Electronic Arts (EA) Andrew P. Wilson on Q4 2015 Results - Earnings Call Transcript

Electronic Arts, Inc. (NASDAQ:EA) Q4 2015 Earnings Call May 5, 2015 5:00 PM ET

Executives

Chris Evenden - VP, Investor Relations

Andrew P. Wilson - Chief Executive Officer & Director

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

Peter Robert Moore - Chief Operating Officer & Executive Vice President

Frank D. Gibeau - Executive Vice President, EA Mobile, Electronic Arts, Inc.

Analysts

Colin A. Sebastian - Robert W. Baird & Co., Inc. (Broker)

Justin Post - Bank of America Merrill Lynch

Stephen Ju - Credit Suisse Securities (USA) LLC (Broker)

Chris Merwin - Barclays Capital, Inc.

Arvind Bhatia - Sterne Agee CRT

Michael J. Olson - Piper Jaffray & Co (Broker)

Drew E. Crum - Stifel, Nicolaus & Co., Inc.

Benjamin Schachter - Macquarie Capital (USA), Inc.

Michael Hickey - The Benchmark Co. LLC

Sean P. McGowan - Needham & Co. LLC

Brian J. Pitz - Jefferies LLC

Operator

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, please disconnect at this time.

Now I will turn the meeting over to Mr. Chris Evenden, Vice President of Investor Relations. You may begin.

Chris Evenden - VP, Investor Relations

Thank you, Jen. Welcome to EA's fiscal 2015 fourth quarter earnings call. With me on the call today are Andrew Wilson, our CEO, Blake Jorgensen, our CFO. Frank Gibeau, our EVP of Mobile, and Peter Moore, our COO, will be joining us for the Q&A portion of the call.

Please note that our SEC filings and our earnings release are available at ir.ea.com. In addition, we have posted earnings slides to accompany our prepared remarks. Lastly, after the call, we will post our prepared remarks, an audio replay of this call, and a transcript.

A couple of quick notes on our calendar; the date of our next earnings call will be Thursday, July 30. And our E3 press conference 1:00 PM Pacific Time on Monday, June 15.

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 5, 2015, and disclaims any duty to update them.

During this call, unless otherwise stated, the financial metrics will be presented on a non-GAAP basis. 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 the call over to Andrew.

Andrew P. Wilson - Chief Executive Officer & Director

Thanks, Chris, and thanks, everyone, for joining us today.

FY 2015 was an exceptional year for Electronic Arts. With a clear focus on putting our players first, we delivered new experiences that were award winners, global best-sellers, and breakout hits. Our live services for franchises like Battlefield, FIFA, Madden NFL, and The Sims are thriving. The communities in our mobile titles continue to grow. And through constant dialogue, we are forging deeper relationships with our players.

We broadened our portfolio on key platforms, introduced new service models, and delivered quality through stable, scalable, and innovative experiences. All of this contributed to outstanding player engagement in EA experiences across console, PC, and mobile in FY 2015.

Our financial results were consistently strong throughout the year. Revenue and EPS were above our guidance for the full fiscal year, and we have reached an all-time high in operating cash flow. EA today is performing with focus and efficiency, and we're leaning into our strengths to deliver great experiences to a growing and diverse audience of players around the world.

Dragon Age: Inquisition and Battlefield Hardline are both terrific examples of the focus we have today. Moving launch dates is never easy, but we are committed to making the hard decisions that will benefit our players. With Dragon Age: Inquisition, those extra few weeks of polish allowed BioWare to deliver a truly epic new experience. Not only did it win dozens of Game of the Year awards. More importantly, our players gave it the highest form of praise, with nearly 200 million hours of Dragon Age: Inquisition played life to date.

Our Visceral team opened up to player feedback earlier and more than ever before while developing Battlefield Hardline, and the input from our community was a catalyst for greater innovation. With the added development time, Battlefield Hardline delivered a complete package for different types of play: core strategy-based Battlefield gameplay that our fans love; fast and fun new multiplayer modes like Hotwire; as well as a deep story-driven single-player campaign. We are very happy with how well the game has sold to date, and more importantly, that we've brought many new fans into the Battlefield universe.

Meanwhile, EA SPORTS had one of its best performances ever. Nearly six months after launch, FIFA 15 remains a top-five title in the Western world, with more than 18 million matches played on average every day in Q4. Gameplay hours of Madden NFL 15 were up nearly 30% for the quarter over last year, and the hours played in Madden NFL Ultimate Team in the quarter increased a massive 97% year over year. Passionate sports fans are spending more time in our games today and engaging in our Ultimate Team modes to extend the fun long after the season is over.

We continue to see major growth in player engagement with our live services and digital offerings across all platforms. Our investments in Battlefield 4 brought greater stability to the experience and allowed us to apply our learnings to ensure that Battlefield Hardline was stable and scalable at launch and beyond. We now have two Battlefield experiences with large, highly engaged audiences, and both will receive new expansion packs in the coming months.

Other services are showing strong momentum with players as well. Monthly engagement levels on Origin were up significantly over the previous year, and the subscriber base for EA Access continues to grow as we learn more about the innovative new delivery model on console.

For players on smartphones and tablets, we've built a strong foundation of key titles, and now we're adding to it. Players are going deeper into SimCity BuildIt, logging more than 2.4 billion game sessions in Q4. And Madden NFL Mobile continues to capture more sports gamers, with gameplay up 25% over the previous quarter.

But perhaps the greatest example of our core strength in mobile, designing experiences that will provide years of entertainment, is The Simpsons: Tapped Out. Nearly three years after launch, The Simpsons: Tapped Out averaged more than 16 million monthly players throughout FY 2015. We are building some excellent momentum in our mobile business, and we're excited to launch new Minions and Star Wars experiences later this year.

In FY 2015, we captured hundreds of millions of players with new RPG, sports, shooter, simulation, and casual experiences across console, PC, and mobile devices. Now as we look at the opportunities ahead of us in FY 2016, we are positioned to build relationships with millions more through entirely new experiences as well as new games in our major franchises.

Just three weeks ago, the world got its latest look at Star Wars Battlefront from our DICE studio. The reaction has been powerful. Our Star Wars Battlefront trailer has been watched more than 29 million times to date across social platforms. Brought to life through an unprecedented partnership with Disney and Lucasfilm, Star Wars Battlefront will immerse players into the Star Wars universe like never before. The power of our Frostbite engine technology enables us to deliver intricately detailed visuals and a completely authentic environment for players to live out their Star Wars fantasies.

Anticipation is now building for the launch of Star Wars Battlefront in November, and we're excited to be a part of one of the biggest global pop culture events of the year with the return of Star Wars. We look forward to showing more of Star Wars Battlefront to players at E3 in just a few weeks.

In addition to Star Wars Battlefront, we will leverage the breadth of our IP to reach a wider audience of players across multiple genres and platforms in FY 2016. EA SPORTS will excite fans throughout the summer and fall with the latest releases of Rory McIlroy PGA Tour, Madden NFL, FIFA, NHL, and NBA Live, including industry-leading gameplay, compelling new features, and fresh Ultimate Team experiences.

FY 2016 will see the return of Need for Speed as we introduce a new console experience as well as a new mobile game. Maxis will continue to deliver great new content for The Sims 4, including another expansion pack, multiple game packs, and additional game updates for the growing Sims 4 player community. After Plants vs. Zombies Garden Warfare became a sensation last year with console players young and old, we will be returning to the Plants vs. Zombies universe with a bigger and bolder new console experience in FY 2016 that we'll share more about at E3. Minions Paradise, our first game with the popular franchise in partnership with Illumination Entertainment, will be one of at least five new EA Mobile titles this year. In spring 2016, Mirror's Edge is set to revolutionize the action-adventure genre with its stunning first-person gameplay.

And of course we'll continue to bring new content to our communities in Battlefield Hardline, Battlefield 4, Dragon Age: Inquisition, Star Wars: The Old Republic, our EA SPORTS titles, and EA Mobile games. Our live services will continue to keep these experiences fresh and fun for players throughout the year.

Across the world today, more people are playing games and spending more time playing games than ever before. The audience is wider and more diverse than we have ever known. Games are truly becoming the best form of entertainment, and EA is well positioned to benefit. Building relationships with new players and strengthening existing ones through meaningful engagement is at the core of our objectives as a company. We are continuing to invest in our digital platform, infrastructure, security, live service systems, and community engagement teams to scale to the needs of a growing global player base that hold games as a vital and intrinsic part of their lives.

FY 2015 was a transformative year for EA, as we put our players first, delivered amazing high-quality games and services, and drove greater speed and efficiency into our business.

I'll now turn the call over to Blake for a deeper look at our Q4 financial performance and a view into the year ahead.

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

Thanks, Andrew.

As Andrew mentioned, we had another great quarter and a phenomenal 12 months. Before going into the details, I'd like to step back and consider the journey we've been on for the last couple of years.

When we first started talking about improving the performance of Electronic Arts, I suggested it would take three years to double our non-GAAP operating margins from 10% to 20%. We've exceeded that in two years. In fact, at nearly 25%, our fiscal 2015 operating margin is over 500 basis points above our guidance at the beginning of the year and at its highest point in over a decade. We've dramatically increased our efficiency. Non-GAAP operating expenses are down a full 10 percentage points, from 56% of net revenue in FY 2013 to just 46% in FY 2015. And we've done so without adversely impacting our revenue or the effectiveness of our R&D or marketing.

This year we delivered the best Dragon Age of all time, grew our sports franchises, expanded a core franchise with Battlefield Hardline, and announced new IP, including Star Wars Battlefront. In addition, we've continued to grow our digital live services and leveraged our IP portfolio to establish a strong position on mobile platforms. Our core product catalog and digital live services are helping the company deliver more consistent, repeatable revenue and cash flow each year.

These improvements have more than quadrupled our free cash flow over the same period, from $218 million in FY 2013 to $972 million in FY 2015, and driven a threefold increase in non-GAAP diluted EPS, from $0.84 a share to $2.51 a share. But there's plenty of road left to travel on our journey to build both great games and shareholder value.

Most significantly, the digital transformation sweeping the whole industry is still in its infancy. This transformation presents opportunity to continue to grow margins by increasing the proportion of full-game downloads, by providing extra content for games, and by taking our IP to mobile platforms. Downloads of our games for current-generation consoles continue to increase. Meanwhile, our extra content and subscription strategy generated $1.3 billion in net revenue in FY 2015 and continues to grow strongly. Finally, our mobile business at $524 million is now the third-largest in western markets and the eighth-largest worldwide, and we anticipate continued healthy growth going forward.

As well as driving gross margin improvement, we continue to look for opportunities to better leverage our investments. For example, our digital platform strategy will help us better understand and engage with gamers for more efficiency. And standardizing on one game engine across studios amortizes core technology development across all our titles and accelerates our innovation. Bottom line, we believe we can continue to grow non-GAAP EPS into the future.

Moving to the fourth quarter results, EA's non-GAAP net revenue was $896 million, which was $66 million above our guidance and $18 million below last year. The quarter's outperformance was driven by sales of Battlefield Hardline and the ongoing strength of our catalog titles. In addition, our mobile business continued to grow, led by SimCity BuildIt, Madden NFL Mobile, The Sims FreePlay, and The Simpsons: Tapped Out. One note, because FIFA Online 3 was launched in China in April, we did not recognize any revenue in Q4. We expect to start recognizing revenue for this service in Q1 FY 2016.

EA's Q4 non-GAAP digital net revenue was $602 million. This resulted in a fiscal year digital revenue of more than $2.2 billion, about 52% of total revenue. Breaking down Q4's digital revenue into its key components highlights the performance of each business. First, extra content and PC free-to-play contributed $247 million, up 2% over the prior year. The growth of extra content slowed this quarter due to FX headwinds resulting from the fact that most of the FIFA Ultimate Team business is in Europe, and from changes we made to reduce illegitimate coin selling in FIFA Ultimate Team. Nevertheless, for the year FIFA Ultimate Team expanded over 40%, and Madden NFL Ultimate Team more than doubled. Overall, Ultimate Team grew 53% on top of the prior year's 62% growth.

We took steps during the quarter to reduce the trading of illegitimate FIFA Ultimate Team coins, which had distorted the economy and made it difficult for many players to build the team they wanted. We've made changes to limit the game exploits and automated processes that used to generate those coins and taken steps to rebalance the game economy. However, some risks remain, and we've factored those into our Q1 and full-year guidance.

Second, our mobile business generated $150 million for the quarter, up 22% over prior year. Premium mobile only accounted for $9 million of the mobile revenue this quarter. Excluding premium, our ongoing mobile business grew 38% year on year.

Third, full-game downloads added $114 million to the quarter, flat year on year, with strong sales of Battlefield Hardline, Dragon Age: Inquisition, and The Sims 4 offsetting the fall-off in Battlefield 4 and Titanfall sales. Our Origin service for PC gamers increased its monthly player engagement levels by two-thirds over the previous year and continues to strongly grow revenues and users.

And finally, subscriptions, advertising, and other digital revenue totaled $91 million, up $22 million or 32% over the same period last year, driven largely by Battlefield 4 Premium. EA Access again outperformed, and we expect its contribution to accelerate this year as we start to promote this service with Microsoft and continue to add titles to the EA Access Vault.

Moving on to gross margin, our non-GAAP gross margin for the quarter was 75.4%, 140 basis points above our guidance due to the strength of Battlefield Hardline. It was down from 77.4% in Q4 fiscal 2014, primarily due to the strength of our sports titles.

Operating expenses for the quarter were $513 million, up $10 million from last year and $2 million lower than our guidance. The year-on-year increase is primarily due to marketing expenses for Battlefield Hardline.

The resulting non-GAAP diluted EPS for the quarter was $0.39 per share, $0.17 above our guidance.

Net cash provided by operating activities for the quarter was $198 million compared to $281 million in the prior year, primarily due to the timing of titles. Operating cash flow for the full fiscal year hit its highest level in company history at $1.07 billion, a very significant increase over last year's cash flow of $712 million, and above our twice-revised guidance.

Fiscal year 2015 capital expenditures were $95 million, resulting in a free cash flow of $972 million.

Our cash and short-term investments at the end of the quarter were $3.02 billion or $9.75 per share. Approximately 62% of this was held in the U.S.

During the quarter we repurchased 1.8 million shares of common stock at an average price of $53.44 per share.

We far surpassed our expectations for the full fiscal year. On a non-GAAP basis, we exceeded our original revenue guidance by $219 million, gross margin by 250 basis points, operating cash flow by $267 million, and EPS by $0.66 a share. The new EA is delivering more consistent revenue, increasing the proportion of high-margin digital revenue, and growing operating margins, earnings, and cash flow.

This has given the board confidence to authorize a new $1 billion stock repurchase program. This new program has a two-year timeframe and replaces the remaining $356 million portion of our previous $750 million buyback program. It represents an expected return to shareholders of approximately 50% of forecasted free cash flow.

On to fiscal 2016 guidance; with regards to the market, we expect the console transition to continue at a rapid pace, and another 22 million units to be sold this calendar year, adding to the 27 million units in place at the end of calendar 2014. This is much faster growth than in previous generations. Illustrating how far the transition has already come, approximately four out of every five copies of Battlefield Hardline sold for consoles that were either Xbox One or PlayStation 4.

In addition to the console growth, we are expecting our mobile franchise to benefit from the continued expansion of iOS and Android. We're anticipating the installed base to grow by over 600 million to nearly 3 billion devices by the end of calendar 2015.

On a constant-currency basis, we expect non-GAAP revenue to increase approximately 8% to $4.65 billion. The anticipated strength is broad-based and driven by the launch of Star Wars Battlefront, the continued growth of our core sports titles and associated live services, the expansion of our mobile business, and the addition of new Need for Speed, Mirror's Edge, and Plants vs. Zombies titles, as well as some other unannounced games.

We expect foreign exchange rates will have an impact on our forecasted results. At our FY 2016 guided exchange rates, we anticipate an FX headwind of approximately $250 million, leading to our expectation for non-GAAP revenue of $4.4 billion. Volatility in exchange rates during the year may cause us to reconsider these assumptions, and we'll update you on a quarterly basis.

Non-GAAP gross margin is expected to rise about 50 basis points to 71.5%, driven by the increase in digital revenue. This forecast reflects gross margin pressure from product mix, as one of our major launches this year is Star Wars Battlefront, a royalty-bearing title. As a reminder, the major non-sports titles last year were Battlefield Hardline, Dragon Age: Inquisition, and The Sims 4, all of which are wholly-owned IP.

Although the dollar's rise has a negative impact on revenue, it has a positive impact on expenses since about 46% of our R&D expense is outside the U.S. This natural hedge is worth approximately $100 million in FY 2016 and offsets the increased investment we're planning for new IP and our digital platform. As a result, we expect non-GAAP operating expense of $1.98 billion, marginally down compared to fiscal 2015.

This would deliver an operating margin of approximately 26.5% and non-GAAP EPS of $2.75, up 10% year on year. This includes an adverse impact of $0.21 from FX and a benefit of $0.11 due to a change in tax rate. The strong growth of our business outside of the United States is having a long-term benefit to our corporate tax rate such that we now view our long term non-GAAP tax rate to be 22% instead of 25%. Our non-GAAP EPS guidance does not factor in any share repurchases that may take place during the year. The earnings presentation on our investor website contains more information about our exchange rate assumptions for the year.

On a GAAP basis, guidance is for net revenue of $4.25 billion, gross margin of 69.4%, and EPS of $1.90. Segmenting the sales provides further insight into key drivers of our full-year non-GAAP revenue guidance. As a note, all of these revenue numbers assumed guidance exchange rates.

Packaged goods and other revenue is forecasted to be approximately $1.85 billion, down 11%, driven by the continued shift to digital delivery. Digital revenue is forecasted to be nearly $2.55 billion, up 14%. Breaking down our digital revenue into its four primary categories, we see the contributions from each group.

Our mobile business is expected to grow approximately 25% as we broaden our revenue base through the launch of more free-to-download games based on our own IP, such as Need for Speed and licensed IP such as Star Wars and Minions, while continuing to generate income from existing titles. In addition, the headwind remaining from the winding down of our premium mobile business is now very small.

Revenue for full-game downloads is anticipated to grow in line with last year's growth. Full-game downloads on current-generation consoles are now over 20% for a newly-launched game, and we're seeing higher percentages for our catalog titles. As a reminder, we count bundled games as physical sales, regardless of whether it's a disk or a downloaded code in a box with a console. 've seen a dramatic increase in PC downloads since 2010, and we believe the same forces that drove this on the PC are at play on the latest generation of consoles.

Extra content and free-to-download is expected to grow approximately 10% this year, driven by FIFA Online 3 and Ultimate Team. Our strongest markets for Ultimate Team are overseas, so this forecast bakes in a significant FX headwind as well as the changes we've made to improve the FIFA Ultimate Team experience.

Lastly, subscription revenue is expected to decline approximately 15% to 20% this year, driven by a fall-off in Battlefield 4 Premium revenue, partially offset by growth in the EA Access and by Battlefield Hardline Premium revenue.

GAAP operating expenses for the fiscal year are expected to be around $2.17 billion.

Finally, cash flow will continue to be a key metric for us going forward. In fiscal year 2016, we're forecasting operating cash flow of approximately $1.15 billion and capital expenses to be approximately $100 million, resulting in free cash flow of $1.05 billion versus $972 million in fiscal 2015.

Focusing on Q1, our Q1 is seasonally the quietest of our fiscal year. And although we have no major launches this quarter, we do anticipate strong catalog sales, particularly of FIFA 15 and of Battlefield Hardline, which launched at the very end of Q4.

GAAP revenue is expected to be $1.14 billion as compared to $1.2 billion in the prior year. GAAP diluted EPS is expected to be $1.14 as compared to $1.04 per share in the prior year. Non-GAAP revenue for the quarter is expected to be $640 million, a 17% decrease compared to last year's $775 million. The year-ago quarter benefited from more favorable exchange rates, Titanfall, the launch of 2014 FIFA World Cup and UFC, and from Battlefield 4 catalog. The decline is offset by Battlefield Hardline catalog, but we are not planning any HD launches this quarter.

Our revenue phasing for FY 2016 is different to the prior year, with a much larger proportion in the back half due to our launch schedule. The expected phasing of our revenue is in the earnings presentation posted to our website.

Non-GAAP gross margin is forecasted to be approximately 74.5%. Non-GAAP operating expenses are expected to be $475 million, $16 million higher compared to last year, driven by the extra week in the quarter, offset somewhat by more favorable exchange rates for overseas expenses.

For the quarter, we expect non-GAAP diluted EPS to be zero cents per share as compared to $0.19 per share last year.

Looking further into the future, we remain focused on driving our business model and improving profitability. We will continue to leverage one of the core strengths of our business, the reoccurring revenue generated by our annualized titles, live services, and ongoing mobile business. While not guaranteed, this revenue is highly dependable and accounts for 60% to 70% of the total.

For the next few years, we expect further improvements in gross margin, on the order of 100 basis points a year, through growing our digital business. In addition, we will continue to invest in new and existing IP and in new technology infrastructure to support our growing live services business. In marketing, we will continue to increase personalization and customization and leverage our player network to further improve efficiency and impact. These efforts will help us move operating margins from the mid-20% to the high 20% and continue to grow our earnings and cash flow power.

In conclusion, fiscal 2015 we made considerable progress on our journey. We were able to massively grow earnings and cash generation. And we have built a solid and consistent business with a strong operational foundation that enables us to capitalize on the shift to digital content, the console cycle, and the growth of mobile.

Now I'll turn the call back to Andrew.

Andrew P. Wilson - Chief Executive Officer & Director

Thanks, Blake.

We are entering a new global age for games, with a growing audience that spends more time playing games across more platforms than ever before. New consoles are being adopted faster than the last generation. Mobile continues its global expansion. New delivery and business models are poised to break through on consoles and PC, and there's huge innovation happening in game experiences across every platform.

Players are at the center of this new era, and our focus is on building long-lasting relationships. As humans, we all need entertainment. For our players, we are delivering the best form of entertainment. Through amazing new games, dynamic and enduring live services, vibrant communities, and meaningful dialogue, we are enabling their passion for inspiration, immersion, competition, social connection, and fun. The passion we have for that opportunity, to lead this new age of gaming built around our global audience of players, is what will drive us in FY 2016 and beyond.

With that, Blake, Peter, Frank, and I are here for your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Colin Sebastian of Robert Baird. Go ahead, sir, your line is open.

Colin A. Sebastian - Robert W. Baird & Co., Inc. (Broker)

Great, thanks, good afternoon, congrats to each of you. I guess first off maybe for Blake, with all the progress and the success to date on managing expenses, I can only imagine that there's some pressure to invest more, given all the growth opportunity. Can you talk a little bit about the ability to keep expenses roughly flat, adjusting for the FX impact, and if that's a realistic expectation in future years?

And then secondly, maybe Peter can add some color on the specific impact you're seeing on Ultimate Team on FIFA with the pricing changes and the transfer market resurgence.

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

So thanks, Colin. The first question on our guidance for OpEx, we're actually saying, as we said in the script, roughly $100 million of investment that we're making. It's flat because of obviously the FX impact on our international based investments. I think we're making substantial investments in new IP, in mobile IP, in our game engine to try to continue to expand cross-buy across multiple products and in our underlying infrastructure. We're continuing to focus on making marketing more efficient and effective by leveraging our digital connection with our consumers, and that will benefit us in our marketing expenses. But I guarantee we'll continue to support our brands in a fairly healthy way. I think we're making the right investments going forward and it will continue to help drive the top line of the business and the effectiveness of our products.

Peter Robert Moore - Chief Operating Officer & Executive Vice President

Colin, it's Peter. Just on Ultimate Team, as Blake said in his commentary, FIFA Ultimate Team expanded 40%, and Madden NFL Ultimate Team more than doubled. So overall Ultimate Team grew 53%, and that's on top of the previous year when it grew 62%. As you know and you're aware when you track it, that we did put some measures in place, outlined by both Andrew and Blake, to look at some of the more nefarious actions that were going on. We continue to monitor that, keep a very close eye on what's going on, trying to balance the economy, keep some of the coin sellers out. But we have great optimism that our growth in Ultimate Team will continue going forward in FY 2016 and beyond.

Colin A. Sebastian - Robert W. Baird & Co., Inc. (Broker)

Okay, thanks very much.

Peter Robert Moore - Chief Operating Officer & Executive Vice President

Thanks, Colin.

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

Next question.

Operator

Our next question comes from Justin Post of Merrill Lynch. Go ahead, your line is open.

Justin Post - Bank of America Merrill Lynch

Great, thank you. Obviously, a lot of anticipation into Star Wars. Can you give us any thoughts on how you've incorporated that into your guidance, how it might affect gross profit? And is there going to be a marketing benefit from that title given all the hype around the movie? Thank you.

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

Yeah, we certainly hope that we can leverage a lot of the hype. We certainly have done that so far, and we've got a great partner in Disney and Lucasfilm on that. They're very excited for our title as well.

For us, we're thinking about it with two bookends. One bookend is the historical Battlefront, which did roughly 9 million units. The other bookend is our core first-person shooter franchise of Battlefield, which typically does around 15 million units. So I think in our guidance, we've roughly put in there roughly 9 million to 10 million units for the title, with we believe some upside obviously if things goes well. It is Gen-4-only and PC, and so that needs to get factored into people's thinking, but it is a very exciting title.

It will put, as we said in the script, some pressure on gross margin in the quarter. We've been trying to target 100 basis points of gross margin improvement, and this year we're forecasting roughly 50 basis points, and much of that is due to the fact that there's a royalty on that to Disney. And at a level of 10 million units, that's a fairly large pressure on gross. So we're very optimistic and excited about the title. And obviously, the market has been the same way as the feedback we've seen from recently the Disney Celebration, where we showed the title for the first time. We'll obviously show it more at E3. And so everyone will get a chance to start to appreciate the depth and the excitement around it.

Justin Post - Bank of America Merrill Lynch

Thank you and congrats on the execution last year.

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

Thanks.

Operator

Our next question comes from Stephen Ju of Credit Suisse. Go ahead, sir, your line is open.

Stephen Ju - Credit Suisse Securities (USA) LLC (Broker)

So, Andrew or Peter, some of your competitors showed off what I thought was a pretty interesting piece of technology, which allows streaming of game content from either the smartphone or the tablet onto the TV. So this obviously creates some interesting opportunities for you as a publisher to take stuff off the console. So is this an area of focus for you right now, or should we expect some of your less graphics-intense titles you're shipping currently with the console releases at some point in the future?

And secondarily, how much data are you collecting from all of your users just broadly? And where do you think you are in terms of using that data to influence your content development? Thanks.

Andrew P. Wilson - Chief Executive Officer & Director

Okay, I'll take that, two great questions. One as it relates to streaming, streaming is a technology that's still in its infancy, I would say. Certainly, we have a few incubation efforts going on around the company to see how best we can benefit from that. But as you think about our core objective, which is to build more relationships with more players across more platforms around the world, streaming certainly represents an opportunity for us. Lots of work to go there in order to deliver the kinds of experiences we believe our players want to play, but certainly we have efforts going on.

As it relates to data collection, we are collecting – I heard one stat once that we collect more data on a daily basis than the combined U.S. Library of Congress, which as you can imagine, is a lot of data. At a more core level, what we're starting to understand better about our players is how engagement works, how engagement works where a player engages on more than one platform, how engagement works where a player plays more than one franchise, and the effect of engagement over the long term as it relates to the likelihood that a player will continue and buy the next version of a title provided we can keep them playing over time. So there's a lot in our data right now as it relates to our players. We are using that data: one, to build better games; and, two, deliver more enhanced and extended and engaging experiences over time that keep them playing and entertained for longer.

Stephen Ju - Credit Suisse Securities (USA) LLC (Broker)

Thank you.

Operator

Our next question comes from Chris Merwin of Barclays. Go ahead, your line is open.

Chris Merwin - Barclays Capital, Inc.

Great, thank you. So just in the context of your guidance for 2016, Blake, I think you talked about 10% growth for the extra content business, and I think a lot of that might have been coming from FIFA Online in China. Can you quantify at all what you're expecting in terms of dollars for FIFA Online in China? Or maybe asked another way, do you think this could be bigger than FIFA Online in Korea?

And then secondly on the Mobile business, I don't know if you can give out a margin for that business. But are you seeing stability in that margin or even improvement as you roll out this more branded IP? I imagine that relative to competitors, you might even have lower sales and marketing costs for mobile given that you are leveraging branded IP that has a built-in audience and I imagine would lower the cost of customer acquisition. Thanks.

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

Yeah, so let me start on FIFA Online 3 China, and then I'll have Frank address the mobile economics. On FIFA Online 3 China, as we said, we did not recognize any revenue in Q4 for that. We will start recognizing revenue in Q1, this quarter, which will include the revenue that we generated last year for that title. It will roughly be around $40 million this quarter. I think going forward for your models, I'd probably focus on $10 million to $15 million a quarter. And as that business grows, we'll keep you updated.

We're very optimistic about it. Tencent has been very public around their optimism. But we remind people it's taken us three to four years to grow Korea to where it is today, and Korea is a more fluid market than China right now, and so it's probably going to take some time. Also, soccer is much more prevalent in Korea than it is in China, but it's growing fast in China, so we hope to follow that. So, it's a longer story for us, we think, but I think there's a lot of potential and everything is going very well. Frank, on the mobile?

Frank D. Gibeau - Executive Vice President, EA Mobile, Electronic Arts, Inc.

The question on mobile I'll take. When we look at how Electronic Arts is constructing its mobile businesses, a couple of key competitive advantages that we're trying to harness. And the first is we have the broadest and most diverse and powerful portfolio of brands in the business, and that translates into very strong organic acquisition advantages. So pound for pound, people have heard of SimCity, The Sims, the products like FIFA and Madden. And organically they install at very high rates. If you looked at how SimCity did over the break, we were generating tens of millions of installs without really spending any money in paid acquisition.

That's also combined with a really powerful network that we're designing. So it allows us to cross-promote and understand based on telemetry and data what our gamers are doing at any given time and what's the right message at the right time and what are the right games that we can put in front of them that might interest them. So the combination of a profound organic acquisition advantage coming from brand power and a network effect we believe will allow us from a long-term standpoint keep marketing and sales as a percentage of revenue very low, very low certainly relative to other mobile game companies. And as we look to grow the business, we'll continue to harness those advantages.

Chris Merwin - Barclays Capital, Inc.

All right, thank you.

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

Next question.

Operator

Our next question comes from Arvind Bhatia of Sterne Agee CRT. Go ahead, your line is open.

Arvind Bhatia - Sterne Agee CRT

Thank you and I'd like to add my congratulations, guys, a couple of quick ones. Just going back to the FIFA Online 3 China question, we got the revenue guidance. I would assume that most of that revenue comes in at pretty full margin. I'm wondering if you could maybe comment on that.

And then you touched on EA Access. I'm wondering if you can maybe elaborate a little bit more how we should think about the adoption rates right now. What are some of the puts and takes there?

And then lastly, Andrew, I would love to get your views on the overall market, the console market in particular, over the next couple of years. We see your breakdown of the physical versus digital revenue. I'm just wondering how you think about the progression over the next couple of years. Thank you.

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

Thanks, Arvind. On FIFA Online 3, we don't disclose obviously the profitability of the individual lines of business. But what you should assume there is Tencent is essentially delivering the product and doing much of the marketing in the local market. We're doing the product development and helping Tencent on any issues around hosting and delivering the product. So we obviously have product development costs. We don't have some of the marketing costs that you'd see in our normal business. So you should assume that it's good profit margins, but that's about as far as I can go on that.

On EA Access, we're extremely pleased with the growth of EA Access. As I said on the call, we haven't really started to promote that with Microsoft. We will this summer. We've now added – we've got 12 titles in the vault. And that's why we feel like it's a great time to start to promote it because much of the value is around those titles in the vault. The subscriber base continues to grow. It's still not a meaningful part of our financials, and thus we're not calling out the actual numbers or the stats, but we will consider that in the future as we see how it grows. But overall, we're very interested in it and we're learning a great deal from the service around players' interest in subscription models and where they get the most value out of the service. I'll let Andrew catch the last one on consoles.

Andrew P. Wilson - Chief Executive Officer & Director

Overall, we're very happy with the speed at which this console generation has been taken up by players. As we talked about in the prepared notes, it's much faster than the last generation. We would expect close to 50 million consoles by the end of the year, and that's a meaningful install base for us to build games for. And the level of engagement we're seeing on a per-game basis is also very, very high, with people engaging in the live services that we're building around our games for much, much longer than before.

As we think about retail versus full-game downloads, certainly we've seen growth in that area. It varies from geography to platform. But on a Gen-4 game like Battlefield Hardline, in the West we're seeing nearly 20% numbers, and we would expect that growth to continue. We've seen a dramatic increase in PC downloads since 2010. And we believe the same forces that drove this in PC are at play on this latest generation of consoles. And so as bandwidth increases, lower-cost storage increases, we would expect continued growth in this area.

Arvind Bhatia - Sterne Agee CRT

Great.

Andrew P. Wilson - Chief Executive Officer & Director

We always give this stat on every call. We're up 51% over the same period in Gen-4 versus Gen-3. So 17 months since launch the install base of Gen-4 consoles is now up 51% versus the same period for Gen-3.

Arvind Bhatia - Sterne Agee CRT

Great. Thanks, Peter. Thank you, guys.

Andrew P. Wilson - Chief Executive Officer & Director

Thank you.

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

Next question.

Operator

Our next question comes from Mike Olson of Piper Jaffray. Go ahead, your line is open.

Michael J. Olson - Piper Jaffray & Co (Broker)

Hey, good afternoon. Just to follow on regarding the full-game downloads, you mentioned 20% on games like Battlefield. Are you trying to accelerate that as fast as you can because it's better margin, or are there reasons to take it slowly? I guess in other words, are there risks to a rapid transition to full-game downloads, or are you just putting the pedal down on pushing that as fast as you can?

And then secondly, regarding the pipeline, we noticed Titanfall is not in your announced title slate as of now. Does that mean that it won't ship in fiscal 2016, or does that mean that it may or may not ship in the year, but would currently be an unannounced title if it were a fiscal 2016 launch?

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

So first on full-game downloads, we're essentially allowing the consumer to vote. We would like the consumer to consume games where they want to consume them. And if that's in full-game downloads or if that's in retail, we want to be there. We've got great partners in retail. GameStop, Target, Walmart, Game (45:30), others are very powerful and helpful to us. And so we want to make sure we're delivering the experience in the way the consumers would like it. Obviously, it's better economically for us longer term to do digital, and we're focused on all the digital content, not just full games. And we see that that's the direction the industry is going, but we're not trying to do something unnatural to push it one way or the other.

In terms of Titanfall, you should assume that that's not in fiscal 2016. It's more likely in fiscal 2017. And a title of that size, we want to be pretty clear as to when it's falling in the title slate, and so your assumption should be 2017.

Michael J. Olson - Piper Jaffray & Co (Broker)

All right, thanks a lot.

Operator

Our next question comes from Drew Crum from Stifel. Go ahead, your line is open.

Drew E. Crum - Stifel, Nicolaus & Co., Inc.

Okay, thanks. Good afternoon, everyone. So I just want to go back to FIFA. You guys talked about a lot of the puts and takes that will contribute to results in fiscal 2016. If you take a step back, you're comping against the World Cup last year. What are your expectations for the franchise maybe on a constant currency basis or a headline number?

And then separately as it relates to Star Wars, you mentioned that you're going to be publishing on Gen-4 only. Is that a strategy you intend to employ across other franchises going forward? Thanks.

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

So, Drew, on FIFA, we expect continued growth in that franchise. Obviously, at the size that franchise is now, the law of large numbers makes big growth numbers difficult. But we've continually year in and year out been able to grow FIFA by improving the quality of the game, by adding extra additional services around the game like Ultimate Team, and driving into continued new geographies around the world.

The popularity of football in America continues to grow, and that's been fueling the growth of the product here in the U.S., even though it's always been very strong internationally, and we think we'll continue to see that. So we're very optimistic about FIFA and we hope to see that continue to see upside growth, and that's what's built into our forecast. Your second question was...

Drew E. Crum - Stifel, Nicolaus & Co., Inc.

As far as Star Wars is concerned...

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

Thanks. So we will see a slow movement away from Gen-3. As a reminder, we've been making Gen-2 console games up until the last year or so. For some of our bigger franchises like our sports franchises, we'll continue to make Gen-3. But we're making some decisions on new franchises and titles to focus on Gen-4, partially because the power of the platform allows for exceptional gameplay and incredible graphics. And for something like Star Wars, we wanted to make sure that we provided the highest level of quality for the game experience, and you can do that only on Gen-4 and PC.

Drew E. Crum - Stifel, Nicolaus & Co., Inc.

Okay, thanks, guys.

Operator

Our next question comes from Ben Schachter of Macquarie. Go ahead, sir, your line is open.

Benjamin Schachter - Macquarie Capital (USA), Inc.

Hi, guys, congratulations again on the execution, a few questions for you. First, some very large companies seem to be focusing more and more on virtual reality. Can you talk a little bit how EA is working in that space? And are there meaningful investments there yet, or is it just still too early?

And then, if you could, also just describe how FIFA is actually monetized in China, and remind us how the revenue recognition works.

And then finally, Blake, I think you said the new $1 billion buyback anticipates returning about 50% of free cash, and then you guided FY 2016 to $1 billion. So does that mean that FY 2017 free cash should be flat with 2016? Thanks.

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

Ben, I love how you do your math. I was not implying at all that 2017 free cash flow was going to be down. I was simply trying to help people understand how we're thinking about return of capital. The goal would be if we were to continue to be able to increase cash flow over time, we would continue to increase our buybacks over time, and we're thinking about that as a two-year program. As you can see, we started a two-year program a year ago, and we replaced that with a new two-year program this year. I'm not predicting what that's going to be for the future, but think about it more like a progression over time versus any guidance around fiscal 2017.

Benjamin Schachter - Macquarie Capital (USA), Inc.

Got it.

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

I'm very optimistic about 2016 and 2017. So that's that piece.

FIFA Online 3 is a free-to-play PC game, which means much like in Ultimate Team, you monetize based on collecting and trading players and playing with those players. You don't have to monetize. You can play the game for free. But like all free-to-play games, to build a better team, to get further ahead in the game, to win against your friends, you will possibly monetize to build that team. The revenue recognition issue was simply a one-time issue for us, and that was we were waiting for the formal rollout of the game in China with our partner Tencent. And that occurred in early April and thus the ability to start to recognize revenue. We did not want to recognize revenue until the game was fully functional, fully rolled out, moved from soft beta to hard beta to full rollout, and it had all the features available for gameplay, and that's why we now start to recognize. But we shouldn't have a recognition issue going forward on that.

Benjamin Schachter - Macquarie Capital (USA), Inc.

Sorry, I meant recognition. If a player spends a dollar in China, are you booking only the piece that you're getting from Tencent, or are you booking the full dollar?

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

Yes, good question. Yes, we are. Much like we do with mobile, we only book net.

Andrew P. Wilson - Chief Executive Officer & Director

On virtual reality, again, I would say that this is a technology that has the potential to profoundly impact our industry over time. I think the notion of immersion as a key motivation that our players are looking to fulfill when they play our games is something that could certainly be well fulfilled through the notion of virtual reality technology. As a company with creative innovation as one of its core pillars, it's very important that we stay ahead of this. And as a result, we have some clear and focused investments in the space. As you will know if you follow this, there are a number of different potential providers and manifestations of virtual reality right now that go everywhere from wearing a pair of goggles to a holographic type experience, or to a room overall that you step into. We are looking at any and all of these things and have a few incubation efforts going on around the company so that as this begins to manifest itself, we are, as a creative and innovative company, able to lead from the front.

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

Next question.

Operator

Our next question comes from Mike Hickey of The Benchmark Company. Go ahead, sir, your line is open.

Michael Hickey - The Benchmark Co. LLC

Hey, guys, congrats on a great quarter and year. Enjoy it, you guys have definitely deserved it here.

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

Thanks.

Michael Hickey - The Benchmark Co. LLC

A couple questions. I was curious on your capital allocation strategy as it relates to share repurchases and intensifying your effort there when your company's valuation is near an all-time high versus potentially accretive M&A opportunities, particularly as you begin to increase investment in new IP, as you outlined today. And then I have a follow-up.

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

Yeah, so we look at a couple of components when we think about return of capital to shareholders. We first and foremost believe that that's a critical goal of the company is to continue to return capital to shareholders. We balance that with two things: one, our need for capital internally; and two, our onshore versus offshore balance of capital. Right now we have about 60% of our capital onshore. Our need for capital in terms of CapEx is roughly $100 million a year, as we've talked to. We have, obviously, our outstanding convert that we will either refinance or pay off over time. That's due next summer. And we believe even after that, we have plenty of capital to respond to any opportunities that come our way either on acquisitions or internal investment. We've got substantial debt capacity based on our performance and substantial onshore cash to be able to address – or offshore cash for international acquisitions to be able to address anything that comes along.

But we're really focused on driving the business out of our existing IP or licensed IP. We see a huge future for the company with what we have today. And we feel like we want to make sure we're focused on that first and foremost before we run and chase other acquisitions. Doesn't mean we wouldn't do something, but we're very focused on the opportunities that we have today.

Michael Hickey - The Benchmark Co. LLC

All right, fair enough, Blake. Thank you. Last question, you had a few game delays last year, and obviously that happens. And ultimately, you seem to have crafted an advantage from the delay by providing a higher quality product. But curious on Star Wars, how confident you feel today on the development of this game and the anticipated quality as pacing within that desired launch window, seeing that the timing of this drop is perhaps more important given the launch of the movie in December and, as you noted, related marketing benefits hopefully from that. I'm also curious if you plan to have a beta or early release within your EA Access program. Thanks, guys.

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

I'll let Andrew touch on the Star Wars question.

Andrew P. Wilson - Chief Executive Officer & Director

So again, as someone who grew up making games in this company, making games is hard, building fun is hard, and getting that right on a day is even harder. And what you saw over the past year was our commitment to players in building great properties and the willingness to make hard decisions around that.

With that said, there are any number of things that might contribute to a miss or a need to move a date. As it relates to Star Wars Battlefront, I would say as it stands right now, we feel very, very good about the trajectory and the velocity of the development team. They're building on platforms now that have been in the marketplace for a number of years. They're building on the core engine that has launched a number of products, including Battlefield 4, Battlefield Hardline, Dragon Age: Inquisition, all of which have been great properties. And they're a tried and tested development team who have a very, very clear focus and understanding of the type of game they're making.

The game is fully playable. We released a gameplay trailer a couple of weeks ago at Celebration, but some of the inside community also got to see a fairly lengthy full gameplay demo, which is very, very exciting. We look forward to showing more of that at E3. But as it stands right now, we feel good about the trajectory and the velocity and our ability to ship that game at the appropriate time this year.

Michael Hickey - The Benchmark Co. LLC

Thanks, guys, best of luck.

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

Thank you, next question.

Operator

Our next question comes from Sean McGowan of Needham. Go ahead, sir, your line is open.

Sean P. McGowan - Needham & Co. LLC

Thank you. I just wanted to circle back on a couple of things mentioned before for clarification. When you were talking about the estimated unit sales of Star Wars, I think you said 9 million to 10 million. Are you talking about in the fiscal year or over the life of the product?

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

In the fiscal year of our guidance.

Sean P. McGowan - Needham & Co. LLC

Thanks. And I don't know if this would be for Peter or Andrew or Blake, anybody. You said you count a bundle as a physical sale and you're still getting 20% full-game downloads. What would that number look like if you counted that as a digital sale?

Peter Robert Moore - Chief Operating Officer & Executive Vice President

Sean, it's Peter. That varies from quarter to quarter, year to year depending on the bundles. But I want to make it very clear that whether it's a code or a physical disk that goes into a bundle that is primarily put together by our first-party platform partners, that is physical media to us and that's how it's accounted for. Our full-game downloads that you're seeing, they do vary from title and by geography. But the latest data we've got shows us at a 20%-plus for Battlefield Hardline, and that's up from about 13% to 15% this time last year for our AAA title releases. So we're seeing the growth. And as Andrew said, if we stay on a path that's analogous to PC, that will continue to grow over the coming fiscal years.

Sean P. McGowan - Needham & Co. LLC

Okay, thanks. And then my last question was on the any variability around the June quarter. Considering that there are no major launches, it seems like this might be a quarter where there's not a lot of variance off of the guidance. Is that a fair way to look at it?

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

I'll let you guys look at history and decide that.

Sean P. McGowan - Needham & Co. LLC

Okay, got to try. Thanks

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

We try our best, guys, to give the best guidance as we can at the moment that we're giving it, so one last question.

Operator

Our last question comes from Brian Pitz of Jefferies. Go ahead, sir. Your line is open.

Brian J. Pitz - Jefferies LLC

Thanks for the question, just a quick Star Wars follow-on. Just curious how DICE is really prepping to ensure the smooth launch of Battlefront, including not only gameplay but also things like connectivity and even various types of IP protection that might be in the works. Basically, are there any out of the ordinary aspects to the game that could cause an unforeseen delay? I know someone else was asking about a delayed timeframe. Just any additional color on out of the ordinary stuff would be great. Thanks.

Andrew P. Wilson - Chief Executive Officer & Director

I don't think there's anything out of the ordinary, I think we treat every game launch with security, stability, and scalability of paramount importance. Certainly as we talked about in the prepared comments, we learned a lot coming out of Battlefield 4. We've launched a number of very, very large-scale titles on our infrastructure since then and have performed very, very well by market standards. Dragon Age: Inquisition launched. Battlefield Hardline launched, so we've been making significant investment into our core infrastructure around security, stability, and scalability. Game teams have been making significant investments in terms of development process and QA around that. So while we can never foresee everything, we have demonstrated now that we've learned from some of the things that we've gone through over the past. And we don't expect anything unforeseen or different with respect to Star Wars than we have around our other giant titles.

Brian J. Pitz - Jefferies LLC

And the reason I ask is just going back to Spore with the DRM limitations back in the past that backfired. With a bigger IP title like this, that's the only reason I'm asking.

Andrew P. Wilson - Chief Executive Officer & Director

No, it's a good question, but we don't see anything at this time.

Brian J. Pitz - Jefferies LLC

Thanks.

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

Great, thank you, everyone.

Andrew P. Wilson - Chief Executive Officer & Director

Thank you.

Chris Evenden - VP, Investor Relations

Thanks, everyone.

Operator

And this concludes today's conference. Thank you for your participation. You may now disconnect.