美商藝電 (EA) 2011 Q4 法說會逐字稿

Good afternoon.

My name is Kristen and I will be your conference operator today.

At this time, I would like to welcome everyone to the fourth-quarter fiscal year 2011 earnings call.

(Operator Instructions).

Thank you.

I would now like to turn the conference over to Peter Ausnit, Vice President of Investor Relations.

Sir, you may begin.

Thank you.

Welcome to EA's fiscal 2011 fourth-quarter earnings call.

Please note that our SEC filings and our earnings release are available at IR.EA.com.

In addition, we have posted earnings guidance to accompany our prepared remarks.

Lastly, after the call, we will post our prepared remarks, an audio replay of this call, and a transcript.

This presentation and our comments include forward-looking statements regarding future events and the future financial performance of the Company.

Actual events and results may differ materially from our expectations.

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

Electronic Arts makes these statements as of May 4, 2011, and disclaims any duty to update them.

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

Our earnings release and the earnings slides provide a reconciliation of our 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.

Now I'll turn over the call over to John Riccitiello.

John?

Thanks.

I am happy to report another strong quarter to finish a strong fiscal year.

In Q4, we beat the Street and hit the very high end of our expectations for total revenue, digital revenue, and profit.

For fiscal 2011, EA delivered on all of its goals, including revenue, market share, and EPS.

And perhaps most importantly, we substantially exceeded our own ambitious target for digital revenue.

We set out the year with a goal of hitting $750 million.

In the end, our digital non-GAAP revenue grew by 46% and exceeded $800 million.

I am particularly proud of EA's rapid growth in scale in digital, and that our growth rate almost doubled that of the digital sector overall.

We did it in a way no other competitor can and in a way that best addresses the future opportunity in the market.

We did it across multiple IP; across all the relevant platforms, from social to mobile to console; and across a variety of business models.

The consumer has changed.

200 million console players have become 1.5 billion consumers gaming on multiple devices.

We are the only gaming company serving this [bold] new opportunity.

In a few moments, we will take you through our FY12 guidance.

Even though most will focus on the full-year EPS guidance range, I would show you that the underlying assumptions are more interesting.

I would draw your attention to our digital non-GAAP revenue, which is expected to exceed $1 billion in fiscal 2012.

And just as importantly, it is worth noting that we expect to finish the fiscal year with a non-GAAP EPS run rate up roughly 50% from our fiscal 2011 performance.

I'd now like to outline a shift in our strategies.

When we established objectives around reducing title count, cutting costs, and starting a digital business, we did so recognizing that we needed to execute a turnaround, and the major part of what needed to change was to reduce titles and costs.

Our strategies can be defined as fundamentally defensive.

Today, we are announcing a big shift to [our] house.

Over the coming years, we will transform EA from packaged goods company to a fully integrated digital entertainment company.

We'll transfer EA to a game type of service model by focusing on three new strategies.

Number one, intellectual property.

We believe we are driving the strongest portfolio of IP in the industry, with EA Sports, FIFA, Hasbro, Madden, Pogo, Battlefield, Need for Speed, The Sims, Tetris, Dragon Age, Mass Effect, and more.

We fully intend to make these properties into year-round businesses that lead their [subjects] across a range of platforms.

Number two, platform.

Increasingly, we see ourselves in the software platform every bit as much as we see ourselves as a content mecca for other companies' platforms.

We had a great start with 112 million consumers in our nucleus registration system, up from 61 million a year ago.

And while we will continue to be a great partner to our best retail customers and our first [party] partners, you will see the beginnings of a consumer game platform merge in EA that complements and extends the content ecosystem and addresses the wider opportunity on [open] devices.

Number three, talent.

To deliver on the two strategies above, IP and platform, we will expand on a model that is already working at EA and only at EA.

We're the only Company with world-class teams working cross-platform on social, mobile, and content development.

We are innovating these teams, and augmenting them with product modernization and marketing.

It's a big change.

As an investor, you can see this is the way to better manage our IP and drive up the ARPU for our core properties.

As a developer, you can see this as the reason EA will be the most interesting and satisfying place to work in the game industry.

Now I'd like to outline our fiscal 2012 guidance at a high level.

There are three factors that make fiscal 2012 particularly challenging for EA.

Following a record year for revenue and profitability, our EA Sports business is facing two potential [new] blackouts and will be comparing with fiscal 2011 that included a FIFA World Cup title.

Year over year, these differences represent roughly a $250 million revenue challenge.

With Battlefield 2, we are mounting the biggest launch campaign for a game in EA's history.

We think the franchise is worth it.

We know the opportunity is worth it.

Still, it's a big commitment of resources.

The Old Republic.

The launch date, while in our fiscal year, is not yet certain.

We see roughly $0.15 EPS [faring] better within the potential launch windows.

Despite these investments and uncertainties, we are guiding a non-GAAP EPS range with the midpoint up 14% and are confident we [are put in] the fiscal year with an EPS run rate up 50% versus fiscal 2011.

In summary, we had a strong fiscal 2011 delivering on all objectives, operational and financial.

Starting now, we are shifting from defense to offense, and will be transforming EA from a packaged goods-centric company to a fully integrated digital model only EA can realize.

Fiscal 2012 promises to be among the most exciting in EA's history, whether considered from a consumer perspective or from a purely financial investor perspective.

Now, I'll turn the call over to Eric.

Thank you, John.

EA had very good top- and bottom-line performance in Q4, hitting the upper end of our EPS guidance and exceeding our overall and digital revenue guidance, thanks to upsize across our digital portfolio and packaged goods performance both for frontline and catalog titles.

We also met our initial four-year FY11 guidance for non-GAAP revenue, non-GAAP EPS, and operating cash flow.

Bad Company 2, and Dragon Age.

For the fiscal year, the combination of Medal of Honor and Need for Speed Hot Pursuit have sold through approximately 8.5 million units.

Q4 digital non-GAAP revenue was a record $268 million, growing 72% year over year.

All revenue types and platforms of our digital portfolio were up double digits year over year for the quarter.

Please note that we had a total of approximately $27 million in Q4 digital revenue that was either timing related or non-recurring.

Q4 non-GAAP gross profit margin was 67.3%, compared to 65.2% a year ago.

On a GAAP basis, gross profit margin was 69.9%, compared to 69.6% last year.

For the fiscal year, non-GAAP gross profit margins improved by six points from 55.3% to 61.2% on higher digital revenue and an improved mix of EA titles compared to fiscal 2010.

Q4 non-GAAP operating expenses of $559 million were slightly higher, driven by increased variable compensation expenses since we exceeded plans for the year.

GAAP operating expenses were $617 million in the quarter.

Q4 non-GAAP operating margin was 11.2%, versus 4.0% last year.

On a GAAP basis, operating margin was 13.3% for Q4, compared to 8.5% last year.

For the fiscal year, non-GAAP operating margins improved by 3.5 points from 4.7% in fiscal 2010 to 8.2% in fiscal 2011, a function of an increase in our digital revenue mix, gaining more profit in the packaged goods portfolio, and a year-over-year reduction in R&D expense.

Q4 non-GAAP earnings per share was $0.25 versus $0.07 a year ago, leading us to a full-year non-GAAP BPS of $0.70.

GAAP earnings per share was $0.45 in Q4 versus $0.09 a year ago.

The principal difference between our non-GAAP and GAAP EPS was the revenue deferral, and we ended fiscal 2011 with more than $1 billion in GAAP deferred revenue.

Headcount.

We ended the quarter with 7,645 employees versus 7,842 a year ago and 7,742 in Q3 fiscal 2011.

22% of our employees are in low-cost locations, and the breakdown of headcount is 5,544 in R&D, 929 in marketing and sales, 990 in G&A, and 182 in cost of goods.

Cash flow from operations this quarter totaled $253 million, the same as last year.

Our full-year fiscal 2011 operating cash flow has increased to $320 million, which is up $168 million versus fiscal 2010.

Capital expenditures have declined year over year, and fiscal 2011 free cash flow of $261 million is up by $414 million versus last year and up $181 million excluding the fiscal 2010 purchase of the Redwood Shores headquarters.

EA has approximately $6.70 per share in cash, short-term investments, and marketable securities, and is debt-free.

At year-end, roughly 60% of our cash in short-term investments were onshore.

Inventory levels were well managed at a year-end balance of $77 million, the lowest level in almost four years, an indication of our success in reducing lower margin distribution inventory and the benefits of an increasing mix of digital business, which has no physical inventory requirements.

[Reduced] for sales returns and allowances as a percentage of trailing six-month non-GAAP net revenue were 13%, up from 10% a year ago, and are up on a nine-month basis to 9% from 6% last year.

Sector performance.

Overall, the worldwide interactive entertainment segment was up mid-single digits in the March quarter.

Packaged goods were down 14% for the quarter, but digital continues to perform well and was up over 20% for the quarter.

From March quarter, the Western packaged goods market was down 12%, comprised of a 6% decline in high-definition platforms driven by a change in Easter timing and the industry release slate and an 18% decline in low-definition platforms.

EA was the number one publisher in the Western world for the quarter with 19% share in North America, 20% share in Europe, and 19% share overall in the Western world versus 19% a year ago.

Our share in fiscal 2011 was 17% overall, with 16% in North America and 18% in Europe.

Industry software sales and high-definition consoles and PCs remain strong, and play to EA's strength on these platforms.

In fiscal 2011, PC and high-definition console software sales in the Western world grew by 14%.

In fiscal 2011, approximately 80% of EA's total packaged goods revenue was on these growing high-definition platforms which offer attractive digital extension opportunities for EA.

Digital highlights for Q4 and fiscal 2011.

In Q4, non-GAAP digital revenue increased by 72% from $156 million to $268 million, comprising 27% of total revenue this quarter.

This growth far outstrips sector performance.

For fiscal 2011, EA generated digital revenue totaling $833 million, up 46% for the full year.

DLC and Free to Play micro transaction content was $113 million in Q4, up almost 200% versus last year.

Mobile and other handheld digital revenue continues to grow at or better than market, and was up 25% versus last year, in thanks to growth in smartphone-related revenue, which more than offset a reduction in feature phone-related revenue.

Bad Company 2 franchises, which, as of the end of the year, posted non-GAAP digital revenue of $46 million and $48 million, respectively, with more anticipated in fiscal 2012.

It is now possible for us to see more than $50 million in high-margin digital revenue derived from a single core packaged goods franchise.

As of the end of Q4, we had approximately 112 million users in our nucleus consumer registration system, up from 61 million a year ago.

The number of monthly active users in nucleus is now well past 20 million as of March fiscal 2011.

Please note that in addition to our nucleus-registered users, we have tens of millions of additional consumers playing our social and browser-based games which will eventually be registered in the nucleus system for upsell and cross-sell opportunities.

Guidance.

Our fiscal 2012 non-GAAP EPS guidance of $0.70 to $0.90 shows EPS growth of more than 14% at the midpoint versus our fiscal 2011 results.

This compares to the 10%-plus growth we referenced on the last call.

The Old Republic ships in the calendar year, but our guidance range accounts for a range of ship dates within the fiscal year.

Fiscal 2012 non-GAAP revenue.

On a non-GAAP basis, we expect a total of $3.75 billion to $3.95 billion in fiscal 2012 revenue.

We expect to grow digital faster than the industry, reaching approximately $1.05 billion to $1.1 billion for the full year.

Our non-GAAP expectations for publishing revenue range from $2.5 billion to $2.65 billion, and our distribution revenue expectations are approximately $200 million.

The Old Republic, which we announced as a digital service.

GAAP revenue and EPS.

Our expected fiscal 2012 GAAP net revenue guidance is $3.7 billion to $3.9 billion.

Our fiscal 2012 GAAP EPS guidance range is breakeven to $0.28 per share, and GAAP tax expense is expected to be approximately $50 million.

GAAP gross profit margins.

We expect GAAP gross profit margins of approximately 62% and we expect full-year non-GAAP gross profit margins of approximately 62% to 63%.

Operating expenses.

We expect fiscal 2012 non-GAAP operating expenses to be slightly greater than fiscal 2011, given current FX rates, but essentially flat versus fiscal 2011 in constant currency.

GAAP operating expenses are expected to be approximately $2.25 billion.

Our fiscal 2012 non-GAAP EPS guidance range corresponds to a non-GAAP operating income margin of approximately 8% to 10%, with approximately $5 million in other income and expense, a full-year non-GAAP tax rate of 28%, and the reduction in share count due to repurchase activity, resulting in an estimated 329 million diluted shares for the year.

Q1 and full-year phasing.

For Q1 fiscal 2012, we expect the following for non-GAAP results.

Revenue between $460 million and $500 million and a non-GAAP loss per share of $0.44 to $0.49.

Non-GAAP gross profit margin is expected to be approximately 54%.

Operating expense is expected to be roughly $470 million and share count is an estimated 330 million.

For GAAP results, we expect the following for Q1 fiscal 2012.

Revenue between $910 million and $950 million and GAAP earnings per share of $0.44 to $0.53.

Gross profit margin is expected to be approximately 75% to 76%.

Operating expense is expected to be approximately positive $530 million and share count is an estimated 334 million.

The Old Republic and leverage from higher unit sales of key owned IP.

We expect fiscal 2012's quarterly revenue phasing to be similar to fiscal 2011 with non-GAAP revenue distributed as follows.

Q1, approximately 13%.

Q2, approximately 24%.

Q3, approximately 38%.

And Q4, approximately 25%.

We expect to incur approximately 49% of our non-GAAP operating expenses in the first half of fiscal 2012 and the balance in the second half.

In terms of the splits between R&D, marketing and sales, and G&A for the year, we expect to incur roughly similar amounts for each category as we incurred in fiscal 2011.

The Old Republic in Q2 or Q3, the lowering of our guidance range assumes the outside possibility of a January launch.

Cash flow.

We expect fiscal 2012 operating cash flow to be $250 million to $300 million, down primarily due to the timing of certain license payments in fiscal 2012.

We expect fiscal 2012 capital spending of $125 million to $150 million.

The Old Republic, direct-to-consumer infrastructure, and related information technology systems.

Foreign exchange.

Our guidance assumes the following FX rates for the fiscal year.

$1.38 to the euro, $1.01 to the Canadian dollar, and $1.62 to the British pound.

[For the center], we expect the worldwide interactive entertainment segment will grow 5% to 10% in calendar 2011 versus calendar 2010, with more than 20% growth in digital, and an approximately 5% decrease in packaged goods.

We expect the packaged goods segment to remain bifurcated with stronger growth of approximately 4% in high-definition consoles and PCs, offsetting 15% declines in standard definition consoles within dedicated handheld devices.

We also want to provide increased investor visibility into three important financial considerations.

Number one, capital allocation strategy; number two, return on investment measures; and number three, our fiscal 2012 exit earnings model.

Let me start with our capital allocation.

We will remain focused on efficient capital allocation, ensuring that we remain well capitalized with adequate cash in hand to fund operations, and notice highly seasonal cash flows.

As of March 31, 2011, EA had $2.2 billion in cash, short-term investments, and marketable securities, or approximately $6.70 per share.

Of that, $1.4 billion in cash, short-term investments, and marketable securities was on shore.

We felt that onshore cash was greater than our first [children] needs, so in February of this year we announced a $600 million repurchase program.

In Q4 fiscal 2011, EA repurchased 3.1 million shares at a cost of $58 million.

$532 million remains authorized for the repurchase program over the next 15 months.

EA takes into account its weighted average cost of capital of approximately 10% [in the] investment proposals, including the green-light process for major game titles.

While we have several financial outlets for investments, one good reference point is the number of the titles that achieve a greater than 20% IRR on a stand-alone basis.

On this basis, the percentage of [new] titles exceeding the financial target increased from approximately 50% in fiscal 2010 to 70% in fiscal 2011.

This improvement was driven by continued cost control in our title development, hitting target ship windows, and getting more units in revenue, including digital revenues from each of our major titles.

Finally, we expect that EA will enter fiscal 2012 with a non-GAAP EPS run rate and operating margin greater than what is indicated by the full-year guidance range.

The principal driver here is the ship date of Star Wars.

We open fiscal 2012 with Star Wars in development, an [incumbent] expense.

We close the year with Star Wars in operation, generating higher-margin, ratable digital revenue and profits.

Now, I'll turn the call over to Frank Gibeau.

The Old Republic.

The EA Games [segment] delivered a record year for quality, schedule predictability, and, best of all, profitability, significantly exceeding our internal plan.

A key goal we set out to do here was to increase the strength of our wholly-owned IP [incremental] platforms.

We delivered on this with Need for Speed Hot Pursuit, Medal of Honor, Mass Effect 2, and Dragon Age.

A big driver in this success was a measurable improvement in quality.

The quality items across our entire portfolio of nine games was an average of 84 Metacritic.

High-quality encore games is key to our strategy to extend our properties to new platforms.

Schedule predictability was another big win for us.

100% of our internally-developed games hit their launch date.

The Games label also nailed our goal for delivering digital revenue.

On a full-year basis, our downloadable content from console and PC combined was triple our fiscal 2010 results.

Individual extensions have played a major role in increasing our profitability.

One of our digital offerings is Dragon Age Legends, a Free to Play game currently on Facebook.

It's one attracting a good fan base and monetizing nicely.

Dragon Age Legends offers a [land] into the future where a game franchise with a large and loyal fan base can attract new players and new revenue streams without cannibalizing the core product.

In fact, our research on player telemetry shows that people first who experience this franchise on the Facebook platform show strong intent to purchase the core game on PC and console.

This is a win-win-win.

Free to Play getting Facebook game generates incremental revenue, introduces new players to the franchise, and drives purchase intent for the higher-end priced different base in game.

Free to Play is additive, not cannibalistic.

In addition to Dragon Age Legends, we have six Free to Play services live and in beta based on big franchises like [Bio Feed] and Need for Speed.

These services are scaling fast with nearly 15 million registered users to date, and strong revenue and profit growth.

What's not or what's also working at EA Sports and EA Play, which have launched Madden Superstars, FIFA Superstars, and Monopoly Millionaires on Facebook, with many more to come.

EA is uniquely suited to this multi-platform strategy.

No other game company has the [dream] IP portfolio and the cross-platform capability to capture this.

Next, let me outline three world-class launches we have planned for fiscal 2012.

I'll start with Battlefield 3 from our DICE Studio in Stockholm.

The game was built on our brand-new FROSTBITE 2 engine.

It takes the battle to an urban landscape with dynamic weapons, destructible environments, vehicular warfare, and a team-oriented multi-player that provides a highly competitive social experience.

Battlefield 3 absolutely blew away critics when unveiled at the Game Developers Conference in March.

Bad Company 2.

A lot of people are telling us they want to play this game on day one.

We know we have a good competitor.

But head to head with Call of Duty in Q3, we have the superior game engine, superior development studio, and a flat-out superior game.

Our goal is to significantly gain share in the huge FPS category and to put the other team on defense.

Come and see for yourself.

We'll be showing brand-new [carbon] features at E3 in June.

I encourage everyone to make time for Battlefield 3.

Our second blockbuster, Need for Speed The Run, was announced last week with a trailer that revealed another spectacular game in this globally recognized franchise.

Developed by the Black Box team in Vancouver and built on our proprietary game engine, FROSTBITE 2, Need for Speed The Run offers an edgier experience that takes players on an action-packed high-stakes race from San Francisco to New York.

The Old Republic, a jaw-dropping subscription-based MMO that is captivating critics and fans in the beta tests.

We currently have over 1 million [better off] and beta testers for the world's first story-driven fully-[braced] MMO.

Everyone is waiting for us to announce the ship date.

Sorry, but that's not going to happen today.

We are holding the date for two reasons.

First, we don't want to tip off the competition.

Second, we want more data from the beta test to guarantee a spectacular experience at launch.

At EA Games, we couldn't be more proud of fiscal 2011 or more excited about fiscal 2012.

No other Company can have gamers consuming great titles on so many platforms.

Now I'll turn the call back over to John Riccitiello.

Thanks, Frank.

Fiscal 2011 was a very good year for EA overall.

We are [proud of the fact] that the record year the team has delivered at EA Games [design], and EA Sports had a record year for revenue and profitability.

We are particularly proud of delivering at the very high end of our financial guidance and exceeding our $750 million digital non-GAAP revenue growth.

Today, we're a very different company.

We have strengthened our IP portfolio by quality and, importantly, extended our franchises into new and fast-growing digital platforms.

From here, it's about building a better, more predictable, and more profitable business.

We will continue to build the game industry's most powerful collection of globally-recognized intellectual properties.

We will build and launch a direct-to-consumer software platform, while supporting the [gray card] there from the [queue first tidings] and the retail operations of our largest customers.

We will extend our hugely talented teams to create and manage IP across the entire spectrum of console, social, and mobile platforms.

This is all about building shareholder value.

We're expanding our earnings power while building a more predictable, less seasonal, less cyclical business, a business that is less dependent on each individual hits and that is deeply anchored in the ongoing modernization of game franchises.

We're shifting on offense and winning plays no other company can.

This is how we create greater shareholder value.

With that, we are happy to take your questions.

(Operator Instructions).

Brian Pitz, UBS.

(Technical difficulty) the impact on the business from the PlayStation network outage.

Obviously, this is a pretty significant situation.

Any results impacted to date?

And can you help us understand the decision to support Battlefield with $100 million in marketing campaign?

Is that going to be enough or is that too much?

How should we be thinking about that investment?

Thanks.

This is John, Brian.

We'll probably pick that up in a couple of pieces.

One thing I was alerted to during the call, just for everybody listening, is that it was apparently muffled and a little rough to hear.

We made a switch so we'll be a little clearer during Q&A, at least we hope so.

And we've already posted and sent out the full transcript to allow those that may have missed a word here and there that they wanted to hear.

Apologies for that.

I have no idea what happened there.

To your question, I'll pick the second part first.

Battlefield 3 is actually a misquote of something I said.

What I said was over $100 million in competitive spending, meaning EA and Activision, which spend well north of that competing for first-person shooter leadership this fall.

That misquote got repeated and then built on in a few other gamer publications, and we are not putting out a specific budget for our Battlefield 3 launch campaign.

We never do.

And that was the reason I kept it in the generic what I expected to combine today, which would be more than that.

Eric may want to speak to the point about PS3 and impact on our financials.

In terms of the PSN outage, obviously we're hopeful that that comes back online as quickly as possible.

We were aware of that heading into the construction of our Q1 guidance.

We think there is a modest impact that we've already factored in here in the upcoming quarter.

Justin Post, Merrill Lynch.

This is Ryan Gee calling in for Justin Post.

I guess -- a couple years back at your analyst day, and I think it was 2008, you guys give an estimate for some of the different labels, and I was wondering if you can just update us on the size of your sports business, maybe what it was in fiscal 2011, and then what it could be in fiscal 2012, some of the titles that are going in and out.

And then, also, on the beta test for Star Wars, it sounds like you guys are already ongoing with that, but how long does a test like that last before full product launch can actually take place?

Thanks.

So we'll break that into two, I think.

I'll pick up on the sports point.

I'm not sure about the relevance to 2008, and we don't put out label-level financials.

I would make the following points about the EA Sports business.

It recorded record revenues and profit in fiscal 2011.

Part of that is driven by a non-annual title in FIFA World Cup, and -- which added north of $100 million to our business, very profitable revenue.

And the sports business, while still projecting strong profitability in a very good business in fiscal 2012, we did note and would note that there's about a $0.25 billion challenge that needs to be overcome in that business through the combination of risks in and around lockouts, our decision on the ship date for NBA Elite packaged good, and then, non-laughing, a -- the World Cup title.

What's great is we've got strong guidance despite that.

But those are sort of some of the headwinds on that business you've identified correctly.

With regards to your question on Star Wars, this is Frank, typically MMOs have about a six-month run in terms of beta testing.

We've been continuously testing Star Wars already and have already embarked on that process.

So we feel very good about the type of telemetry and feedback that we've got coming in from that, and we have a very sizable sign-up list of beta testers that are actively engaged in making the game better.

Edward Williams, BMO Capital Markets.

Just a quick question to follow up a little bit on the beta, if I could for a moment.

Can you give us a little bit of color as to what the level of interest is at this point in the Star Wars beta?

And then, if we were to look at your guidance for the year, and the range of your guidance, can you comment a little bit about what's at the high end in terms of the assumption behind Star Wars?

Is that a -- what the timing may be in the launch of the game or if you could give brackets around what we might be thinking of in terms of a sub level or an ARPU level even?

This is Eric, and I'll take the second part of the question first.

So our guidance range is at the high end of $0.90.

We give it a ship date range of Q2 -- fiscal Q2 to fiscal Q3 for Star Wars, and so Star Wars shipping earlier, i.e., in Q2 versus Q3, is factored into the $0.90 upper range.

We are not giving any specific subscription or subscriber targets or ARPU.

The only thing we've said about business models, expect it to be monthly subscription-based, but beyond that we haven't given any specific metrics for that.

The other thing, though, in terms of operating within the guidance range, moving from the upper end down to, say, the middle or the lower end, is if the ship date should slip by a couple of months from Q2 into the latter portion of Q3, it's north of $0.05, $0.05 to $0.10 in terms of their ability, based on the ship date of Star Wars within the windows that we've provided there.

And that is, of course, factored into the $0.20 overall non-GAAP EPS guidance range.

In terms of your first question about interest in the beta, it's exceedingly high.

The demand metrics for this franchise are amongst the highest we've ever seen at Electronic Arts.

And in fact, the customer data coming in from the beta tests, intend to purchase, quality rating, desirability, are all at the very high end of what our partners in the testing groups have seen.

We're very excited and confident that we've got the right game.

Brian Karimzad, Goldman Sachs.

I guess, first one, just parsing a bit the digital guidance.

So, this year, ex that $27 million one-off benefit, you did about 40% digital revenue growth.

And for fiscal 2012, you're implying 34% growth, even though you have some benefit from the MMO in there.

So, if you were to think about what's baked in there, excluding the MMO, is it safe to say you're assuming somewhere in the, call it, high 20%, low 30% growth range, or are you baking in a more material deceleration from the fiscal 2011 growth rate for digital ex the MMO?

This is Eric.

I mean, we're looking to grow all portions of the digital portfolio year over year.

But coming off a year where every line item was up 20% or better, whether it's mobile, Free to Play, micro transaction, DLC, subscription, advertising, other, et cetera, full game digital download.

So we've experienced strong growth across the portfolio.

We think Star Wars will, obviously, lead to digital growth.

There is some variability based on the ship date, so we're going to get a partial year.

It's a question of how many months that we get.

So, that has to be taken into account in terms of the guidance overall.

Star Wars will be additive to two line items in terms of the guidance, subscription and we expect to sell some of the clients via direct digital download, so that will also be included in that digital full-game download category.

The one area where there's likely to be a deceleration is in console-related DLC.

At this point in time, what we've done is we've effectively digitally enabled 90%, 95% of the portfolio versus less than, say, 25% two years ago.

So we had the benefit of going from, in some cases, zero digital revenue in a franchise to $10 million-plus of digital revenue.

So, if there's any deceleration, it has to do with that aspect.

You can't redigitally enable every portfolio.

Bad Company 2.

And on Battlefield 3, I know I'm not going to get an absolute pre-sale number out of you, but can you give us some color on what mix of folks have elected for digital download when they made that pre-order?

And also a sense for -- I'm guessing a lot of these folks were already on nucleus, so what mix of them were existing Battlefield purchasers or owners or players?

These are pre-orders coming in from retail, so we don't really have a mix on the digital peak at this time.

It's all basically apples-to-apples on a retail level.

When we looked at -- on the nucleus level, it's -- there's a lot of new users coming in.

The game is a generation ahead of what's out there because of the FROSTBITE 2 technology.

People are very excited, so we're seeing a lot of interest coming in from non-Battlefield fans.

I would also add that the first-person shooter, we saw strong digital client uptake on Medal of Honor.

So PC digital direct, so it seems that that mode of delivery is resonating well with the FPS fans.

James Hardiman, Longbow Research.

Thanks for taking my questions.

First, you had a couple of really highly rated games that you came out within the fourth quarter.

Certainly Crysis 2, Dead Space 2.

It seems like these are games that the critics, at least, liked quite a bit, and yet the sales were maybe not quite where I had hoped and maybe you had hoped.

Have you learned some lessons about maybe the launch window so closely on the heels of a pretty solid first-person shooter game that came out over the holidays, and does that have any ramifications about how you think about launch windows as you move forward with high-quality first-person shooters?

So, almost all of us would probably have a different point of view on that, but I would start by saying that Dead Space 2 in a, I guess, post-holiday window dramatically outsold Dead Space 1.

That's precisely what we want to see with these things, which is we create a franchise, we manage to get some [usable] profitability with the first edition, and build that intellectual property so it's got the breadth and shoulders so each successive release can sell more than the one prior.

That's where the profitability comes in our business, which we've been doing that well, and Dead Space is a perfect example of that working, despite it moving from a holiday quarter introduction to a post-holiday follow-on, and it did well and we're pleased with the outcomes.

Do you want to pick up on Crysis?

Yes, Crysis 2.

That shipped at the very end of March, so the data that's coming up through NPD and the others doesn't really reflect the full measure of how the game is selling.

It's selling extremely well and it's continuing to sell very well into the new fiscal year.

So, the title's got legs.

It's extremely high quality.

We got the Crytek really nailed on the product, and it's got deep multiplayer which is keeping it in the disc tray and people are continuing to play.

The marketing has continued to really branch out and bring new users in.

So, we're very pleased with the Crysis 2 launch.

I think maybe we're looking at too early a read because it shipped so late in March.

I'd add one thought to this as well.

I'd mentioned this, as did Frank, on the call, that we're pursuing digital in a way that no other company is, and Dead Space is a perfect example of this.

More early innings than FIFA or Battlefield.

But the core thesis that we're able to do that literally no one else can do, and it generates strong profit opportunity for us, is taking a property like Dead Space and then driving it across iPads, across iPhones, across Android, ultimately in social, DLC, ongoing micro transactions associated with the franchise.

And what we're finding from our telemetry, and we have details on this that we're quite convinced we're right, we're not trading dollars for pennies.

We're in fact adding new revenue streams and increasing the interest in our existing business model while adding new business models.

As we concentrate our intellectual property portfolio, we're doing something, as I said, no one else can do in that there really isn't a competitor that's a leader in console, a leader in PC, a leader in DLC, a leader in micro transaction, the leader on iOS, a leader on social networks like Facebook.

So it's taking our best properties, and frankly, I think, if you try to evaluate any of them just on packaged goods, you're missing the larger picture and the larger opportunity that we [have] for the [end].

Very helpful.

And then, I was hoping you could maybe give us a little bit more color.

You talked about a $250 million revenue challenge this year versus last.

I'm assuming that a good chunk of that you sort of know in terms of the NBA Elite, certainly, and the FIFA, and then I was hoping you could maybe qualitatively talk about the piece that you don't know.

It sounds like that's primarily Madden.

What are your sort of thoughts about whether or not a season this year, or a delayed season, how does that affect Madden?

And if the NFLPA and the NFL came to an agreement tomorrow, how would that change your assumptions and ultimately your guidance?

Well, think of it this way.

One, there's 112 million fans out there with an opinion, and I may have an insider seat, but in terms of trying to give you an insider's view, I won't do that here.

I think that's really for the NFL and the NFLPA to do.

Personally, I'm a fan, and I am hopeful there's a season.

In terms of business planning, we planned the business down about one-third.

$85 million, $90 million, on the principle that there is a lockout for the season.

That's a worst-case planning assumption.

We expect it to do better if there's a season.

And as I said, we're hopeful that there's at least a partial season.

The third thing to know, and we communicated this some time ago at an investor conference, we have -- we came to an accord with the NFL and PA regarding our business relationship with them that largely facilitates, if you will, profit protection in the downside scenario.

So, think of revenue upside, relatively modest upside, if there's a season.

But the revenue loss is baked into our guidance.

And that's baked into your guidance throughout the full $0.70 to $0.90 range, or is it -- you know?

It is.

And it's baked in at every scenario, and the assumption is there's no season.

That's what's baked into our guidance.

Arvind Bhatia, Sterne, Agee and Leach.

Thank you, and congratulations on a strong quarter.

My first question, guys, is on the direct-to-consumer business that you're building.

I think, Eric, I heard you say part of the reason some of the expenses on the OpEx side will be higher will be spending on that.

Can you provide us some more color there?

How soon do you want to ramp that up?

How big do you see that business over the next 12 to 24 months?

Just what the plans are.

Sure.

Just to be clear, overall you would expect OpEx to be up slightly year over year, but only due to FX -- overall.

On a constant-currency basis, roughly flat.

We do, however, expect to increase capital spending year over year, and we called out, really, three items there.

One is the buildout of the Star Wars server infrastructure to bring that service live, and the other two were to support our DTC initiatives.

So we anticipate ramping a bit on the capital side as we deploy platform technologies and support systems to further beef up, for example, our nucleus registration system.

We've got 112 million registered users as of the end of the quarter, roughly double where it was a year ago.

That system has to be ultra-scalable.

So we've taken that into account in terms of our capital spending assumptions there.

Also, we are making further investments in customer acquisition and monetization.

CRM messaging is an area that we've really started to focus on.

We've sent more than 0.5 billion direct messages in fiscal 2011.

We intend to increase capacity in that area as well.

So those are a couple of examples of B2C investments that we have looking into FY12.

And some color on that that I think you were getting at about our spending on digital.

We are actually increasing our spend in digital.

What's happening is there's a shift in mix.

If you were to take EA's aggregate investment in SG&A or look exclusively at R&D, you -- the internal data shows us a pretty sharp waterfall.

What we've been doing is stepping down investments against our core packaged goods business and stepping up investments against digital opportunity.

In fact, this year we're getting reasonably close to 50-50.

Obviously, three years ago, we were closer to 90/10, so sort of under the surface of this business is a dramatic transformation of our resource allocation, which is why we describe ourselves looking forward (technical difficulty) digital business because virtually everything we're doing now is against the digital opportunity.

It's where we see our growth.

It's where we see our margin expansion.

It gets us that less cyclical, less seasonable, more ratable, and more profitable business.

Good, and then, one of your key titles for the fiscal fourth quarter is, of course, Mass Effect 3, and I didn't hear too much about that, so I wondered if you could take the opportunity to maybe talk a little bit about what's happening there and what you see so far.

This is Frank.

Yes, the Mass Effect 3 title is well under development up at our Edmonton studio, and we're very excited about the innovation that we have planned for the game.

For the first time in a Mass Effect series, we're actually going to be able to launch on all platforms simultaneously, which will allow us to expand the market fairly dramatically.

We have some announcement at E3 that I think everybody will be excited about in terms of some feature innovation and some new ways to play Mass Effect, but it was a very successful franchise for this year.

Won 150 different awards.

It had -- I think it's Metacritic was nearly 95.

So this is a great platform for us to continue to build from, and we're very excited about Mass Effect 3.

Just to add a little bit, and this franchise is a personal favorite of mine.

I won't get into any game-play strategies, but I will point out that the franchise has done exceptionally well so far, and it's one of the franchises we're building on.

And one of the things Frank and [Rick Rizzita] and the team up in Edmonton have done is essentially, step by step, adjust some of the game-play mechanics and some of the features, which you'll see at E3, that can put this into a genre equivalent of shooter meets RPG, and essentially address a far larger market opportunity than Mass Effect 1 did and Mass Effect 2 began to approach.

So, we're huge believers in the intellectual property and we are purposely shifting it to address a larger market opportunity.

Atul Bagga, ThinkEquity.

Thanks for taking my question and congratulations on the quarter.

I have a couple of questions for you.

I wanted to understand a little bit about your philosophy around investment in new IPs versus building or extending the existing IPs.

How many new IPs we can expect to see year over year from EA?

So, John here.

Couple of thoughts.

So, just a few years ago, we had north of 75 packaged-goods titles, and in fiscal 2012, we have 22.

If you listened carefully to Eric's commentary during the call, if you could hear it over some of the interference that was there, we have a very strong focus on making sure we achieve greenlight hurdles involving our own profit metrics, but one important one is strong IRR.

And if we're efficient at whittling the titles, we're driving up the profitability of the ROIC for the Company overall.

We are still investing in new intellectual properties.

At any given time, we have two or three in development.

We do now, and we will be making announcements when it's appropriate to do so.

But we're still believers in new intellectual property.

If you want to think about where EA is trying to go, it's around this concept of about a dozen great IP that we can program, if you will, 12 months of the year with 12 months of revenue across multiple platforms and multiple business models on a global -- addressing a global opportunity.

The second thing is, is to that, trying to add one meaningful new property a year, recognizing that some genres, some sectors don't perform forever.

Take the music genre, for example.

It was all the rage on ours and a competitor's call a couple of years ago, and it's essentially not a subject today.

So, we're a believer in our, if you will, our great dozen IP, and we recognize the need to add to that in order to keep it at a dozen to grow and expand that portfolio.

That's helpful.

My second question is around your nucleus database.

I wasn't sure if you guys touched upon this.

So right now, the 120 million nucleus registration, does it include people who are coming from Playfish side?

And going forward, how do we see this evolving?

Do you see either getting more focused on distribution co-publishing, given your platform advantage of the nucleus registration database?

Thank you.

This is Eric.

So, as of the end of Q4, we had 112 people registered in nucleus.

112 million.

112 million.

And that did not include Playfish or some other game services like Pogo, so (multiple speakers) or mobile, so if we were to take all those other sources and merge it, as we are in the process of doing and add it to nucleus, it would be well north of 150 million, probably closer to 175 million.

And we fully expect to integrate the user data from those other systems and drive, in all future product releases, registration to nucleus.

And so, this is really going to be an important asset to the Company.

It allows us to do some of the things that you're referring to, to direct market both our titles and potentially titles that we digitally distribute on behalf of other developers.

And so, think of this as evolving a way analogous to the way that we evolved our packaged-goods distribution business through -- successfully through EAP.

The equation in our industry moving forward -- in so many ways today, we talk about packaged goods.

We talk about units.

We talk about price.

The conversation that's driving EA at this point is really more about the lifetime value of the consumer, or a customer, less the acquisition cost for that customer.

And what nucleus gets us is the opportunity to build directly against that type of a business model, which can yield that more profitable business.

I will tell you that we're going to focus a lot of our communication at E3 in describing what we mean by a platform that extends and augments console, PC, and mobile, that we put into our prepared comments today.

We think it's actually one of the most valuable parts of our Company and will lead us into a much better future.

So, it's a heavy emphasis here.

So far, we've been giving you the equivalent of eyeballs.

We haven't been telling you what we're going to use it for.

You're starting to pick up on that.

If you go to EA.com and look at our download manager, et cetera, you can see a lot of new features.

If you interact with our mobile games or iPad games, you'll see not only are you playing the Dead Space game on iPad, you're seeing the rest of our content come along with it.

If you're interacting with a Chillingo product, whether it's Angry Birds or Cut The Rope, and you are involved in the crystal platform there, you're seeing a lot of things under the surface that I think yield the best insight into where we're going as a Company.

That makes sense, John, and just to follow up, how do you reconcile your partnership with Bigpoint with the nucleus registration items that you guys are building?

We have a relationship to distribute and publish some Free to Play games with Bigpoint, and I won't go into details on how we've worked that out, but we're very comfortable with the agreement that we struck with them to continue to drive against our goals with nucleus.

Yes, think of it, Atul, as those kinds of things.

That's why we actually don't think of ourselves in conflict with other distributors, as we doled out EA's platform capability.

If you're -- arguably, there is a reason Kindle wants to be an application on the iPad or Netflix wants to be an application inside the PlayStation 3.

They want to push their content in as many ways as possible.

When we push individual intellectual properties through other platforms, they ultimately register with us and become our users, and then we can ultimately monetize it in more ways than that first initial purchase.

One of the great things about being an IP holder as opposed to just a distributor of content, like some of the companies I just mentioned -- obviously Amazon doesn't write books and Netflix, for the most part, doesn't produce movies -- when you own that intellectual property and you bring it inside your ecosystem and you monetize them, you do so at very high margins.

John Taylor, Arcadia.

I've got a couple of questions.

I wonder if you could -- this may be anticipating what you're going to do at E3, but when you talk about shifting from defense to offense, I wonder if you could sketch out kind of what that means in terms of planning, measuring, composition plans, that sort of thing, to get everybody sort of focused on the same set of goals.

Any way you can kind of address that?

Only if you could spend a couple of weeks with us, but I think the best answer to that question is essentially this.

We have radically reduced complexity in our Company as we've gone through from mid-70s to low 20s on titles, and those same intellectual properties are being promoted across all the various platforms and business models.

We've identified intellectual property owners inside of our Company and we're sort of organizing around that.

We are essentially charging those individuals in teams with the architecture of a plan that involves console, PC, mobile, social, micro-transaction subscription, et cetera.

So you get the vast simplification when you organize around a single organizing principle as opposed to multiple, which is what we had to do these past three years as we managed the transition.

So, ultimately I would say offense is frankly a good description of what happens when you know what play to run over and over and over again, and score touchdowns or make field goals.

And right now, that model is our best properties, but across all of those various business models, and having the teams that are charged with it feel responsible, accountable, and rewarded for success.

(Multiple speakers) we're getting close to the end, JT, if we can pick up a little bit on (multiple speakers)

Let me ask one more.

So, Eric, the Star Wars game, can you talk maybe about the difference in run rate before and after the game ships in terms of pre-build and then ongoing service beyond that?

Here's the way to look at it, and we made some specific comments about what our year looks like when measured with a portion of the year with Star Wars versus where we exit the year where Star Wars is fully in operation.

And so, again, we opened the year fiscal 2012 with Star Wars still in development, with us incurring expense through our P&L, fairly significant R&D expenses.

At the end of the year, Star Wars will be live.

We'll have some of the costs shift from R&D into cost of goods as we activate the live services, you know, the game masters, the customer care, et cetera.

But all in, the Star Wars P&L slips from being dilutive at the beginning of the year to highly accretive at the end of the year.

So, that's really the point that we wanted to make.

Now exactly what that delta is before and after is subject to assumptions about subscriber counts, retention, et cetera.

We're just not in a position to get into that level of detail right now, but suffice it to say, on a fully operational basis, 12 months of Star Wars will look even better on our P&L in regards to the partial-year contribution in fiscal 2012.

We did give a little bit on prepared comments, and I pointed out, if you could, again, hear it over the technology.

Our EPS run rate is essentially 50% higher than it was throughout fiscal 2011 as we shipped through the pre- and post Star Wars ship date, so it's a pretty dramatic increase in earnings leverage, and one of the reasons for -- there's a perspective.

We said plus 10% on earnings during the last call, expecting a $0.65, $0.66 EPS outcome for fiscal 2011, implying $0.72, $0.73, $0.75.

We just reported guidance of $0.70 to $0.90, midpoint $0.80, up 14% versus our F11 actual.

But the full range is really explainable in the range of ship outcomes for Star Wars.

And so, we think that's a very attractive situation because the actual hit the pin on the dot for when we ship it doesn't affect the underlying value of Electronic Arts.

A little bit later or a little bit earlier in the scheme of things is meaningless to everything other than fiscal 2011 EPS outcome.

I think with that, we're going to -- we can take one last question and we'll wrap up the call.

Sean McGowan, Needham & Company.

I was wondering if you could comment on some of the recent acquisitions that you've made and are you expected to see additional ones, kind of small strategic ones or anything bigger, coming up?

Thank you for asking that question because one of the things we rather enjoy here is acquiring companies, and then having people speculate that we've spent five times more on it than we actually did, which is what happened the last time around with Chillingo.

Here, we just picked up a company we feel great about, Firemint, a very strong creative organization, and we get did so at a vastly lower price than has been reported publicly.

Eric, do you want to pick up on specifics?

Yes, I think it's consistent with the strategy that we've articulated in terms of M&A, smaller scale acquisitions that are purely digital.

Firemint is going to continue to drive the overall mobile portfolio, particularly in smartphones.

They're extremely talented developers.

They've already proven themselves with a couple of blockbusters, and there's more in the works.

And as you look at the acquisition, overall in price, it's less than $25 million.

If you look at the actual EBIT multiple, it's in the 4X range.

And so, by any metric, it's a great pick-up, and we're super excited to have that talented team joining EA.

All right, ladies and gentlemen, thanks for joining us on our fiscal 2012 earnings call and FY 2011 report.

See you next time.

Thanks very much.

This concludes today's conference.

Thank you for your participation.

You may now disconnect.