Electronic Arts Inc. - Shareholder/Analyst Call

Aug. 1.13 | About: Electronic Arts (EA)

Electronic Arts Inc. (NASDAQ:EA)

July 31, 2013 5:00 pm ET


Rob Sison

Lawrence F. Probst - Executive Chairman, Principle Executive Officer and Member of CEO Search Committee

Stephen G. Bené - Senior Vice President, General Counsel and Secretary

Blake J. Jorgensen - Chief Financial Officer and Executive Vice President

Joel Linzner - Executive Vice President of Business and Legal Affairs

Gabrielle Toledano - Chief Talent Officer and Executive Vice President

Rob Sison

Good afternoon, and welcome to the Electronic Arts 2013 Annual Meeting of Stockholders. My name is Rob Sison, and I'm the Vice President of Investor Relations. First, I would like to cover the agenda for today. We will start with official business of the meeting, then Blake Jorgensen, our Chief Financial Officer, will give a short presentation followed by a Q&A session. During the Q&A session, we ask that you come up to the microphone at the front of the room to ask your questions.

Now, I'd like to read our Safe Harbor Statement.

During the course of this meeting, officers and directors of the company may make forward-looking statements regarding future events and the future financial performance of the company. We caution you that the actual events or results may differ materially. We refer you to the company's most recently filed Form 10-K for discussion of risk factors that could cause of our actual results to differ materially from those discussed today. Now, I'd like to turn the meeting over to Larry Probst, our Executive Chairman.

Lawrence F. Probst

Thank you, Rob. Good afternoon, and welcome the Electronic Arts 2013 Annual Meeting of Shareholders. Before turning to the formal items of business, I would like to introduce the members of our Board of Directors, corporate officers and a few others who are here with us today. Would you please stand up when I call your name. In addition to myself, the current members of the Board of Directors with us here today are: Rick Simonson, lead director, Chairman of the Audit Committee; Luis Ubiñas, Chairman of the Nominating and Governance Committee; Len Coleman; Jeff Huber; Vivek Paul; and Denise Warren. Each of the nominated directors has consented to serve a 1-year term. Biographies of the nominees can be found beginning on Page 7 of the proxy statement. The members of our executive staff joining us today are: Frank Gibeau, President, EA Labels; Blake Jorgensen, Chief Financial Officer; Peter Moore, Chief Operating Officer; Rajat Taneja, Chief Technology Officer; Andrew Wilson, Executive Vice President, EA Sports; Ken Barker, Senior Vice President, Chief Accounting Officer; Joel Linzner, Executive Vice President, Business and Legal Affairs; Gabrielle Toledano, Executive Vice President and Chief Talent Officer; and Stephen Bene, Senior Vice President, General Counsel and Corporate Secretary.

I would also like to introduce John Ebner and Sanjiv [ph] from KPMG LLP, the company's independent auditors. They will be available during the Q&A session, if you have any questions.

I will now begin with the formal business of the meeting. After the voting results have been announced, we will adjourn the formal portion of the meeting. Steve Bene has been appointed secretary of this meeting and Andrew Wilcox, representing Broad ridge Financial Solutions has been appointed as the inspector of elections. Steve?

Stephen G. Bené

If your shares are registered directly in your name with our transfer agent, Wells Fargo Shareowner Services, or if you are the beneficial owner of the shares held in street name and you've obtained a legal proxy from your broker, you have -- and you have not already voted by proxy, please register at this time with Andrew Wilcox, who's sitting at the proxy table at the back of the room. You will be given a ballot to vote on the matters to be considered at this meeting. A list of EA stockholders as of the record date, June 10, 2013, has been available at the company's headquarters for the past 10 days and is available for examination by any stockholder present, whereby any proxy holder is representing a stockholder.

A copy of the notice of this meeting and a declaration of the mailing to each a stockholder of record as of the record date is also available for inspection.

I'm advised by the inspector of elections that a total of 274,965,300, or 89% of the votes eligible to vote are present in person or by proxy. A quorum is present and the meeting is authorized to transact the business. It is 2:07, and the polls are now open.

The first item of business is to elect members of the Board of Directors for a term of 1 year based, in part, on the recommendations of the Nominating and Governance Committee, the Board of Directors has nominated the following persons: Leonard Coleman; Jay Hoag; Jeffrey Huber; Vivek Paul; Lawrence Probst; Richard Simonson; Luis Ubiñas; Denise Warren.

The second item of business is to approve amendment to the company's 2000 Equity Incentive Plan. The board has unanimously approved amendments to the equity incentive plan, which are detailed in more -- further in the proxy statement.

The third item of business is to approve an amendment to the company's Employee Stock Purchase Plan. The board unanimously approved the amendment to the employee stock purchase plan, which is also described in more detail in the proxy statement.

The fourth item of businesses is to cast an advisory vote on the compensation of the company's named executive officers. The Compensation Committee of the board has unanimously approved the compensation of the named executive officers, which is described in more detail in the proxy statement.

And the last item of business is to ratify the appointment of KPMG LLP as the company's independent auditors for fiscal year 2014. The Audit Committee and the Board of Directors recommend to vote for ratification of the appointment of KPMG LLP. Further information about this proposal may also be found in the proxy statement.

We now turn to voting on these matters. Let me remind you that if you've already sent in a proxy, there is no need for you to cast a ballot, unless you wish to change the vote that you put on proxy. The proxy holders will vote your shares, as indicated on that proxy. If anyone here today has requested to vote by ballot, please mark your ballots now and give them to the Inspector of Elections.

It is 2:09 p.m. and the polls for voting are now closed, and no further proxies or ballots will be accepted.

I've been advised by the Inspector of Elections that over 89% of the shares outstanding were voted by proxy and counted prior to the meeting. Proposal number one, a majority of the votes eligible to vote and voting, either in person or by proxy, have been voted for each of the 8 nominees for director. Accordingly, each has been elected as a director of the company to serve a 1-year term until the next annual meeting or until their successors are elected.

The amendments to the company's 2000 Equity Incentive Plan, the amendments to the company's Employee Stock Purchase Plan, the advisory vote on the compensation of the company's named executive officers and the ratification of the appointment of KPMG LLP as the company's independent auditors for fiscal year 2014 have each been approved by a majority of the votes cast in favor of each proposal.

Lawrence F. Probst

This now concludes the formal business portion of the meeting. I would like to express my sincere appreciation to the stockholders who attended the meeting, as well as those who submitted their proxies, but were not able to be present in person. I declare the 2013 Annual Meeting of Shareholders adjourned. Now, I'd like to turn the meeting over to Blake Jorgensen for a short presentation to be followed by a question-and-answer period. Blake?

Blake J. Jorgensen

Thank you, Larry. Thank you, Steve. And now it's the fun part of the meeting. So I'm the CFO of the company. I've been here for just under 1 year. I started just after the Annual Meeting last year. Previous to my time here, I was CFO of Levi Strauss and CFO of Yahoo!. And what I'd like to do is walk you through a couple of pages here on the business to give you a sense of what we're doing and a couple of pages on the products that we're working on.

First, I'll talk a little bit about what's going on in the industry because we're in a very interesting transition that's going on with the console business shifting.

I'll talk a little bit about our product strategy and about our operations and our financials to go along with that. In terms of the transition that's happening, most of you may know that the Xbox and PlayStation are now going on their seventh or eighth year in their current generation. Both Sony and Microsoft have announced that they're going to shift to a new generation of boxes, and those will most likely come out around the Christmas time this year, the holiday period this year.

What we've seen in each of the successive generations that have gone on is, new users coming to the market and existing users buy new soft -- or new hardware. When new hardware is bought, typically, a new software is bought with it, and you see growth in the marketplace.

Historically, at the tail end of a console transition, you're seeing a decline because people don't want to buy a software for a box that's no longer going to be up-to-date. And exactly, we've seen that in the last 2 years in our business, and it's been difficult to grow the business as that transitions occur.

The other important thing that's gone on in the business is the shift towards digital. More and more of the products are going digitally to the consumer. And in fact, if you look at the overall industry, the console business, as well as the PC business and the mobile business, people playing games on either their phones or tablets, that business has grown dramatically driven by that explosion of the digital content. Digital now represents almost 70% of that business and is now almost $60 billion to $70 billion a year opportunity, huge potential for our business, as well as the world, the rest of the marketplace.

What you've seen in our Digital business is the following: Our digital business is comprise of a couple of key components: The mobile handheld business, all that delivered to the consumer digitally; as well as a subscription business people that are buying a subscription to some of our services over time; and extra content. People that are playing our games and then buying extra content for our games. FIFA and FIFA Ultimate Team, are the perfect examples of that. And then last but not the least, full-game download, where people are actually bypassing the retail channel and downloading games directly onto their PCs or consoles. All of that has grown dramatically inside of our business, and we're now running at a roughly $1.7 billion-a-year rate for our digital. And the digital business is extremely profitable, much more profitable than our packaged goods business. And so a part of the drive towards profitability that we are pushing on is to try to continue to push the digital side of our business.

If you look at our financials over the last few years, you can see the benefit of some of that digital shift. First, in our gross margin, from 55% to now 66-plus-percent driven by that shift towards digital; Second, we're trying our very best to drive down our operating expenses by delivering more products digitally and by managing them more aggressively internally to help drive the operating process. As you can see, we've guided the street this year towards an operating margin improvement of upwards of 13% from where we were 5 years ago and an operating profit of over $500 million. This is a journey that we're continuing to march on and we would like to see those operating profit numbers in the high-teens or maybe even in the 20s in the next few years to come, with continued focus on driving the top line, driving our digital business, driving gross margins and managing our costs.

To do that, we're on the right path. We think our first quarter earnings have showed that to people. We're ahead of what we told the street and we're seeing some of that benefit from investors. And most importantly, we think we've got a great product slate to be able to help us get there.

If you think about the foundations of our business, it's all about products. FIFA, for one example, is a huge business for us because it's not just the original software that you buy, it's all the additional components of that FIFA engagement that we have with our users throughout the year.

Battlefield is a very large product for us as well. We did not have a Battlefield last year. We'll have one this year, shifting in October. I'm very excited about the Battlefield business, and Battlefield has an additional component of which we service and add new content to the game over the coming years. Big, big opportunity for us and one that we're very excited about.

In addition to Battlefield, we've got a new sports product coming out this year. It will be on the new generation of boxes, consoles-only, but it's a NBA game, and you saw a little snippet of that in the start, very exciting, exciting game.

On the mobile platform, to those who haven't played The Simpsons: Tapped Out, I encourage you to do it. It's fantastic, and it's a business that generates close to $100 million a year on mobile for us, all digital.

Plants versus Zombies, another mobile product. We'll have a new version of this out next month. And while most people think it's a little silly, it is really, really addictive and fun. So try it out, not just with your kids, but you yourself will love it.

The Sims, one of our great franchises, will be out next -- early next year. And another Plants vs. Zombies console-based game, called Garden Warfare, will also be out next year.

And then, for those who haven't heard, we have a partnered with Walt Disney and Lucasfilms to develop a whole new generation of Star Wars game for the console, as well as for mobile and handheld devices.

The first game that we're focus on is Battlefront. It's been a traditional game. It's done extremely well, and this will most likely come out along -- around the same time that the Star Wars movie start to come out, probably in the summer of '15.

And a new title that's coming through a partner of ours. It's got a lot of excitement in the industry. It's called Titanfall. We've partnered up with a Respawn studios to build what is going to be a very exciting multi-player game. And it's the most recent E3. At the industry conference, it was awarded the Best Game of the conference.

And then last but not the least, UFC, the fighting game, aligned with UFC, the organization, we're really putting together what is going to be a very exciting game. You'll see that some time next year.

Oh, and I forgot, Need for Speed, didn't mean to leave that out, one of my favorites. You saw some of the trailer there. It looks like me driving on the road when I'm going back home to San Francisco at night, but very exciting game.

So we are extremely excited about where we're positioned. We're positioned well for the new-generation boxes. We're excited about the leadership roles that we play in the industry and in driving digital, and we're very focused on growing our cash flow and building our margins, which we know is what shareholders are looking for.

So with that, I will open the meeting up for any questions. I'll either take the question or have members of the management team or the board answer questions. And as a reminder, there's microphones here, as well as microphones around.

Question-and-Answer Session

Blake J. Jorgensen

It looks like we have a potential question.

Unknown Attendee

I'd like to schedule kind of a portfolio management with house full of investors. If you could excuse me for a second. I'm getting through my iPad to get my questions all laid out. But I wanted to ask you just a few simple questions. Okay. First, I was in [indiscernible] traveling today. A big news on CNBC. My analyst tells me about the lawsuit. The -- did you guys make any comment on that today?

Blake J. Jorgensen

We have not made any comment other than to say that we typically don't comment on pending lawsuits. I will ask Joel to make a brief statement on that lawsuit. Joel is our Head of Business Development and Legal.

Joel Linzner

The lawsuit? Of course, we're very pleased that the Ninth Circuit court feels -- ruled in our favor. In the Jim Brown like this lawsuit, we were equally disappointed that the Ninth Circuit ruled against us in a 2-to-1 decision in the Keller license lawsuit. But we're confident that the briefing set forth in the descent will ultimately prevail as we continue to seek review of the case.

Unknown Attendee

Okay. Second, you touched on it briefly about this, the transition to digital, but obviously, things like Angry Birds and casual gaming, and these are things that turn you into a booming business. Can you just talk a little bit about sort of longer-term, how you're transitioning the company to deal with cloud and 99-cent games and those sort of things?

Blake J. Jorgensen

We are a firm believers that the digital business is additive to the console business, and we see that in our own business model today. For example, we continue to sell more and more FIFA console games every year and alongside of that, we continue to have more people involved in playing FIFA through FIFA Ultimate Team and the console game, all during the year. The second part of that equation is this digital part, and it's additive to the traditional console business. We see, over time, more and more opportunities to extend the console game play into the mobile games. The reality is, today, most console games, in particular, the new consoles are much more powerful than what can be played on a portable device. And so we believe that'll still be both experiences for the consumer over time.

Unknown Executive

[indiscernible] most of our line up on mobile is actually using a premium business model. So we're positioned very well to what is popular in the marketplace right now, and it's very well-positioned against offerings like 99-cent games that you called out. Over time, the mobile platform is a key initiative for Electronic Arts. We have a lot of growth in front of us. It's very important globally, especially in emerging markets. And our brand power with EA sports, The Sims, Plants vs. Zombies, puts us in a very good position to maximize that opportunity.

Unknown Attendee

And then my last question, and then I'll exit. And this was from my analyst, but actually, I threw that [indiscernible] I get it. Your target audience, instead of younger, when I look at the management team and the Board of Directors, I don't see a huge amount of diversity. No offense, because it's kind of -- your pipeline is kind of get black here, but how do you guys stay in touch with this sort of a changing needs and dynamics of typically a younger marketplace, college and that sort of thing?

Blake J. Jorgensen

I don't look that young? Is that what you mean? I'll have our Head of HR, Gabby, answer that. And if you have the whole -- I'll start by saying, if you did have the whole company sitting in here, you would see a very different company, and people who are very hands-on, I guess.

Gabrielle Toledano

That's really it. Our population, our average age in the company is the very low-30s. So -- and we're not that old, I don't think. We all have kids, as well, who are -- who play games, we all play games. So again, the overall company population is at the lower age. So...

Blake J. Jorgensen

And I would add, don't ever get in a game with Frank because he's very good. Or Andrew, with FIFA, I mean.. Sir?

Unknown Attendee

What happened with the college football game?

Blake J. Jorgensen

So -- and I'll let Joel jump in here, but we have severed our relationship with NCAA, but not the college licensing organization. And so essentially, going forward, we would not be able to call our game NCAA Football, but we still can have a college football game. So we'll still have most of the colleges involved because that's through the CLC arrangements. Joel, you want to add? I can't tell you though if Notre Dame will be able to win or not.

Unknown Shareholder

I have a follow-on question. This is about the diversity. I'm wondering why there aren't more women involved? There's one woman on the board and one woman in management here. I'm just wondering if that wouldn't help to improve the bottom line level. I'm a long-term stockholder. My name is Erica Rickter, I've had the stocks for many years. I keep waiting for you guys to do something with this company. So do you think it would help? I mean what's the rationale for having so few women involved in this organization?

Gabrielle Toledano

Thank you for that. We -- the industry as a whole, not EA specifically, has a low population of women in the workforce, and that is often true in engineering companies in general, not just the gaming industry. EA is actually a leader in terms of the population of women in a company, which we're super proud of. So -- and we're growing that each year, and we watch the levels of women promoted and that kind of thing. So there is an issue though overall in technology in the industry, also gaming in terms of the supply of women that come out with a CS, a Computer Science degree who are qualified to help make games. But believe me, we're super -- we are focused on it. I don't disagree with you that women can make a difference. That's for sure, but it is an industry supply chain issue and so forth, and we are improving all the time in leading with that for the company in the industry.

Unknown Shareholder

As compared to other gaming?

Gabrielle Toledano

Other gaming companies and technology companies are also super challenged when it comes to engineers, women or in engineering. It's a real issue in Silicon Valley. So we are going into secondary schools and colleges in trying to encourage women to study engineering more specifically. We're real active in high schools and in the colleges and outreach in this area, so...

Blake J. Jorgensen

If I can add on behalf of the board, we've actually brought on a terrifically, a new qualified board member in Denise Warren. We were looking for somebody with direct skills in digital content creation, marketing, distribution, and Denise brings that to us, and I think the share price is up smartly since her announcement of joining the board.

Unknown Shareholder

I have one more question. I'm just wondering if you can share the percentages of each person received, the board received in both case -- that we just voted on. Can you share the percentages of that for the audience. You said it was a majority, but I'll be curious...

Blake J. Jorgensen

I don't have my shareholder report right in front of me, but I can tell you that every board member received more than 90% of votes for.

Unknown Shareholder

So more than 90%?

Blake J. Jorgensen

Well, every single one of them, yes. Any other questions? I appreciate your attendance today, and I look forward to seeing you at next year's meeting. Thanks very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!