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Executives

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

Analysts

Eric J. Sheridan – UBS Securities LLC

Electronic Arts, Inc. (EA) UBS Global Technology Conference November 19, 2013 1:00 PM ET

Eric J. Sheridan – UBS Securities LLC

My name is Eric Sheridan. I’m the U.S. Internet and Interactive Entertainment Analyst here at UBS. Thanks for being here today. With us is Blake Jorgensen, who is the CFO of Electronic Arts. Blake has now been in Electronic Arts for about a year.

Blake J. Jorgensen

More than a year…

Eric J. Sheridan – UBS Securities LLC

Okay. And before that CFO at Levis, CFO at Yahoo and going all the way back to one of the family members of Thomas Weisel one of the sort of economic investment banks in the valley, so known Blake for quite sometime. So thanks for being here Blake.

Blake J. Jorgensen

Thank you for having me. I appreciate it.

Eric J. Sheridan – UBS Securities LLC

Yes, I’d like to turn the floor to you, if you want to make some opening comments and then we could sort of delve into Q&A.

Blake J. Jorgensen

Sure. It’s an exciting time in the video game business. I don’t know how many people follow it closely, but obviously PlayStation 4 came out last weekend, Xbox comes out this coming Friday. And at least early indicators are that the consumers are very excited, obviously Sony sold over a million PlayStation 4s in the first 24 hours, which is a great sign for those who watched Sony in the last console transition. This is a much smoother transition for them and looks like Microsoft will be similar.

We had a great weekend of sales relative to the consoles that looks like the average consumer tie ratio is about three pieces of software for console, which is exactly what we thought and because our Super Slate that we’ve got out there looks like a one of every three pieces of software was coming out of Electronic Arts. So we’re really excited. And essentially biggest worry now is making sure there is enough product in the stores because the consumers obviously want to buy a software to go with the new boxes.

Eric J. Sheridan – UBS Securities LLC

Great. So it’s been a while since we’ve had a console cycle going on seven years. In the run up to this console cycle and as you look out over the next three, six, 12 months, what is different than maybe what you anticipated what were coming out of these three and what might be in line with what you anticipated but how the marketplace is going?

Blake J. Jorgensen

That’s a good question. I think the market is very excited, but I still think the consumer doesn’t fully appreciate the power of the new consoles. They’re 10 times more powerful than the last consoles and until you actually get on and play a game like Battlefield where you’ve got the depths of the game and the multiplayer component, playing against 64 other people. It’s an exciting experience.

And I don’t think the consumer really appreciates that yet because they’ve haven’t had a chance to do it. And so you’ll see over the next six months, consumers gravitating to the new consoles because of that excitement. And then over the next couple of years, I think you’ll see a lot of excitement as game developers start to really harness the power of that new processing capacity to be able to build even more deeper, more exciting, more broad games for all different genres.

Eric J. Sheridan – UBS Securities LLC

Was there anything different this time around with respect to development costs that you saw over the architecture of the new consoles and how to position games in the marketplace and develop them to go to market?

Blake J. Jorgensen

Well, a couple of things. One, the Sony and Microsoft were more aligned in time. Last time they were disconnected time wise and that makes it easier for a game developer as they’re getting code from both of the hardware makers to their both built on a similar chipset, the AMD chipset which is more off the shelf and our designers are more used to that particularly for the games that are PC based games like a Battlefield. And three, I think they were much more advanced in their life services offerings.

And so we could work with them closely all through the process on how best to build-in life services into our games to match the life services that they have. It’s always a tough process to develop new hardware and software at the same time, but I think both Sony and Microsoft did a great job keeping us in the loop along the way.

Eric J. Sheridan – UBS Securities LLC

One of the questions we get the most from investors is, it’s a unique time to have both the console cycle and so many key franchises around the industry launch all in the same time period, sort of the September to March of next year timeframe is going to be a lot of titles, new consoles, old consoles. What are some of the challenges that are faced by that or coming again at the same time and what are some of the opportunities as we move into calendar 2014 coming out of that?

Blake J. Jorgensen

Clearly the excitement and challenges are having to do both last generation and new generation at the same time. Doing a new generation set of titles is always going to be a challenge, but we’re trying to also produce Gen3 titles and we’ll be producing Gen3 titles for many years to come. And we think that the consumer will continue to buy. And we don’t know what the prices of Gen3 boxes will be after the new console rollout, but I’m assuming that they’ll start to come down over time and that may bring new people into the market. So as trying to maintain a great control on your costs during that, so you don’t get a big bump up in R&D cost during the timeframe, but at the same time it’s also trying to make sure that you’re developing great games under both generations, you can’t, but all your talent on Gen4, you still got to develop good Gen3 games, and we’re trying to make sure that we have a great experience for consumers across all platforms.

Eric J. Sheridan – UBS Securities LLC

In so many ways the industries coalesced around some very large key franchises for the industry and then you get – your possible launches coming next year and you have one that to be the next-generation of very large franchises. Talk a little bit about sort of how the industry has moved in this direction to large franchises of either an annualized or an every other year sort of timeframe and what that means for the industry in general?

Blake J. Jorgensen

Yes, I think what people have found is that they’d like to play games that have a lot of excitement around and a lot of depth and have the ability to be extended over time. So our Battlefield with Battlefield Premium, our FIFA with FIFA Ultimate Team or Madden with Madden Ultimate Team, it’s an experience not just a single activity and so you’ll play the game for 12 plus months, often times until the next franchise comes out and the extensions of that franchise, one, allow game makers to monetize games over a much longer period of time and two allows the ability to provide for the consumer much more exciting experience. And that creates bigger and bigger franchises.

And while we want to make sure we’re always out developing new IP, but at the same, we’re also trying to make sure we’re delivering for the consumer the type of franchise they want to play and the activities they want to play over time. Sports becomes the perfect opportunity to do that because people are so ingrained with their sport and their sports teams. They want to have activities associated with that and they want to play with their friends on those in terms of things like FIFA, FIFA Ultimate Team allow people to do that all during the soccer season for the entire year.

Eric J. Sheridan – UBS Securities LLC

And how do you think about, inside EA there is obviously a very large franchises that are IP and then there is very well franchises that are literally franchised that are licensed content from other providers? How do you think about striking the right balance inside the company for those two different, very different types of properties in terms of going to market?

Blake J. Jorgensen

Yes, we’ve always wanted to have a strong balance of the two. Obviously when you leverage a franchise like FIFA or the NFL or in the case of Star Wars with Disney, you’re able to leverage the marketing that those organizations are doing. That should maintain – allow you to maintain lower marketing expenses for your products and build off of the strength that those franchises have outside of the game business.

They like it because it helps to extend their franchises and so it’s a good partnership that we’ve developed. Clearly, when you pay a royalty expense, it’s going to eat into your margin, but if you can counterbalance that with less marketing expenses or the ability to develop an annual franchise like in the sports world, you should be able to do that at a roughly similar margins what you’d see if it’s completely 100% developed IP.

I think the real challenge is bringing to the consumer excitement and new games over time that allow them to continue to stay involved in the gaming industry and to be excited about the IP that they’re seeing coming out of us. We always want to have something on the back burner being developed for five, ten years out that’s exiting new IP and it keeps everyone coming back for an exciting experience.

Eric J. Sheridan – UBS Securities LLC

One of the other questions we’re getting a lot from investors is around the decision or not going forward about Battlefield and whether it should be an annualized title or not. Without talking about a decision itself, can you help us to understand some of the pros and cons of annualizing the big franchise like that that hasn’t been date and sort of – what the sort of probability tree around…

Blake J. Jorgensen

Yes, obviously we haven’t made any announcements yet about our 15 title slates and about Battlefield, it will do that as we start to give guidance at the end of the year for next year. The challenges are you’ve got to most likely do it out of two studios because it’s hard, it’s a two year project, Battlefield takes us about two years to develop and so you want to make sure that your sharing talent across studios, so you keep core talent of the product and the experience for the consumer there. You also want to be really careful that you don’t destroy the franchise along the way. You got to make it exciting and different, but at the same time you want to make sure you maintain a great franchise.

And Battlefield is a product that doesn’t just sell once; it sells for 24 months associated with not just Battlefield, but all the additional Battlefield premium activities that the consumer wants. So you’ve got to be careful that you don’t destroy some of that tale that is on the Battlefield product. But we’re clearly interested in continuing to grow that business and it’s been a great franchise for us and there would be more to come as we talk about it. I think for 2015 one of the concerns people have is that if Battlefield does well this year, you’ve dug a hole for next year, how do you fill that hole, we’ve got a new fighting game UFC coming out.

We’ve got a magnificent dragon age that’s in development that should be a big hit for us next year. Obviously, we’ll bring the out next year, Respawn Titanfall product that will start selling at the tail end of this year will also sell well into next year and obviously all of the Gen4 title benefits will start to build-up as we see more and more people get on new boxes. And so, we’re excited and we think that will be a great 2015 and 2016 when we’ll start to see the emergence of possibly the Star Wars titles along with the Star Wars movies that will start to come out in late calendar 2015 or fiscal 2016.

Eric J. Sheridan – UBS Securities LLC

And with Titanfall maybe you decided to commit Titanfall to one of the two platforms as an exclusive. So understanding a little bit about the decision making that went into that and why you decided to do that and sort of what the implications are for the company for that sort of franchise committing to one of the two platforms?

Blake J. Jorgensen

Yes, so obviously it’s the first title that’s committed to a single platform. That’s a process that’s been done through the industry for many years, there is a lots of single platform titles. Obviously, you work with the first parties to make sure the economics make sense for all sizes and we made that decision on Titanfall. Obviously, it’s a very exciting product; people are really, really waiting for it. We haven’t seen anything quite this exciting since in the industry in a long time, the Respawn team has done an amazing job, they really have talented group of people and we’ll find I’m sure that there will be future Titanfalls at some point that maybe on multiple product platforms don’t know that’s up to the teams that are going through that now, but at the end of the day, we’re excited about this Titanfall and we think it will be a big title and it will be great for Xbox One.

Eric J. Sheridan – UBS Securities LLC

How do you think about when you do plan to develop a group like Respawn and you create some really interesting IP like Titanfall. How do you think about develop a deeper or longer standing relationship with a developer like that when you look out over the next couple of years?

Blake J. Jorgensen

It’s a business partnership, so we’re trying to make sure that we’ve developed a great relationship with them. We help them on marketing. We help them on development where they needed. We try to just maintain a strong partnership with them over time. And it’s no different than any other business partnership or partnerships that we would have Sony or Microsoft.

Eric J. Sheridan – UBS Securities LLC

What are the things I know we talked on about on the last earnings calls that keeps coming up is Origin, and the idea of creating a community around EA and has bought us a community platform for the fans of EA IP as well as possibly a future distribution platform for EA? Can you talk a little bit about how you think that might develop over the next couple of years platform for Electronic Arts?

Blake J. Jorgensen

Yes, it’s been very successful so far in – particularly in the PC base games obviously where we’re strong Battlefield assumes and it allowed the consumers the ability to get access to games and extra content very efficiently through the Origin platform. We’ll continue to see that grow. I think as bandwidth speeds continue to increase and makes it easier and easier for the consumer to access games through Origin and I mean it’s a great opportunity for people to be able to play a whole slue of our games not just one or two games, they get a chance to play and quite few different games on platforms and bring them into their computing at home very easily through how that interaction works.

Eric J. Sheridan – UBS Securities LLC

So what are the topics that you talked about a lot over the last year, Blake it’s improving the operating margins in the business and looking at what – the way EA runs its business and thinking about optimizing margins and managing the cost structure of the business. Maybe you give us an update on what you saw when you joined EA a year in? What you’re pleased about and sort of way out over the next couple of years? What you think the opportunities inside EA that continues to improve the cost of the business?

Blake J. Jorgensen

Sure, when I got there what was clear from the start is it was a very passionate organization about building great games and that’s the most important part of the business. You probably could have gone in there with ax and chop a lot of cost out but you would have ruined the real spirit and art of the business and that’s not what we wanted to do. We really wanted to do is put some discipline around how to manage the business and really leverage what was going on in the digital side of the business to try to drive the cost. So we’re really focused on making sure that we had a platform to deliver business digitally, which would help our gross margins and we’ve seen that, we’ve seen a climb from the 50, mid-50s now into the mid-60s and we think that can be as high as 70 over the next few years as the business continues to shift digitally.

Second piece of the puzzle was how to maintain our R&D expenses by trimming some of the product lines, getting out of some of the areas like social games that were not as profitable and being very careful to manage that R&D expense to not let to – it continue to expand over time without hurting the quality of the games. And then to really start to move towards more ROI driven marketing, organize the marketing function more efficiently to try to centralize it in some areas and reduce some of the fixed marketing costs that we had developed and now we’re really focused on how do we have a better marketing driven or ROI driven marketing dollar spend as we’re connected to many of our customers on a full time basis.

A customer playing FIFA and FIFA Ultimate Team will often play FIFA all through the year. We don’t need to spend a lot of money to reacquire that customer at the start of every FIFA season. We try to instead build that relationship along the way to minimize our marketing cost. And I think the combination of all those hopefully we’ll be able to move our gross margins, I mean our total operating margins from we were in the 9-ish percent range, now we guided to 13% for this year and I think we’re tracking ahead of that and we see by FY’16 margins that should be able to creep into the 20% range.

All through just some discipline versus cutting cost and doing it in a way that makes the employees and the team members excited about what we’re doing. We’re trying to create a great organization that doesn’t hamper the creative development and its all about just educating and helping people understand why we can and how we can do it differently.

Eric J. Sheridan – UBS Securities LLC

How does – you mentioned the shift to digital and mobile helping not only on the gross margin side but possibly on the operating margin side over time. How does taking a franchise like FIFA and sort of developing it with all of that in mind on day one, so that helps the margin profile? I think about playing FIFA on an iPad as opposed to playing on the console and you’re sort of launching it day one across multiple platforms, how does that see into that market?

Blake J. Jorgensen

Yes. And for us its trying to develop a brand new franchise from scratch is really hard and can be very expensive. When you have a franchise like FIFA that’s based on the most popular sport in the world that’s growing probably faster than any sport in the world and its geographically diverse around the world. You start to think about the business differently than purely a console based business. You want to think about it as bringing the sport of FIFA to people on any different mortality that we can and so for example, it’s a console based game, it’s a mobile based game and it’s a fee based game.

In Korea, we have one of the most successful local games FIFA online with Nexon, where it’s growing dramatically and it’s basically an online game. We’re doing the same thing with Tencent. In China, we roll that out next summer, but what that also does is it increases the interest in FIFA as a game that people are playing and we can then roll that out on to an iOS platform or an android platform, or a console platform depending on the country and the consumer. And it really leverages that great sports and global growth of that sport can helps us to maintain a much more profitable franchise over time.

Eric J. Sheridan – UBS Securities LLC

How does something like FIFA online in China, we get a lot of questions about that as well, sort of how does that appeal to you in general, and then what does it mean broadly for margins globally for EA as you roll something like that out and possibly has it an imprint on the overall brand globally?

Blake J. Jorgensen

Yes, so what obviously doing a brand new business in China from scratch is not easy and so finding a partner like Tencent who has an amazing embedded base of customers already in the marketplace, but doesn’t have a sports property like FIFA, it’s a great partnership, and allows us to leverage their foundation essentially and their customer relationships where we provide the content. It also allows us to continue to build a brand that we know we can use on many different delivery methods across China over the long-term. And so it may ultimately allow us to do mobile games or console based games where we’re doing that either with the different partner, or with Tencent or on our own over time.

Eric J. Sheridan – UBS Securities LLC

When we think about the economics of mobile, how does that sort of fit in as well to differentiate it from digital which in a lot of ways is an add-on to something you’ve already sold predominately upfront. How does mobile as a standalone business grow as a percentage of EA’s business over time and what are the applications for that for margins overall?

Blake J. Jorgensen

Yes, so the mobile businesses in many ways a completely new consumer and maybe a consumer that plays console based-games at home, but then plays mobile games on their way to work in the bus, flying across the country. Wherever it might be, they’re playing mobile outside and the Tencent is the games and/or played in shorter bust of time and in often times in most cases are free to play, which means you are monetizing the user over time as they either want to play the game longer, they want to play the game with new components to it, they are able to buy parts of the game and economics to that can be very, very strong.

Mobile game is far less expensive to develop and so at the same time you want to also make sure you’re building games without creating a sprawl of too many games. You want to make sure you are building games and franchises that you know you can sell well because it’s expensive to market mobile games. And so trying to build off of core franchises like FIFA, like the Simpsons, like Plants vs. Zombies has been our strategy to try to continue to build mobile games to deliver on either the iOS platform or the android platform around the globe and to do that in a way where we over time can continue to increase the monetization of those products and continue to grow those products through more and more downloads.

It’s a very different business model, but one that we feel is complimentary because people tend to play mobile games either in the home or out of the home and they tend to play mobile games along with playing console based games. People like to play games and so we are trying to deliver great gaming experiences on any platform.

Eric J. Sheridan – UBS Securities LLC

As you do look out over your targets for margin improvement for EA broadly over the next couple of years, I think the natural question you are going to start getting from people is thinking about capital allocation inside the business and what you want to do with excess capital to either reinvest back in the business to grow and/or possibly change the profile of shareholder returns to the company going forward. How do you guys think internally about all those choices that might be plenty over the next couple of years?

Blake J. Jorgensen

Yes, we are pretty straight-forward about it. First and foremost, we are focused on how do we improve the margins, I mean that’s critical, while continuing to get top-line growth that matches what’s going on in the industry either mobile or console or both, but if we are able to increase the margins obviously that dramatically improves the free cash flow. It’s a business that requires roughly $100 million a year in capital investment, give or take $20 million. It’s not huge capital investment, it’s a fluctuating year-in and year-out. So if you are able to move margins from where we were at say 9% into the 20s, you could take cash flow from $200 million a year, free cash flow to $700 million or $800 million a year. Dramatic improvement in free cash flow, and we are very focused on that. Second is we are going to try to be a little more focused on this type of acquisitions that work well for us.

What works well for us, the small development teams, not large businesses. This is an industry that’s a people based industry and historically, we’ve spent money on some acquisitions that probably haven’t paid out as well for shareholders. And so we are very focused on trying to stay to our – where our core strengths are around small acquisitions and that should hopefully then help the free cash flow be available to return to shareholders in the form of buybacks over time, and maybe some day if there is plenty of cash out there, we can buyback enough stock maybe even a dividend. But at the end of the day, our first and foremost focus is how do we build the cash flow base over time and our belief is that, that should go back to shareholders.

Eric J. Sheridan – UBS Securities LLC

How do you think longer term about leverage on the business, still I was pleasantly surprised when activation on their call as best earnings call said, we’re comfortable with the leverage we put on from the Vivendi transaction and they might continue to operate with that amount of leverage. How does leverage fit into a business that throws up a lot of free cash flow maybe in a couple of years when the margins the way you want them to be and their stable margins throwing up a lot of cash flow. How does leverage factor into that equation as well?

Blake J. Jorgensen

Yes, I mean clearly this is a business that has great cash flow capabilities. And if we were able to do that we might consider more aggressive leverage, but I’m trying to keep everyone focused on let’s build the cash flow first, let’s build the margin profile and let’s make sure it’s sustainable before we worry about the capital structure. Right now, we’ve got a $600 million converts on our book that comes due in a couple of years. I really want people to be focused on how do we make sure, we’ve got great cash flow that if we wanted to pay that off we could or if we wanted to refinance that we could, but it’s all about the stability of the cash flow first is the most important piece.

Eric J. Sheridan – UBS Securities LLC

I understood. I guess we’ve got 15 minutes left, I have some more questions, but I do want to leave some room for the audience to ask questions if they want, so – are there any questions from the audience or I’ll keep going.

Question-and-Answer Session

Unidentified Analyst

[Question Inaudible]

Blake J. Jorgensen

Yes, it’s a great question. So both Xbox One and PlayStation 4 have the ability through their life services to download full games day in day meaning when the games comes out. The biggest impediment still appears to be bandwidth coming into the house and while bandwidth speeds have improved dramatically over the last five years, unfortunately because the processing power of the new boxes is so high, the size of games have increased dramatically. And so all of the benefits that we got from faster bandwidth is probably eaten up by bigger games. So just to give you an example Battlefield, on a download into the new PlayStation still takes about six hours.

Now, the boxes have been designed so you can start to play the game why you’re downloading or you can set it, so it downloads it and then the day – or the time it’s available midnight the game is ready to play, but the average consumer is still tends to want to grab something to play it immediately and so that downloading capability is still going to be based around bandwidth. I also think that used games are an important part of the industry. People think about the price of a game based on the fact that they can still return that game and they need a physical disk to do that. And so that will probably keep the physical business around for some period of time as well.

We spend a lot of time looking at the record business and it’s surprising, but despite the fact that probably no one in this room has bought CD lately. There is a lot of CDs being sold. And so I think there will be a physical business probably puts for a long period of time. I think where the excitement is the extension of the business which is in most cases a 100% digital. And so you might still buy a physical disk but you might then extend the game play on that by 10 months or 12 months based on digital extensions to it where all that comes via downloads and it’s coming a smaller pieces and so you don’t have some of the big upfront client issues that you have with the physical product.

Eric J. Sheridan – UBS Securities LLC

How do you think margins will be impacted as they shift to downloads and streamings continues to grow in terms of the size versus traditional disk?

Blake J. Jorgensen

Yes, so and clearly the electronic or digital side of the business is a much higher margin part of the business. Even if you just look at the two pieces of the puzzle, couple of components obviously retail margins is in there. We also do sales reserves and price protections, funding to keep the channel clean in a digital world that goes away and that’s in some cases as much as $0.15 on every dollar. And so while you clearly would be sharing margin with Microsoft or Sony, you are going to get some benefits for not having the retail margin and not having some of the channel economics which had plus the physical distribution cost which is not a lot, but its still a component there.

And what’s more exciting though is really the extension of life of the game because if you are able to take a game that you may sell upfront for $40 or $50 that then you turn around and create substantial more game play for the consumers that they are willing to pay for over time, all of that is where that incremental profitability comes. And so you might see a product that ultimately you are making $150 on versus $50 on and the consumers play for 12 months and they are very engaged with and they are excited about buying the next version of that game when the new sports season starts for example. And I think that’s where that incremental margin is where the real opportunity is.

I’d say with today’s physical business, you’re probably still going to see gross margins and high 60s to low 70s and until you see a real tipping of the physical business you probably not going to see gross margins bump up much higher than that. But that’s still a great business to be in and if you can manage the OpEx side of the equation as we’re really focused on as we start to see some of the operating margin expansion.

Eric J. Sheridan – UBS Securities LLC

What are the topics we talked a lot advertisers and you are certainly a big advertiser that is targeted advertising, improving efficiency at marketing. So one of the other [indiscernible] looked at for the year that possibly could improve margins that’s continuing to get more and more efficient in your marketing activities. You obviously have a core group of people that buy products from you that can be targeted against probably pretty aggressively. How do you think that as a potential tailwind for margins as well?

Blake J. Jorgensen

Yes, it’s clearly a big potential boost for us. We’ve historically been a very event driven organization you try to develop a lot of buzz around the title, it’s a lot like a movie where you are trying to create that initial path of the consumer. But when you have franchise is that we have you need that less and less and while you are always going to have some of that marketing at the start of every franchise, you’re really going to want to try to figure out how to better target that connection you have with the consumer. And so if you are a big fan of football, you are going to play football all through the season. We want to make sure we continue to extend your game play as long as possible and get you as close to the next start of the football season.

With soccer, that’s a lot easier than with American football because the soccer season is so much longer, but what we are trying to do is make sure that we are having that communication with you and so we don’t have to reacquire you every time. And that’s a better experience for the consumer as well because it makes the ability to re-up into the next season much easier for you and we find that the consumers really enjoy that connection. So that’s we are trying to really shift the world towards from a marketing expense standpoint and that will hopefully move us away from things like Big TV advertisement and – advertising more and much more targeted advertising that’s really about point-to-point with the consumer.

Eric J. Sheridan – UBS Securities LLC

And along those same lines next year for one of your key franchises soccer becomes pretty much a 12-month activity next year with a world top follow strictly by the resumption of the regular soccer season shortly thereafter in August. What is sort of the challenges and opportunities that exists with soccer becoming a 12 month activity next year and how that might compare to four years ago the last time there was another World Cup?

Blake J. Jorgensen

Yes, now it’s a bit very, very exciting. Last time, we obviously had a World Cup FIFA game as well as a FIFA game and we haven’t yet announced this late, but we’re excited about that opportunity that can clearly help us to grow the FIFA franchise even more during the World Cup years. And it does – it creates a lot of engagement particularly if there is certain countries that get into the World Cup, we’ve got our internal bets on who we want to make sure get fit to the World Cup, we can’t control that, but obviously it’s great when certain countries get in, so if the U.S. is in or Mexico is in, those are big positives for us.

Eric J. Sheridan – UBS Securities LLC

Yes, understood. What are the franchise we wanted to ask about was Star Wars, The Old Republic, now it’s free to play sort of how was that performed against expectations since that decision to make it free to play and sort of how the game continues to perform for you guys?

Blake J. Jorgensen

Yes, the original expectations obvious we’re very, very large and obviously the multiplayer MMO world has – the popularly that have come down over time and we tried to restructure the Star Wars business to better match the economics that we’ve done that was available there. It’s a great business that’s very repeatable. We brought the economics in line, so it’s a profitable business for us. And what we’ve noticed is that people either want to play as a subscription base for as a free-to-play and the consumer makes that trade off. In some cases people thought us free-to-play and realize it’s probably cheaper to do it as a subscription business and so they’ll switch over and other consumers like it come in and out as a free-to-play. And it’s a great mix of the consumer base there.

The other thing that we’ve noticed is people respond very well to new content that comes in and so we’re in regular process of adding new content to that. And we think as the Star Wars franchises start to grow with Disney’s investment, we’ll continue to see more excitement around that game as well as the other games that we’ll start to produce.

Eric J. Sheridan – UBS Securities LLC

Okay. Anymore questions from the audience? Okay, one of the things bigger picture question we got from people is there was a lot of title concentration in this fall obviously around the new console and just the timing of some franchise if that’s been out in the market for a while. How do you think longer term about moving franchises around through year or sort of sticking with what is known from the consumers the time of the year they always buy video games. I could see it’s coming both ways of or if you move Battlefield in some March then it has a lot of free runway that’s not populated by other titles, but in November it’s the time of the year wherever…

Blake J. Jorgensen

Yes.

Eric J. Sheridan – UBS Securities LLC

And presence and things like that. So is that a certain notion around from a consumer standpoint?

Blake J. Jorgensen

Yes, I think that you’re always going to have that seasonality that’s driven by the holidays. For us it’s also driven by the sports calendar and so a large portion of our product is aligned with the sports calendar, Madden, NHL, FIFA, they’re all going to be fall releases were a lot connected to the sports calendar. I think what we’re trying to do is we would like to try to have a business that’s a little less third quarter dependent and a little more first quarter strength where we’ve tended to not have as much business, the benefit of the digital business and the extension of the franchises will allow more smoothing over time. And we’ll start to see more of our business gets moved out in the first and the second quarter versus as we’ve seen in the past which is so dominant around our third quarter which is the fourth quarter of the calendar year.

Eric J. Sheridan – UBS Securities LLC

You have referenced earlier on the next-gen consoles, there is a lot of capability in those devices. And I would agree with you; I don't think consumers are necessarily well aware of all the capabilities inside the devices. How long do you think that takes for the market to understand that? Is that sort of incumbent upon Sony and Microsoft to continue to educate the consumer? Is it retailers educating the consumer; yourselves? How do you think about sort of how that might develop, not over the next two months, but over the next two years?

Blake J. Jorgensen

Yes, it’s a great, great question. I think what we’ve seen historically as it takes a good 12 months in the marketplace for the consumer to really understand what’s there and obviously the early adopters will always jump on the new technology or the core gamers are going to want to have the new boxes soon. But I think at the end of the day the software developers will get better over the next two years developing software that really harnesses the power. I mean when you take computing power up by 10 times, you can do a lot more with the game and remind people creating games is more about restricting versus being creative. The game developer is extremely creative, but a software engineer have to restrict some of that creativity. So they can populate the screen with all the things you want to do.

Well, when you increase the power dramatically, you can start to – you don’t have to restrict as much. And so you can start to do more things and you are going to see I think in the next coming years some things that people can’t even imagine that they could do on a video game, much bigger world, much more excitement, much more activity and much more multi-game playing. I mean I don’t think anyone imagines a few years ago the ability for 64 players to play a game of Battlefield together. And it’s exciting – you should go on YouTube, when you look at the video the people put up of their game play, it’s incredible what they are doing, and I think you’ll see more and more of that expand and more consumers understand what the power they’ve got and it’s probably something that Sony and Microsoft will market, will obviously market and you’ll hear a lot more from the consumers who are starting to play those games.

Eric J. Sheridan - UBS Securities LLC

Yes. There's an interesting phenomenon, how it has almost become a cottage industry of republishing your own gameplay on YouTube as an extension of the game. One last topic we wanted to talk about was the next Star Wars game, the franchise that will come through the licensing deal with Disney; if you could help us understand how that came about, sort of what are the challenges and opportunities of developing that kind of game alongside of, obviously, an enormous movie title that will no doubt do big business?

Blake J. Jorgensen

Yes, so I mean we’ve done movie games over the years and we wanted to make sure that we weren’t doing a movie game i.e., game based on the movie, the beauty of the Star Wars franchise is that it's so broad and so deep, you don’t have to do a movie game, you can do a game that's very focused on the world that's been created around Star Wars. We had a long relationship obviously with Lucas on the original Star Wars and when Disney took over Lucas, they really wanted to maintain a video game business around Star Wars. They felt it was very valuable and a lot of people loved the games historically. And so they came to us because of our partnership and they knew that we could help them develop really great games and we struck what we believe is a fantastic deal which allows us to be able to build games in many different genres across multiple types of platforms over 10 years and we’ll leverage the strength of the Disney marketing associated with the Star Wars properties both in movies and other things that they may do over the timeframe. We’ll try to align those with that marketing, power the Disney has so it will get aligned with timing around the movies, but it won’t necessarily be aligned with the movie.

We’ve shown a trailer for one of the possible games that we’re going to make Battlefront and it’s got a lot of people very excited because it’s a very popular game from before. We have the team in DICE, building some early stages of various games and building them in Frostbite, so it will be a very exciting game play and you’ll hear more about it in the years to come, but we’re very excited about the opportunity.

Eric J. Sheridan – UBS Securities LLC

So you have a fair bit of flexibility to create content around the universe in general that J.J. Abrams and his team is going to build up with the Lucasfilm’s franchise. It’s not totally tied in just to the movies.

Blake J. Jorgensen

Yes, definitely very much – so, very much around the historical types of games as in play plus new games that we’re inventing around their content, around the broad Star Wars content, and around some of the new assets that they may produce over time as well.

Eric J. Sheridan – UBS Securities LLC

Okay. Any – time for maybe one more quick one, if we can squeeze one in, in 30 seconds. Well, one more.

Unidentified Analyst

[Question Inaudible]

Blake J. Jorgensen

No. Demographic shifts definitely do. I mean the gaming community is not all young teenagers. There is a lot of people who play games in their 20s, 30s and 40s. And I clearly, if there is a worry, I worry about young people not playing as many console based games, and so that’s why we’re spending as much time as we are on non-console games as well in mobile and free-to-play and PC-based gaming because that demographic shift over time will continue to impact how many people have a console in their house, and hopefully, the new consoles will keep people excited, but we’ll see how that plays out.

Eric J. Sheridan – UBS Securities LLC

Great. I want to thank Blake for being here today.

Blake J. Jorgensen

Thank you. I appreciate it. Thanks everyone.

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