美商藝電 (EA) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen.

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

One note that today's call is being recorded.

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

Peter Ausnit, Vice President of Investor Relations.

Thank you, Tara.

Thank you all for joining us this afternoon.

Welcome to EA's fiscal 2010 fourth quarter earnings call.

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

Before we begin I'd like to remind you that you may find copies of our SEC filings, our earnings release, and a replay of 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 reconciliation of GAAP to non-GAAP measures.

These non-GAAP measures are not intended to be considered in isolation from, as a substitute for, or superior to our GAAP results.

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 in the prior year unless otherwise stated.

Please see the supplemental information on our website for 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 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 May 11, 2010, and disclaim any duty to update them.

Now, I'd like to turn the call over to John.

Thank you, Peter.

Earlier today, EA announced results for both Q4 and fiscal 2010.

We finished the fiscal year in the fourth quarter slightly ahead of the guidance we provided the Street on February 8.

Our quarter came in stronger than Street consensus.

We are reaffirming our FY 2011 financial guidance.

Details on the quarter, our fiscal year financial performance, and our guidance, are in our press release and will be covered in more depth by Eric Brown.

Key points I would highlight include these and note, these are non-GAAP numbers.

FY 2010 was EA's highest revenue year in history.

We had a strong financial rebound in FY 2010 versus FY 2009, increasing EPS by $0.74.

We made significant progress on each of our four strategic objectives -- cost management, fewer but bigger games, improving game quality and driving digital revenue streams.

On cost, we successfully implemented a restructuring program, significantly reducing our cost base.

Packaged goods fueled our bigger games.

We were the number one publisher overall in Europe and North America combined.

We were the number one publisher on PC, Xbox 360, PlayStation 3 and PlayStation 2.

We achieved share growth in FY 2010 versus FY 2009 on 20% fewer titles.

Quality.

Our investment in quality was a key reason for our segment share of success.

EA leads the industry in quality with 20 titles in fiscal 2010 to receive the Metacritic rating of 80 or above.

Digital.

FY 2010 revenue from our digital initiatives was up 33% over fiscal year 2009.

We saw substantial growth in post-release downloadable content sales with big titles like Dragon Age, Mass Effect 2, and Battlefield Bad Company 2.

We continue to lead on mobile, iPhone and now iPad.

In a tough market, our advertising sales were up, and the acquisition of Playfish makes us a strong leader in social network gaming.

We enter FY 2011 with strong momentum.

The quality of our titles, both packaged goods and digital is something we feel passionate about at EA.

We couldn't feel more pleased with the people who make these games.

This investment in quality is what allows us to extend our properties connecting us to millions of consumers online.

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

Thank you, John.

EA reported solid Q4 financial results today with non-GAAP revenue coming in at the high end of the guidance range of $800 million to $850 million that we provided on February 8.

Non-GAAP EPS exceeded the high end of our guidance range of $0.02 to $0.06 per share.

Non-GAAP net revenue was $850 million, up 40% year-over-year.

On a GAAP basis, net revenue was $979 million.

At constant currency rates, non-GAAP net revenue increased $210 million or 34% year-over-year.

On a GAAP basis net revenue increased $85 million, or 10% year-over-year.

Non-GAAP gross profit margin was 65.2%, compared to 49.6% a year ago.

This was up from the prior year primarily due to product mix featuring more owned IP and less distribution product versus Q4 last year.

On a GAAP basis, gross profit margin was 69.6% versus 59.4% a year ago.

Non-GAAP operating income was $34 million versus a non-GAAP operating loss of $165 million a year ago.

On a GAAP basis operating income was $83 million, versus an operating loss of $62 million a year ago.

Non-GAAP diluted earnings per share were $0.07 versus diluted loss per share of $0.37 a year ago.

GAAP diluted earnings per share was $0.09 versus a diluted loss per share of $0.13 a year ago.

Headcount.

We ended the quarter with 7,842 employees versus 9,106 a year ago.

22% of our employees are now at low-cost locations versus 18% a year ago.

Cash flow from operations this quarter totaled $253 million versus $215 million a year ago.

Fiscal year to date operating cash flow improved by $140 million from last year to $152 million.

Q4 of fiscal 2010 highlights.

In our packaged goods business, EA was the number one publisher in North America and Europe for the quarter, reflecting a 4 point share gain year-over-year.

We were also number one for the fiscal year with four titles in the top 20 in both North America and Europe.

Battlefield Bad Company 2, we sold through three million packaged and digital units in the quarter for Europe and North America combined.

Battlefield Bad Company 2 launched with a Metacritic rating of 89, and to date we have sold through over four million units of Battlefield Bad Company 2.

Mass Effect 2 sold through over 1.6 million packaged and digital units in the quarter for Europe and North America combined and launched with the Metacritic rating of 96 on the Xbox 360.

Dante's Inferno sold through almost one million units in the quarter for Europe and North America combined, more than any other new intellectual property during the quarter.

And the sequel title, Army of Two the 40th Day, sold through over one million units worldwide in the quarter.

Highlights from our digital business include downloadable content including Madden Ultimate Team, FIFA 10 Ultimate Team, Battlefield 1943, and Dragon Age which performed well in the quarter.

Mobile sales continue to grow year-over-year and we had a strong launch of games on the iPad in April.

We had 1.8 million total paying subscribers in the quarter, this includes POGO as well as massively multiplayer online, or MMO, subscribers.

We finished the quarter with over 58 million registered users, up 18% from the prior quarter.

Battlefield Bad Company 2, FIFA 10, and Madden 10 were the top three titles driving user registrations in Q4.

Highlights from our catalog.

FIFA 10 continues to be a top selling title, ranking number six in Europe for Q4.

To date, FIFA 10 has sold in over ten million units since launch.

Madden 10 finished the year fiscal strong growing 9% year-over-year on the PS3 and Xbox 360 combined, a marked improvement from the relatively slow start we had with Madden in Q2.

Digital business results including the following.

For the fiscal year we had total digital revenue of $570 million, up 33% year-over-year meeting our expectations.

We reported record mobile non-GAAP revenue of $212 million, up 12% year-over-year.

We reported $358 million non-GAAP digital revenue from non-mobile sources, up 49% year-over-year.

In the quarter, mobile non-GAAP revenue was $55 million, up 15% year-over-year, driven by Tetris, The Sims 3, Bejeweled and Need for Speed.

Q4 non-GAAP revenue from non-mobile sources was $101 million, up 66% year-over-year.

We have three different businesses in our digital portfolio.

Let me give you detail on each category.

The first category is console games and downloadable content, or DLC, which consists of digitally delivered fully playable games and associated content packs.

In Q4, EA Sports launched Madden Ultimate Team and FIFA 10 Ultimate Team.

Both Madden Ultimate Team and FIFA 10 Ultimate Team exceeded our expectations.

Our frontline titles in Q4 had extensive console DLC offerings.

The second category is PC and browser full games and associated DLC, which consists of digitally delivered fully playable PC games, associated content packs, and free-to-play PC games with paid micro-transaction content.

During the quarter, we launched several PC and browser games including Battlefield Bad Company 2, Mass Effect 2, Command and Conquer 4, and Lord of Ultima.

Battlefield Bad Company 2 exceeded our expectations as a PC download title in Q4.

Playfish launched a browser game called Hotel City in March, which looks promising and has already reached 13 million monthly active users and is a top 15 Facebook application.

The third category is mobile, game services, subscriptions, and advertising.

Mobile consists of games delivered on feature phones, SmartPhones and handhelds such as the iPhone and the iPad.

We launched five games on the iPad at the tail end of Q4.

Game services, subscriptions, and advertising include advertising in Playfish social games, POGO subscriptions, MMOs and browser-based games with subscription models.

POGO subscription revenue for fiscal 2010 was up 3%.

A few comments on the industry.

The total sector, inclusive of packaged goods and digital, was up 3% in calendar 2009.

The worldwide packaged goods subsector was down 9%, which was more than offset by digital being up by approximately 28%.

In the quarter, for western markets overall, the total sector including digital was up.

The packaged goods subsector was down 2%, which was more than offset by digital.

By region, North America was down 5% and Europe was up 1%.

We saw growth trends in Spain, Italy, and Germany, while the UK and France were down.

In fiscal 2010 the packaged goods subsector in both North America and Europe was down 11% which contrasts sharply with EA's strong performance.

In the quarter and despite console hardware shortages, year-over-year PS3 software sales increased 41% in western world markets, Xbox 360 software sales increased 1% and Wii software sales decreased 9%.

In the quarter, top 20 titles in North America increased dollar share to 43% versus 41% in the prior year.

For fiscal 2011 we are affirming our Q1 non-GAAP and GAAP guidance.

Our full-year non-GAAP guidance and we're updating our full-year GAAP guidance.

We expect the market, inclusive of packaged goods and digital to grow 8% year-to-year in calendar 2010, based on the assumption that total worldwide packaged goods, consistent with recent industry reports, will be down 3% offset by digital growth of approximately 26%.

We expect to end fiscal 2011 with total headcount of approximately 8,200.

And our managing headcount consistent with restructuring plan that called for a shift from high cost to low cost locations.

Total low cost location headcount is increasing from approximately 22% to 26% at the end of fiscal 2011.

Regarding exchange rates, we're assuming $1.36 US to the euro, $0.95 to the Canadian dollar, and $1.55 US to the British pound.

Currency markets are 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 excluding 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 76% in fiscal 2010.

There is an updated FY 2011 title plan in our earnings press release detailing our principle titles.

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

We expect approximately $150 million in non-GAAP distribution revenue for fiscal 2011.

Digital.

EA is incurring significant development costs for major new massively multiplayer online game.

However, this game is not expected to ship in fiscal 2011.

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 examples are the map packs that we released for Battlefield Bad Company 2.

We are planning a number of digital service launches in fiscal 2011.

In March, we announced Need for Speed World in beta, the MMO action racing game.

This April, we launched Tiger Woods online, an authentic and feature rich golf video game experience available through a web browser.

In Q2, we will launch FIFA online.

We expect to grow our total digital revenue by approximately 30% from $570 million of fiscal 2010 to approximately $750 million in fiscal 2011.

The year-over-year dollar growth of approximately $180 million is divided roughly as follows.

Approximately a quarter from console full games in DLC, approximately a half from PC and browser full games in DLC, approximately a quarter from mobile, game services, subscriptions and advertising.

Now to our guidance.

We are maintaining our Q1 fiscal 2011 GAAP and non-GAAP guidance.

Revenue.

On a GAAP basis we expect Q1 FY 2011 revenue of $710 million to $750 million.

On non-GAAP basis we expect Q1 FY 2011 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 FY 2011 title slate includes FIFA World Cup South Africa, Skate 3, and Tiger Woods PGA Tour 11.

There are five frontline titles versus ten in the prior year.

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.

For the full fiscal year, we expect the following.

Revenue, on a GAAP basis we expect revenue of $3.35 billion to $3.6 billion, down from prior expectations of $3.45 billion to $3.7 billion primarily due to release schedule changes which affect revenue deferrals.

On a non-GAAP basis, we are affirming our total revenue guidance of $3.65 billion to $3.90 billion.

Breaking this down into three components, we expect digital revenue of approximately $750 million in F '11.

We expect approximately $150 million in distribution revenue, roughly a $450 million decrease year-over-year and we expect packaged goods revenue ranging from approximately $2.75 billion to $3 billion.

Revenue phasing.

We currently expect to total 36 frontline titles shipping in fiscal 2011.

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

Q1, six titles, Q2, seven titles, Q3, 16 titles and Q4, seven titles.

I'd 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 21%, Q3, approximately 42%, and Q4, approximately 24%.

Please note that as announced on May 5, and representing a change from our last earnings call, we have moved Medal of Honor to October 12, 2010, to optimize the launch window.

This move has a negligible impact on full year fiscal 2011 non-GAAP net revenue, non-GAAP EPS and cash flow.

Q2 non-GAAP EPS is impacted due to the high margins of the Medal of Honor title and other items.

We estimate an approximate $0.25 EPS reduction versus current analyst Q2 expectations.

Gross margins.

We expect full year GAAP gross profit margins of approximately 56% and non-GAAP gross profit margins of approximately 60%.

Below the line, we expect GAAP diluted loss per share of $0.85 to $1.15.

We expect to generate non-GAAP EPS of $0.50 to $0.70.

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

Thanks Eric.

Q4 was a strong finish to the fiscal year thanks to the launch of some great franchises in the quarter.

EA is ranked number one in the western world, with 19% segment share for fiscal 2010.

We have five titles that sold more than four million copies this fiscal year.

FIFA 10, Madden NFL 10, The Sims 3, Battlefield Bad Company 2, and Need for Speed shift.

Our top selling title was FIFA 10 which sold more than ten million copies since launch.

In terms of the current trading environment, the overall industry has remained positive thanks to digital offsetting a slight decline in packaged goods.

On the packaged goods side, North America was down 5% in the March quarter while Europe was up 1%.

Both better than the December quarter and consistent with our guidance for the year.

We expect packaged goods in April were sharply down with a console mix shift change favoring EA.

We expect the overall packaged goods sector to pick up in the summer, when major titles launch.

We remain confident in our overall expectations for growth of the sector, with packaged goods declining 3% in the calendar year.

Turning to E3, this year you're going to see a strong portfolio of blockbuster titles from EA.

The EA Sports label will showcase Madden NFL 11, FIFA 11, NHL 11, NBA Live 11, Tiger Woods PGA Tour 11 and EA Sports Active.

We will also unveil games that make use of the new motion controllers from Sony and Microsoft.

The EA Play label will showcase a new Harry Potter game and some great titles from our partnership with Hasbro.

The Sims 3, EA's mainstream gaming mega-brand with over 125 million units sold, is coming to consoles and will be available this fall on the PS3, Xbox 360, Wii, and Nintendo DS.

We will also highlight The Sims 3 Expansion Packs, including the recently announced The Sims 3 Ambitions Expansion Pack.

The EA games label will unveil a new Need for Speed title, Dead Space 2 and a return of one of the most storied franchises in first person shooter history, Medal of Honor.

EA partners will blend bullet form from Epic Games, Crisis 2 from Crytek and in partnership with LucasArts, we will highlight the much anticipated Star Wars The Old Republic.

We will also show a marquee title in breathtaking 3D.

Next, I'd like to provide some highlights on our EA interactive business unit which includes EA mobile, POGO and Playfish.

First on EA mobile.

We continue to be the number one mobile games publisher in western markets.

In March, we had seven of the top ten games on Verizon and achieved more than half of the top ten games on AT&T, Sprint and T-Mobile.

I want to highlight the EA is the number one app store publisher, a formidable achievement that affirms our belief that mobile consumers gravitate towards high quality and brands they recognize from other platforms.

Proving the point again that consumers love IPs that they know, we launched five games on the iPad at the end of Q4 and had two of the top three grossing titles.

Scrabble was the number one grossing title and Need for Speed was number three.

Second, POGO continues to be one of the most engaging online gaming destinations, generating 5.4 billion minutes of play in March.

It is one of the most diversified models in casual gaming generating multiple revenue streams -- subscriptions, advertising and micro-transactions.

From February to March, POGO grew US monthly unique visitors by 9% versus flat for the market and grew total online gaming minutes by 8% versus 2% for the market.

POGO's play rate among daily and monthly active users is 30%, placing it on par with the best performing social network games.

At the end of Q4, we launched POGO Facebook beta.

This application includes a total of 12 games including Poppit and Word Whomp.

And, third, Playfish is the number two social gaming site in a rapidly growing market.

In Q4, we had two of the top ten Facebook games, Restaurant City and Pet Society.

In March, Playfish launched Hotel City, which is off to a promising start with 13 million monthly active users, and is also a top 15 Facebook game.

At the end of April, Playfish had a total of 59 million monthly active users up 17% since January.

Daily active users have increased 23% since January.

We couldn't be happier with the integration process and look forward to Playfish launching their first EA-branded title, FIFA Superstars, which is now in beta testing and is coming soon.

We continue to believe that social network gamers will mass behind quality and brands they recognize, as they have done in the mobile segment.

Finally, I'd like to offer some detail on our progress in extending the consumer experience with online services and content.

Yesterday, EA Sports introduced online pass, a program to give game owners more features and content by using a one-time-use, game-specific access code printed on the back of the game manual.

When the first purchaser goes online to register the software, he or she can receive title specific bonus content and access to services like clubs and leagues as well as online game play.

Benefits that registered users also get that include newsfeeds from EA Sports, ESPN, and others.

Other content may be available after launch and online pass will be available to secondary purchasers for a fee.

EA Sports titles including Tiger Woods PGA Tour, NCAA Football, Madden NFL, NHL, Fight Night and MMA, Mixed Martial Arts, will feature online pass.

This concept builds upon similar initiatives from recent releases.

Last year, The Sims 3 launched with an entire second city available to players who registered their game online.

And Mass Effect 2 consumers will be provide an access to the Cerberus network, which offers additional missions, equipment, even a new character when the game is registered online.

Similar offerings were included with Dragon Age and Battlefield Bad Company 2.

These offerings reward purchase, add value to the game, and keep players engaged.

We believe the ship it and forget it mentality is giving way to much deeper relationships between the consumer, the game, and the publisher.

With that, I'll hand it back over to John.

Thanks, John.

Before we take your questions, let me leave you with one last thought on a topic which means a great deal to us.

The quality of our games.

We banked on success as a Company on a simple idea.

Fewer bigger hits in our core business which will translate into success in digital.

What underpins this opportunity of extending the consumer experience with new content and new revenue opportunities, is 100% dependent on ensuring that the consumer's first experience with each game delivers an extraordinary quality.

Gamers are the most discerning consumers in the world of entertainment.

They will not tolerate a shoddy product.

Today, I believe that EA has turned a corner and that consumers now identify our games with high quality and innovation.

I see it when I review games with our many talented teams and when I read the blogs where gamers communicate.

We are rebuilding EA's reputation with consumers.

Now we want to show investors how that translates into new revenue streams and increasing profitability.

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

(Operator Instructions) And we'll go first to Edward Williams with BMO Capital Markets.

Good afternoon, guys.

Thanks for taking my question.

If we can just talk a little bit more about the digital revenue.

What are you seeing with regards to direct download of PC titles?

What growth rate have you seen specifically and in that area or the use of steam?

And also if you can comment, a little bit, John, on your comments you just made about the sale of codes basically to people who are buying used games?

How is that business looking at this point and how can that -- how significant do you see that business becoming over the course of, say, the next 12 months to 18 months to 24 months?

I'll take the first part, since John had the second, I'll have him follow up on that.

In terms of digital, I'm going to answer by not answering.

We're are seeing significant uptick.

It is particularly sharp with titles that have a history of being strong PC titles.

We're getting our arms around the shape of that business, how much is coming out of of our own sight and how much is off of steam.

And I'm sure we'll let you in for more information at a later date.

But consider it a small business growing rapidly for the moment.

And, hi, Edward, for the online pass business.

That business is about giving first-time users a one-time use code which enables online access plus gives them bonus content per game.

And additionally when they take that game home they go online, they register it, they download the free content and they also will see there is additional downloadable content available for purchase.

So our goal is to turn these customers from thinking that it ends with the disk, to that it really starts with the disk.

And that there is a lot of additional content for them to be able to purchase and to use in addition to the content that we give away.

You mentioned -- we've done this before in a few of our past games and the uptick of, if you will, the registration has been very, very high, exceeding 70% from the code that we included with the likes of Battlefield Bad Company and Dragon Age or recent Q4 releases.

So we feel pretty good that we'll have good uptick there and we think it is also a good opportunity to turn these packaged good consumers into digital consumers.

Edward, this is Eric.

I'd also add that the -- if you look at overall digital business, it grew 33% year-over-year for the 12 months.

The PC component of that, of consisting of full games and extra content, grew at a rate above that average, so it is performing disproportionately better than the average of the overall portfolio.

And it is important to note that EA is the number one publisher overall in terms of the traditional PC market share.

So we have a pretty good slate of products for that particular platform.

Next question, please.

Move on to Justin Post with BofA Merrill Lynch.

Thank you.

John, when you think about the year you just had, you had quite a few hits like FIFA, certainly Battlefield exceeded your expectations.

When you look at your margin profile, obviously there were some games that lost money.

If you were to improve the hit ratio, how much of an impact do you think that would have on margins?

And do you see the opportunity now that you've been with the Company for a couple of years to improve that ratio?

Couple of thoughts on that.

First off, the challenge that we and many other publishers had in what was our fiscal 2010 was an opening expectation for big to high, if not double-digit sector growth in the packaged goods side.

And we actually saw double-digit decline.

So, a big shift in expectations going into the year versus exiting the year.

And I think that our strategy responded to a variety of different pressures.

But we've been talking for a couple of years of shifting our profile from a higher quality exploited on multiple business models.

And that's exactly what we're doing.

So if you go back to fiscal 2009 where we had mid-70's in the number of titles.

Fiscal 2011, we've got mid-30s in the number of titles.

We cut our titles by slight little bit more than half.

Now in doing that, we're getting more revenue per IP.

And we're getting more revenue per IP by exploiting the best IP across multiple revenue models.

Using FIFA as an example, it was once upon a time just a packaged goods game.

Now there is FIFA the packaged goods game, and now there is disk based DLC.

We just announced our social network game that is about to go out into launch from its development stage.

We are strong on mobile with our FIFA franchise.

We have done well on the iPhone.

We've got FIFA online in Korea.

We've actually launched two titles this year -- World Cup in addition to the core packaged goods game FIFA 11 coming later in the year.

Another great example of this is Need for Speed.

Need for Speed is now two packaged goods games.

It was just an action game in the fall.

We now have an action business and a simulation business.

We brought our simulation business out last year, we're turning to action this year.

In addition to that, we announced Need for Speed online.

I think you know it is a leading title on the iPhone.

It is a leading title on the iPad.

It has done well on a number of business models, including post-release downloadable content.

So, what we've been doing is bringing our slight down in terms of the number, and broadening it.

It is that mild joke we've been saying that the new short and fat is the new tall and thin.

Meaning a shorter list but more broadly exploited across properties.

So, to answer your question, I think what we saw with a depression across the board relative to our earlier expectations as a consequence of less packaged goods sales overall, we're pleased with a number of our titles reaching hit status, including titles like FIFA, Madden, Battlefield Bad Company, and a few others, The Sims.

And as we go forward we think we can better navigate the current environment, the rapid increase in digital revenue streams with a lesser slight, exploited more ways.

Thank you.

And next we'll hear from Jeff Lubert from Wells Fargo.

Good afternoon.

Thank you for taking my question.

In terms of guidance, I was hoping you would discuss some of the puts and takes to the outlook, prior guidance excluding The Rock Band, the current outlook includes two titles in the franchise.

Yet the top and bottom line forecast for the 2011 are unchanged.

In light of these additions, can you discuss the decision to leave the forecast as it was?

And specifically, can you discuss how the recent decline in European currency may have factored into the outlook?

This is Eric.

I think that it's fair to say that there were a series of puts and takes that we incorporate into the current guidance versus 90 days ago.

Currency is certainly something that we've considered.

We've seen markets fairly vulnerable right now.

We've seen a weakening of the European currencies, and so that's going to have an adverse impact.

We did have pickup of some distribution business, as you noted.

That's a net positive.

Albeit a lower margin business in terms of bottom line EPS impact.

And so there are other puts and takes, as well.

And, net, we end up in the same guidance range.

With a mindful eye towards currency impacts for the balance of the year.

Thanks.

We'll go on to Ben Schachter of Broadpoint AmTec.

Hi guys.

A few questions, if I may.

On Facebook, first, I was wondering if you could talk about how the business model is going to evolve there particularly as it relates to having to share or possibly sharing economics with the Facebook platform?

And then any other financial detail you could give us on Star Wars in terms of the quarterly run rate on expenses there, or anything else that we should know?

And then, finally, on sports, just what does revenue look like for the overall category this year versus last?

Thanks.

Hi, Ben.

This is John Schappert, I'll take the Facebook question.

So I think what you're referencing is the talk of credits in Facebook, credits in different payment mechanisms with Facebook that are making the rounds.

What we see, we see that as a net positive for the business because it reduces the friction for users to go and pay for services and products on Facebook.

So we're supportive of that initiative.

What we do see also in that space, because you ask how we see that business evolving.

We think that, that space is going to evolve similar to the way we saw the mobile segment evolve.

Where, when you look at it right now, it is dominated by the brands and the IP that gamers know and trust, and so we're very excited about the launch of FIFA Superstars, which is now in beta.

Which is the first IP we're bringing to that platform.

So, we've got -- we're bullish on our IP on Facebook.

Eric will do Star Wars and I'll do sports.

With regards to Star Wars, there is little to add versus what we previously said of the title.

It is clearly a more expensive project than any traditional packaged product.

We noted that before.

It has been in development for some time.

We are expensing all R&D as we go along, and that's an important caveat.

And the only other granularity we would provide is that it is not included in our FY 2011 release slate.

In terms of sports, at the sector level I would tell you that one way to think about it as three sub-segments, one is core sports.

League sanctioned sports, if you will, titles like FIFA, Madden, NBA Live fit into that category.

Archaic titles like Wii sports, and other analagous titles others have put them out including EA and Take 2 and others.

And then lastly, the fitness category.

The core business is looking pretty healthy right now.

We expect growth this year.

We expect EA to do well this year.

We've got a strong slate.

And so that feels solid for us overall and incremental title in a World Cup year.

What underpins EA's core feels very solid.

The archaic business is really driven increasingly by first party.

The first party business is often packed in as it is with Wii Sports and Wii Sports Resort.

It will be interesting to see what the specific titles are that might or might not exist around the other platform holders this year.

Some things that fit into that archaic category will include titles from EA this year like NBA Jam which we previously announced.

That's likely pretty volatile and driven more by the individual leases from first party than anything else.

And lastly fitness, the fitness business we're a leader there with EA Sports Active.

We have a strong slate this year.

We can certainly expect more innovation from Nintendo.

We expect a lot of competition.

My general expectation this year is that we'll see unit growth.

We may not see dollar growth as consumers buy fewer hardware peripherals associated with perhaps the Wii Fit platform because they'll be buying software extensions, having the physical apparatus in place already.

But overall, it feels like a solid business on the sports side.

Core is what we focus most on and that looks real healthy.

Thanks and good luck on FY 2011.

Moving on to Janney Capital Markets, Shawn Milne.

Thank you, and thanks for taking my questions.

I just wanted to quickly -- couple of housekeeping follow-up on the guidance for fiscal 2011.

What was the rate that you now have implied in your guidance for the Euro?

For fiscal 2011 we're assuming $1.36 USD to the Euro.

It just feels like that back of the envelope math, that's maybe $150 million impact from where you were in (inaudible)?

No, it's significantly less than that.

The one thing I would note is that vis-a-vis the Euro, we are substantially hedged, not completely, but substantially hedged internally with good full year revenue offsets versus OpEx so less of a concern on the volatility on the Euro.

I was talking more top line wrapping into the pound.

Just back to the quarter, did you -- you said Battlefield sold through three million units.

What was the five million?

Is that shipments live to date or launched to date?

The five million units which we noted on the press release was as of yesterday or so.

It is a total units sold into the channel.

Including digital.

Including digital units PC.

Okay.

So for the quarter did you give us the exact shipments for the quarter?

Three million units sold through in the quarter.

Okay.

It just feels like with Battlefield being so strong that you might have delivered a little bit more up-side.

Did you break out your catalog sales and what they were for the quarter?

Let's check the catalog sales in terms of percent and we'll get back to to you on that.

Was catalog weaker than expected?

Catalog was a little bit lighter than expected because of strong frontline releases.

Catalog was 23% for overall revenue for the fourth quarter.

Couple of our titles had some surges right at the end of Q3, but then cost us a little bit in Q4 in catalog.

FIFA was among those.

So nothing really uneven there other than it was a little bit different than the shape of what we might have expected otherwise.

Okay.

Thank you.

Next from Arvind Bhatia from Sterne, Agee & Leach.

Thank you.

Good afternoon, just a couple of title-specific questions.

Specifically on Medal of Honor, even if it's coming after a gap, could you provide some qualitative color on that?

So we can form the right expectations since it's come back here?

And then FIFA with the two titles this year can you help us understand where you're thinking is in terms of the overall FIFA franchise growth that you're expecting this year?

The first on Medal of Honor, I would give you this color.

We generally do not break out by title forecast.

In fact, I don't think we ever have.

I would tell you that -- and this is maybe one of the larger statements we'll make on the call, we're not going to be happy until we've taken the leadership back in the first person shooter category.

And the tip of the spear is the combination of Battlefield Bad Company and Medal of Honor.

So, we fully expect this to be a successful title this year.

We're using a lot of the same technology between the two, the multiplayer game that is a part of Medal of Honor this year.

Which is in fact built by our DICE studio, which builds the Battlefield Bad Company and Battlefield franchise as well.

And we think it is a particularly strong title.

So we've made great strides with Battlefield Bad Company and we expect to make further strides with Medal of Honor.

And we have strong plans for years to come.

This is an important strategic priority inside of our Company of taking market share precisely here.

In terms of FIFA, generally speaking, a World Cup title will do less than half from quarter-over-quarter of what we would get out of a full FIFA franchise.

And the challenge in every given time, time we have have a World Cup year, to get the title out there and roll it back in, because there's nothing on the shelf for when FIFA 11 ships into the marketplace.

Great.

One last one for Eric.

You gave gross margin guidance for the year.

Given the mix that you're modeling for, the next few quarters, could you talk about gross margins on a quarterly basis?

Yes, at a high level I would say that in Q1 -- this is on a non-GAAP basis, we're expecting gross profit margins in the low 60%.

Q2, mid-50% Q3, low 60%.

And Q4, low 60%.

Good luck.

(Operator Instructions) We move on to Heath Terry with FBR Capital Markets.

Great.

Thank you.

I was wondering given the push especially with going to online pass on the sports products, with the push behind registration keys.

Can you give us a sense of what you're seeing -- what impact you're seeing that have on the used market?

Whether or not, at least at this point, in the experience that you've had so far you're seeing either the rate of games being sold back or the usage of those games hitting your servers, changing at all?

So, hi, Heath, this is John Schappert.

We don't participate in the used market.

And we have not launched online pass yet.

We've launched it on Tiger.

What I can give you some color on though is, looking at Mass Effect with our servers network and Dragon Age and Battlefield with our VIP code which had basic bonus content with purchase for the first-time purchaser.

And the ability for second purchasers to purchase that bonus content, we saw a very, very high redemption rate north of 70% of first-time purchasers using the code and redeeming the content.

And we saw a low percentage, single-digit percent of purchasers second non-first-time registers purchasing the code.

What we also saw, though more so was by giving people this access code, we got them into the online world.

And so we've seen very, very strong uptick in downloadable content across all of those titles because we have, A, content available on day one for purchase and, B, we seeded it with a bonus token of free content.

So that is really our drive with our online pass.

Sure.

I get that.

What I'm trying to get to, you mentioned the low single-digit purchase for the used titles that we're hitting the servers.

Were you seeing on a relative basis -- were you seeing fewer of those used titles hitting your servers relative to maybe some titles that you had released last year that obviously didn't have these registration keys?

This is John.

For clarity sake we don't have a way of distinguish a used consumer versus a new consumer when they're hitting our servers.

We can distinguish between someone who's got the code and doesn't have the code and then we sell the code.

I think what you're getting at is the answer to a question that we'll probably be in a better position to answer towards the end of this fiscal year.

In terms of how much business we build, among users who don't have codes, or that they purchased the codes.

What we can tell you in virtually every way imaginable the scenario where the consumer puts in the disk and reaches for new business models is on an uptick.

And we established this strategy, among others, to build our direct to consumer business often starting with the disk.

We think it is a great idea.

We think it is going to build our business, and we think it is a positive consumer experience.

Invariably the consumer is getting a boat load more content to experience something otherwise would.

We used to literally pull our teams off a game within four to six weeks pre-ship and then work on something else because the game was done, it was going into manufacturing, their job was done.

John Schappert referred to that on his script earlier as ship it and forget it.

Our teams are being held in place up through and beyond ship.

They continue to create content to entertain the consumer with new content that's associated with the IP they'd like back.

This is why when we go from 72 titles, or 75 titles, four years ago.

We believe we can successfully go to 36 titles, having our title count and retaining our revenue by generating more revenue per IP by extending our business model into subscriptions, into micro-transactions, into downloadable content and then into new platform like social networks, putting our IP through the POGO or building directed services, like Tiger online, FIFA online, and Battlefield online.

Great.

Thank you.

Was there some reason that the decision to do pass wasn't done in front of the World Cup launch?

The honest truth is we have been preparing for this for the better part of 18 months.

Our first step was, what we did with NBA live about a year and a half ago when we had the live season data, for the first time we put something behind a coupon code, which is a first in the industry.

We had to build our infrastructure.

We had to get what we call our nucleus registration database into a bullet proof position, so we could manage intelligence entitlements without leaving the consumer holding the bag while we make mistakes.

We've now got more than [60] million people that are registered on that database and we're managing entitlements from it.

But it took us awhile to build.

It may seem simple but the underlying database structure and architecture to support it was not simple.

But we're now in a position to be able to do it across a full range of titles from (inaudible).

Great.

Thank you.

We'll move on to Lazard Capital markets, Colin Sebastian.

Thanks for taking my questions.

I have three.

I'm curious how deeply you're integrating motion sensitive controls into the second half product lineup and how well you think that technology is progressing.

Secondly on the Facebook games, John, I think we've seen a lull in growth there over the past couple of months.

I was wondering if you could provide your perspective on that.

Third, curious also on your perspective with what seems to be a bigger push at retail for the used products, somewhat in opposition of where you're headed with the online pass.

And whether you expect any impact there on new product sales as Wal-mart and Best Buy dig in on used?

Hi, Colin.

It's John Schappert.

I'll take your first two, the first one with respect to motion-sensing controls on our products.

We've only announced Tiger Woods for the Sony move to date.

And we have more announcements you can expect from us at E3 inclusive of demos of some of this technology.

So you'll have to wait til then to see it and hear more.

That said, we're bullish on these new controllers and this new technology because we think it brings new consumers into the market.

It's going to be a big push.

Obviously for the hardware companies this fall, it is going to bring a lot of attention to our industry, a lot of new users to our industry, and bring some new life into these consoles, which is exciting.

So we're bullish for their upside for our space.

With respect to Facebook, we're happy to say that our Playfish team has bucked the MAU and DAU decline in the fourth quarter that Facebook saw.

So basically, while most of the top 25 games dropped, in fact they dropped by 4% in DAUs, Playfish increased by 23% and their MAUs ended at 59 million at the end of April which is up 17% since January.

Now, that was because of some nice good re-engineering efforts on Pet Society and Restaurant City to keep these titles fresh and now.

As well as the launch of Restaurant City, which has certainly made up for any declines and grown their share as well.

We're bullish there and again we're excited about the upcoming launch of FIFA Superstar with them, too.

This is John.

Regarding retail.

First off I'd just like to clarify.

I don't view what we're doing is in opposition in any way, shape, or form relative to retailers seeking to be in the second-sale business.

I think it's notable that GameStop joined us with our press release to announce EA Sports online pass.

I think it's an opportunity for us to build the business direct to consumers.

I think retailers will ultimately find the best way to participate.

And I think we'll be able to grow our business very successfully behind this strategy.

Now in terms of the other retailers getting into second sales.

They're mostly using third parties to do so.

There have been a number of announcements.

I would probably suffice it to say that it's a challenging business to operate because you're taking in inventory, re-packaging inventory and reselling the inventory.

A business I'm certainly happy not to be in.

For us at least, we look at our online pass and analogous businesses and strategies we put in place over the last couple of years as being very pro-consumer.

We're delivering more content to consumers just the way they like it.

And we're very pleased that the key retailers are supportive of our strategies to do just that.

Fair enough.

Thank you.

And that does conclude our question-and-answer session.

Gentlemen, I'll turn the conference back to you for any additional or closing comments.

No, thank you very much for joining us on the call, and we'll see you a quarter out.

Thank you, ladies and gentlemen, that does conclude today's conference.

We thank you for your participation today.