in the first part of the year.

Great, thank you, guys.

If I could, I would like to respond to the earlier question about how is the sports label doing year-over-year?

So, starting in FY '09, comparing that to FY 2010, the sports label overall is up significantly.

You have key drivers like the launch of VA sports active.

The tremendous performance by FIFA, the packaged good as well as the digital extensions.

So that's very significant growth 2010 versus fiscal '09.

And fiscal 2011, we're expecting continued growth as well in the overall sports label.

And the next question comes from John Taylor of Arcadia Investment.

Hi.

I wonder if you might be able to characterize the additional revenue potential that you are looking at from the digital -- the follow-on digital content, and maybe talk about it within the baskets in terms of sports and EA games and so on.

How much additional can you get over what period of time, and maybe give us a sense of what kind of lags or increased revenue per user?

And maybe even put that within the context, the answer that you gave at the beginning of the call about the consoles being used is one thing.

I mean, time used is one thing, but they are being used for an awful lot of other things, and none of the video game guys are getting much revenue off of Netflix being downstream and on PSN for instance.

So, what I'm trying to get at is, how are you compensating for that, and maybe talk about within that ARPU context.

The data that I gave you on console usage was not whether they were turned on or off.

It is whether they were being used to play games.

Okay.

So, the data was narrow enough to sort of capture the flavor of what we were trying to talk to.

The second point is -- and this is something that might be fun to look at.

I often like to look at things over a longer period than just the last week or month or quarter.

2003 to 2009, I think if you were to just pick a cycle, last to where we are now, the top three and top 30 are 2X, if not 3X larger in the business.

So our fewer but better is designed to put us further up in those charts and benefit from that.

And lastly, I think it's really early innings to give you a revenue for downloadable content across the full range of our products, but I will give you these indicators.

In many cases, the number can be double digits, like north of $10, but those are typically isolated circumstances where that occurs with a game.

Across the weighted average of our portfolio, I would like to see it get to that, but it's certainly nowhere near that in our FY 2011 model.

It's in the $2 range.

That's a gigantic pickup from zero.

That is essentially brand new ARPU, and it's part of our digital growth story.

I see lots of reasons to believe that will move north over time.

And if I was trying to say sort of in a broader maylays of how people can interpret or misinterpret the packaged goods business, I would say EA strategy is fewer but bigger and higher ARPU.

Fewer but bigger drives revenue per title at the retail level, and/or download as that model develops more fully over time, and all of the PDLC and stuff that we get in the back end as ARPU against each disc.

And so that's what we're seeking to do, and we think it's a smart investment thesis for us, given the way the industry is evolving.

Okay.

And can I ask, on the 750 or whatever the digital piece is going to be, could you give us a rough geographic breakdown of what that might look like?

No, it's more North America than international, but we're not going to parse it by the geos, I would note that, that's in terms of the growth, the online services we have in Asia have been quite successful to date.

So FIFA online is growing in Korea, we are extending that online services product across portions of the region, so there is that growth there.

The highest growth rate that we see within the digital portfolio is for the console PDLC, and so we have seen success to date across products like FIFA, which sell principally in Europe, but obviously in North America, as well in Asia.

Madden, Mass Effect and Dragon Age, we're expecting that our overall console PDLC business to grow by over 100% in fiscal 2011 versus fiscal 2010.

And that may have a revenue distribution that more or less mirrors the underlying packaged goods, but it could deviate a bit.

Great.

Thank you.

So, operator, we have time for one more question.

Thank you.

And that question will come from Jeetil Patel with Deutsche Bank.

Great, thank you.

Couple of questions, first of all, I guess if you look at fiscal 2011, what type of visibility do you have into the $0.50 to $0.70 EPS number, I guess relative to years past?

I guess, would you say there's more or less or comparable amounts of visibility into kind of how this year plays out relative to, I guess how you saw the last couple of years play out.

Second, I guess going back to Colin's question, but if you back out the profitability of the mobile business, and also the distribution business, we end up with a core publishing operating margin of about 5%.

I guess within that number, is the bigger theme or question -- kind of issue that it's the core EA business on the sports side and core products that you have had for years that's underperforming, or -- where the margins are depressed or is it actually more on the newer IP that you have coming out this year that, or in general that seems to be where the margin drag is.

This is John.

A couple of thoughts.

The first one in terms of visibility.

An observation about F 2010, and we too are disappointed with the F 2010 results.

We guided at the beginning of F 2010 to 7% top line growth for the sector, and it ended up being roughly minus 10, a 17-point split, and our most recent guidance for the fiscal year versus our original was 4.3, and we're 4.1ish in our most recent guidance.

So we're adhering to top line, much, much better than the sector overall, which is reflective in the fact that our fiscal year to date market shares are up, and projected to be up through the fiscal year.

I would say that our biggest challenge on visibility in fiscal 2010 was at the sector level.

We pretty much charted where we thought our expenses came in as we thought.

Our business performed at the market share level as we thought.

We delivered the titles that we said we would deliver with extreme fidelity.

What we missed was the top line, which was driven primarily by factors related to the sector.

And for what it's worth, even making up half of the revenue forecast lost at the sector level, and having that play into EA, we would have made our plan.

So it's a tough one.

I don't know that we were alone in forecasting the industry off in calendar year '09.

It was a very frustrating and challenging experience for us.

As we look into fiscal 2010, I only hope that we are as accurate as we have been on our title slips or non-title slips, the quality of our games, the windows that we hit and the market share that we achieve because we nailed it, with almost perfect accuracy in '09.

So the key question for me is more about the sector level, and at this point, we think minus three is the best assumption going in.

We also note that we're sensitive to that assumption.

5% in either direction is a little bit north of $0.20.

So it's a very, very important assumption for us.

By the way it's about the same for an impact as a one share -- one market share point.

In terms of the 5%, what is underperforming or overperforming in the packaged goods portfolio.

What we have gotten to now is 36 major titles.

I think if you did a -- sort of a study of our business, until you got major breakout hits, that make up a significant portion of your portfolio, single-digit returns is fairly typical on pure packaged goods businesses.

And our goal this year is to break out and drive above that.

We have identified in quarters past and years past that our biggest deficit coming out of the fiscal -- sort of fiscal '04, '05 console transition was that we basically had lost Lord of the Rings, Bond, Medal of Honor, and we were down on Need for Speed.

And where we're going now is we're replacing that with Dragon Age, Mass Effect, back to Medal of Honor, growth on Need for Speed.

So our goal is to replace that and get back in the double-digits strongly.

We're not guiding to it because we're waiting for it to happen first.

Just a quick follow-up, but didn't you at the beginning of fiscal 2010 guide to about $4 billion.

So your revenues stayed about the same from the beginning of the year to the end of the year, didn't they?

We guided to 4.3.

So no, we missed on top line, not as much as the sector missed.

But we missed.

And I think we've detailed our rationale for what had occurred there.

Some margin shift as a consequence of more digital titles, and a revenue mix which I think is consistent but not as rich a miss as the sector overall.

Thanks very much for the calls, and we'll see you next time.

And that does conclude today's conference.

Thank you for your participation today.