Electronic Arts F4Q08 (Qtr End 3/31/08) Earnings Call Transcript

| About: Electronic Arts (EA)

Electronic Arts Inc. (ERTS) F4Q08 Earnings Call May 13, 2008 5:00 PM ET


Tricia Gugler - Director, Investor Relations

John S. Riccitiello - Chief Executive Officer, Director

Eric F. Brown - Chief Financial Officer, Executive Vice President

John Pleasants - Chief Operating Officer and President - Global Publishing

Frank D. Gibeau - President - EA Games Label


Brent Thill - Citigroup

John Taylor - Arcadia

Mike Hickey - Janco Partners

Colin Sebastian - Lazard Capital

Shawn Milne - Oppenheimer

Arvind Bhatia - Stern Agee Leach

Justin Post - Merrill Lynch

Edward Williams - BMO Capital Markets

Evan Wilson - Pacific Crest


Good day, everyone and welcome to the Electronic Arts fourth quarter fiscal year 2008 earnings conference call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the call over to Ms. Tricia Gugler, Director of Investor Relations. Please go ahead.

Tricia Gugler

Welcome to our fourth quarter fiscal 2008 earnings call. Today on the call we have John Riccitiello, our Chief Executive Officer; Eric Brown, our Chief Financial Officer; John Pleasants, our Chief Operating Officer; and Frank Gibeau, our President of EA Games.

Before we begin, I’d like to remind you that you may find copies of our SEC filings, our earnings release, and a replay of the webcast on our web site at investor.ea.com. Shortly after the call, we will post a copy of our prepared remarks on our website.

Throughout this call we will present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude charges and related income tax effects associated with acquired in-process technology, amortization of intangible assets, certain litigation expenses, losses on strategic investments, restructuring charges, stock-based compensation and the impact of the change in deferred net revenue related to packaged goods and digital content.

In addition, the company’s non-GAAP results exclude the impact of certain one-time income tax adjustments.

Our earnings release provides a reconciliation of our GAAP to non-GAAP measures. In addition, we include a detailed GAAP to non-GAAP reconciliation on our website.

These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results and 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 for the prior year unless otherwise stated.

All references to “current generation systems” include the Xbox 360, the PlayStation 3, and the Wii. We refer to the PS2, Xbox, and GameCube as “legacy systems”.

We have also included our trailing twelve month platform shares in a supplemental schedule on our website.

During the course of this call, we may make forward-looking statements regarding future events and the future financial performance of the company. We caution you that actual events and results may differ materially. We refer you to our most recent Form 10-K and 10-Q for a discussion of risk factors that could cause our actual results to differ materially from those discussed today. We make these statements as of May 13, 2008 and disclaim any duty to update them.

Now I would like to turn the call over to John.

John S. Riccitiello

Thanks, Tricia. Before I begin, I would like to welcome both John Pleasants and Eric Brown to Electronic Arts. I am thrilled they have decided to join EA and partner with me and the executive team at this exciting time. John Pleasants is our Chief Operating Officer and President of Global Publishing. He’s been with EA for two months and has spent much of that time on the road meeting our customers and teams around the world. For Eric Brown, it’s great to have him back at EA as our CFO. Before moving on, I would also like to thank Warren Jenson for his many contributions over the last six years. We wish him all the best.

Now, let me touch briefly on our agenda today. I will start with a strategic update and will lay out our priorities and goals for Fiscal 09. Eric will discuss our Q4 and FY08 results and provide our detailed guidance for FY09. Frank Gibeau will discuss progress and plans for the EA Games Label. Finally, I’ll wrap up with a few closing thoughts and then Eric, Frank, John and I will be happy to take your questions.

When I returned to EA, we said fiscal 2008 would be a year of fundamental change and we would exit with an enhanced financial trajectory. On our May 2007 call, we laid out four strategic objectives for EA, which we developed further throughout the year and for our February 12, 2008 Analyst Day briefing. The priorities we laid out one year ago were first to grow our segment shares, to return EA to being a growth company after three years of flat sales. We suggested that we would be making some organizational changes to improve our ability to develop the world’s best and most innovative games and to launch them successfully. We set out specific guidance of adding $500 million to $700 million to EA’s top-line.

Second, we talked about the need to deliver leverage in our P&L, to drive our operating margins up through a combination of tighter cost management and more productive R&D. We said we would have a clear sense of our improved margin trajectory toward the end of fiscal 2008. The specific goal we laid out for FY08 EPS was a range of $0.90 to $1.20 per share, which we reduced by $0.05 as a result of our acquisition of BioWare and Pandemic Studios.

Third, we talked about growing our digital businesses aggressively. By digital we mean our direct to consumer business models that cut across our entire portfolio, including our pure digital businesses like Pogo and mobile and also micro-transaction based games, in-game advertising and infrastructure that will enable direct-to-consumer monetization for many of our titles in the coming years. These investments are important to EA’s long-term strategy.

Fourth, we talked about making smart M&A a core part of our business and strategy and suggested that we’d make acquisitions, partnerships and investments that either add important IP and development teams to our core business and/or add to our strategic growth initiatives in Asia, Casual and in digital/direct-to-consumer.

I believe the focus on these four strategic objectives was clear in nearly all we did in fiscal 08.

On our objective to reignite growth, we introduced a new label organization structure to the company. We launched a number of new intellectual properties including MySims, ARMY OF TWO, SKATE and The Simpsons Game. We added multi-year partnerships with Harmonix, MTV and Hasbro that will add to our growth for years to come and we made some tough calls to hold titles for quality reasons -- the right decisions for the long-term. Best of all, we added nearly $1 billion in non-GAAP top-line growth in fiscal ‘08.

On the cost leverage side, we made moves to reduce cost by closing our Chicago and Chertsey U.K. facilities. We shifted headcount to low-cost locations and increased focus on low-cost outsourcing. And at our Analyst Day in February, we laid out plans to dramatically ramp our operating margins.

FY08 also saw big moves for EA on the digital direct to consumer side. We launched FIFA Online Two, reversed a weak trend in our mobile business, expanded our Pogo business, and announced a number of exciting new initiatives with Battlefield Heroes, our first global micro-transaction based game.

And lastly, regarding smart M&A, we completed the acquisition of the Bioware and Pandemic Studios bringing to EA 10 new properties that are now in development.

Net, FY08 was a year in which we exceeded our top-line and delivered within our bottom line guidance range. Our focus in FY09 will be on execution and proving we can drive margin growth consistent with the plans we presented to many of you in February.

We have ambitious goals for fiscal 09.

In fiscal 2009, we expect to add $1 billion in non-GAAP revenue. In achieving this target, we will have added $2 billion to EA’s revenues between fiscal ‘08 and fiscal ‘09. This would be the most aggressive growth in EA’s history.

We are also targeting to increase our non-GAAP operating income by roughly 100%. In doubling our operating income versus FY08, we intend to deliver the margin leverage we first discussed a year ago and detailed at our Analyst Day.

Our fiscal 2009 operating plan keeps us on track to achieve our fiscal 2011 targets and does not include any contribution from Take-Two.

What gives me confidence in these targets? Simply put, my belief in our teams and the quality of the products we will be introducing in fiscal year ‘09. Our label structure and newly energized publishing teams will be introducing the strongest title line-up in EA’s history, including: for EA Sports, Madden, our 20th anniversary edition, stepping forward with an entirely new way to play and learn the game involving a new holographic interface.

NBA Live looks to be the strongest entry we’ve had in basketball in years and we’ll be introducing a huge step up with a feature set we will be unveiling at E3. And we’re launching an entirely new wholly-owned IP called Face Breaker, our first new IP from EA Sports since 2002.

We’re also introducing Wii All-Play editions of NCAA, Madden, Tiger, NBA and FIFA which takes last year’s family play idea to an entirely new level. FY09 promises to be a great year for EA Sports.

EA Casual Entertainment -- we’re leveraging the Hasbro partnership across the board in our Pogo business, in mobile and in packaged goods, and with a particular focus on the Wii. Last week we launched a new IP we developed with Steven Spielberg, Boom Blox for the Wii, with a metacritic rating of 85, making it one of the highest rated Wii games. And later in the year, our Harry Potter game is shipping with the movie in the all important holiday quarter.

The Sims Label -- this team is on a roll. We’re adding richly to our top performing new IP in fiscal ‘08, MySims, with two sequels. We’re also introducing a new IP, SimAnimals, and launching the highly anticipated Sims 3.

From EA Games we’ve got an incredible line-up. It is where we expect our greatest revenue growth driven by Spore, Need For Speed, Dead Space and many more. Frank Gibeau will talk to you in a bit about the key initiatives and more about the new titles coming from his label.

I hope you can understand why I am excited about EA’s FY09. I believe it is the best and most exciting title plan in EA’s history. We look forward to lighting up our consumers in the year ahead and with that, let me pass it on to Eric to take us through our financial results and outlook.

Eric F. Brown

Thank you, John. Good afternoon, everyone. Before I begin, let me say that I’m very happy to be back at Electronic Arts. I look forward to partnering with the entire EA team to drive profitable growth in the years ahead. Now, on to our results.

Our fourth quarter performance exceeded our expectations both on the top and bottom line. For the quarter, GAAP revenue was $1.127 billion versus $613 million a year ago, representing an increase of 84%. $208 million of the GAAP revenue increase was due to the fact this was the first quarter where we had a net benefit from the deferred revenue rollout.

GAAP diluted loss per share was $0.30 versus a loss of $0.08 a year ago. Non-GAAP revenue, which excludes the impact of the revenue deferral, was a fiscal fourth quarter record of $919 million, up 50% year-over-year or $306 million. Non-GAAP diluted earnings per share were $0.09 versus $0.06 last year.

During the quarter, several titles stood out. ARMY OF TWO sold over 1.8 million copies, exceeding our expectations. We are pleased to have added another successful wholly-owned franchise to our portfolio. Congratulations to our Montreal team.

Burnout Paradise from EA’s Criterion studio, with a strong average metacritic rating of 88 on the PS3 and Xbox 360, sold 1.5 million copies. Sell thru at retail is up relative to last year’s Burnout Revenge despite being available on one less platform.

FIFA Street 3 sold over 800,000 copies in the quarter. In addition, Rock Band continued to gain momentum. During the quarter, Rock Band sold over 1.5 million copies. It competed head to head with Guitar Hero 3, garnering roughly 50% of the units on the Xbox 360 and PS3 at retail in North America at a higher price point.

For the full year, GAAP revenue was $3.665 billion versus $3.091 billion up 19% year-over-year. GAAP loss per share was $1.45 versus GAAP earnings per share of $0.24 a year ago. Please note that FY08 was the first year where we implemented the revenue deferral for our online-enabled packaged goods.

Non-GAAP Revenue was a record $4.020 billion, up 30%. Surpassing $4 billion is a record for any third-party software company. Non-GAAP EPS was $1.06, up 36% year-over-year.

Let me touch on a few highlights from FY08. Our top ten titles in FY08 were Rock Band, FIFA 08, Madden NFL 08, Need for Speed Pro Street, The Simpsons Game, Tiger Woods PGA Golf 08, Harry Potter and the Order of the Phoenix, MySims, NBA Live 08 and ARMY OF TWO.

This year we successfully launched six brand new wholly-owned games, two of which hit our top ten for the year, MySims and ARMY OF TWO. In addition, we launched SKATE, Boogie, Playground and Smarty Pants.

On the Wii and NDS we shipped 14 SKUs for each platform during the year. This resulted in share gains on the Nintendo platforms of 1 and 8 points in North America and Europe, respectively.

For the year we had 27 platinum titles up from 24 a year ago. We strengthened our share position as the year progressed and ended the fiscal year as the number one publisher in both North America and Europe.

We continued to see growth in digital/direct to consumer. For the year, our digital revenue reached a record $342 million, up over 25%. Our Pogo business has surpassed the $100 million mark in revenue with 1.6 million subscribers. Congratulations to our Pogo team.

Our wireless business delivered 7% annual growth, overcoming weakness at the front of the year.

I would now like to spend some time discussing the last quarter in more detail. Please note that all of the following references to fourth quarter revenue will relate to non-GAAP revenue, which excludes the impact of the revenue deferral.

Non-GAAP revenue was $919 million, up 50% from a year ago. Excluding the impact of foreign exchange, revenue increased 46%. Our Q4 revenue was primarily driven by the launches of ARMY OF TWO and Burnout Paradise, as well as the continued strength of Rock Band.

During the quarter, EA was the leader across all platforms. We had 21% share in North America, up 5 points from a year ago. In Europe, we had 18% share, up 1 point versus last year.

Console non-GAAP revenue was $380 million, up 28%. Current generation non-GAAP revenue was $327 million, or 86% of the total. The PS3 was our best performing console with $138 million, up 165% year-over-year. Revenue from the Wii and Xbox 360 were each up more than 50%. The PS2 was down as expected; during the quarter, we did not release any titles for the PS2.

Handheld non-GAAP revenue was $83 million, up 20%. NDS non-GAAP revenue was $36 million, up 33% primarily due to catalog sales of The Sims franchise and The Simpsons.

PSP non-GAAP revenue was $47 million, up 21% primarily due to the launch of Need for Speed ProStreet. Mobile phone revenue was $41 million, up 14% due to growth in Europe. We had three of the top-ten games in North America and two of the top-ten in the UK.

PC non-GAAP revenue was $92 million, down 28% principally due to the strength of last year’s launch of Command and Conquer 3 Tiberium Wars. Co-Publishing and Distribution non-GAAP revenue was $271 million, up six times from last year primarily due to Rock Band.

Internet, licensing, advertising and other non-GAAP revenue was $52 million, up 41% primarily due to dynamic in-game advertising and Pogo micro-transactions.

By geography, North America non-GAAP revenue was $544 million, up $237 million or 77%, primarily due to growth in co-publishing and distribution revenue.

International non-GAAP revenue was $375 million, up $69 million or 23%. Excluding a $26 million positive impact from foreign exchange versus last year, international non-GAAP revenue would have increased 14%.

Europe non-GAAP revenue was $318 million, up $54 million or 20% driven by Burnout Paradise, ARMY OF TWO and FIFA Street 3. Excluding a $21 million benefit from foreign exchange versus last year, Europe non-GAAP revenue would have increased 12%.

Asia non-GAAP revenue was $57 million, up $15 million or 36%.

Moving to the rest of the income statement, GAAP gross profit in the quarter was $665 million, up 76% primarily due to the benefit from the deferred revenue rollout and greater overall net revenue.

GAAP gross margin was 59% versus 61.6%, down 2.6 points due to a higher mix of co-publishing and distribution revenue partially offset by the deferred revenue rollout. Non-GAAP gross profit was $463 million, up 20% year-over-year. Non-GAAP Gross Margin was 50.4% versus 63%, down 12.6 points due to a higher mix of co-publishing and distribution revenue. Please note that EA Partner revenue meaningfully contributed to our operating income.

Operating expenses, marketing and sales; non-GAAP marketing and sales expense was $123 million, up $10 million primarily due to an increase in personnel-related costs. Excluding the impact of co-publishing and distribution revenue, sales and marketing was 19% of non-GAAP revenue, down one point from a year ago.

General and administrative -- non-GAAP G&A was $80 million, up $21 million. The increase was driven by higher contracted services costs related to finance and IT projects and the VGH integration and higher personnel-related costs.

Research and development -- non-GAAP R&D was $285 million, up $45 million including $32 million related to our acquisition of VGH. R&D headcount ended the year at roughly 6,900, up approximately 1,000 from a year ago. Our acquisition of BioWare and Pandemic Studios added 775 people and the remainder of the increase came primarily from lower cost locations -- India, Romania, Montreal and China. Today approximately 16% of our R&D headcount is in a low cost location, up 4 points from the prior year.

Below the operating line, non-GAAP other income and expense was $7 million, down $23 million from a year ago and down $25 million sequentially. The cause of the reduction was FX losses and a decline in interest income.

Income taxes -- we realized a non-GAAP tax benefit of approximately $48 million in the quarter, resulting in a full-year tax rate that is lower than our Q3 year-to-date rate. GAAP diluted loss per share was $0.30 versus diluted loss per share of $0.08 a year ago. Non-GAAP diluted earnings per share were $0.09 versus $0.06 a year ago.

Our fiscal ‘08 full year operating cash flow was $338 million versus $397 million for last year. The decline was due to the increased working capital requirements related to the growth in our business.

Turning to the balance sheet, cash and short-term investments were $2.3 billion at year end, down $296 million from last quarter as we spent $607 million for our acquisition of BioWare and Pandemic Studios. Marketable equity securities and other investments were $750 million at year end, down $116 million sequentially.

During the quarter, we recognized a pretax loss of $106 million in the P&L related to our investments in The9 and Neowiz. At quarter end after the write down, we had a net unrealized gain of $496 million comprised of a $501 million gain on Ubisoft and a $5 million loss on Neowiz.

Gross accounts receivable were $544 million versus $470 million a year ago, an increase of 16% primarily due to the growth in revenue partially offset by a greater portion of Q4 revenue being recognized earlier in the quarter versus last year and stronger collection efforts.

Reserves against outstanding receivables totaled $238 million, up $24 million from a year ago. Reserve levels were 9% of trailing six month non-GAAP revenue, down two points. As a percentage of trailing nine month non-GAAP revenue, reserves were 7%, down one point.

Inventory was $168 million, up $106 million from last year, primarily due to the build in Rock Band inventory for North America and the upcoming launch in Europe.

Goodwill and intangible assets were $1.4 billion, up $510 million sequentially. During the quarter we recorded $528 million related to our acquisition of BioWare and Pandemic Studios. Of this amount, $414 million is classified as goodwill and $114 million relates to identifiable intangible assets. The intangibles will be amortized to the P&L over three to five years.

Ending deferred net revenue from packaged goods and digital content was $387 million, down $208 million sequentially primarily due to the rollout of deferred net revenue.

Now to our outlook; let’s start with the industry. We expect that combined software sales in North America and Europe will grow 15% to 20% in calendar 2008. This increase, relative to our prior statements, is primarily driven by our higher hardware expectations for the Wii and NDS. In mobile, we expect global industry growth of over 15 %.

Guidance -- before I provide our FY09 financial guidance, I would like to highlight changes to our guidance methodology and provide context. First, we are only providing annual guidance from this point forward. Let me explain why.

As you know, our business is hit driven, seasonal and significantly impacted by the release dates for our titles. This creates uneven quarterly comparisons, both sequentially and year-over-year. If we delay a title for quality reasons from one quarter to another in the same fiscal year, while good for the long-term future of the franchise, it could have a significant impact on our quarterly performance without necessarily affecting our annual performance. Moving away from providing quarterly guidance re-emphasizes our commitment to making operational decisions that are focused on creating long-term shareholder value.

In February 2008, for the first time we provided a multi-year strategic plan for EA, highlighting our strategy to deliver revenue and profit growth over the next three years. We believe our annual results will be the best measure of our progress towards our long-term targets. Therefore, going forward we will only be providing annual guidance, updated each quarter.

Second, we expect significant top and bottom line growth in FY09. We expect to add approximately $1 billion in revenue and roughly double our operating profit as compared to fiscal 08.

On the revenue side, much of our growth will come from our EA studios, with over 15 first time launches. This year we plan to release over 55 titles, up more than 10 from last year.

By platform, you can expect us to launch approximately 30 games for each of the PS3 and Xbox 360. On the Wii, we expect to ship over 20 games. We expect to ship 18 and 8 games for the NDS and PSP respectively. For the PC, over 30 games and finally on the PS2, we expect to ship roughly 15 games.

In total, this year we expect to ship over 150 SKUs, up more than 35 from last year.

From EA Partners, we are launching Rock Band on the Wii in North America, will ship Rock Band in Europe for the Xbox 360 and PS3, and will be launching Left For Dead from Valve.

For FY09, we expect co-publishing and distribution revenue to be over 10% of our total non-GAAP revenue. In digital/direct to consumer, we expect to generate over $450 million in non-GAAP revenue, up 35% versus FY08.

In online, we estimate our online non-GAAP revenue will be in excess of $285 million, up approximately 50% year-over-year.

In EA Mobile, we expect our wireless revenue will be in excess of $185 million, up approximately 20% year-over-year. In addition to our existing franchises, we plan to launch SPORE, My Sims and a broad offering of Hasbro titles on handsets around the world.

Before we talk about expenses, let me address operating margin leverage in FY09.

We are guiding to non-GAAP operating margins of 12% to 14% for FY09, or an increase of up to approximately 550 basis points.

Our gross margins are expected to be up 2 to 3 points, reflecting the benefit of the BioWare and Pandemic owned IP. We expect to gain 1 to 1.5 points in G&A expense and we expect to pick up about 1 point in sales and marketing expense.

Let me spend a moment on R&D; we expect that R&D will be roughly the same percent of non-GAAP revenue in FY09 as FY08. We expect non-GAAP R&D will increase roughly 30% year-over-year, driven mostly by the full year effect of BioWare and Pandemic and investments in Online and Hasbro.

We expect a $120 million increase related to our acquisition of BioWare and Pandemic Studios and an additional $40 million investment in our Hasbro initiatives. Excluding the FX impact on expenses and the assumption of funding bonus at 100%, R&D in our EA Studios will be up about 10% year-over-year, related to new IP investments and our online and mobile initiatives.

Below the operating income line we see the following: other income and expense -- in FY08, non-GAAP other income and expense was $98 million primarily comprised of interest income slightly offset by foreign exchange losses. We expect the FY09 other income and expense dollar amount will be roughly half the FY08 actual levels given the steep decline in interest rates. Year-over-year, this decrease translates to roughly $0.10 of EPS.

Income taxes -- as you know, our GAAP tax rate can fluctuate quarter to quarter and we expect that will continue in FY09. For the full year, we expect a GAAP tax rate range of 42% to 50%, which includes one-time acquisition related charges with respect to the integration of VGH.

For non-GAAP, we expect our rate for FY09 to be 28%. This rate represents what we expect for our long-term normalized tax rate. Please note that we are switching our non-GAAP tax rate guidance and reporting methodology to this single tax rate. We believe this 28% rate reflects an appropriate long-term effective rate of our worldwide legal entity and tax structure. You can also use this 28% rate to model the quarters, including loss quarters.

Finally, some comments on P&L phasing during the year. This year we adopted new bonus plans which will result in bonus expense being charged to the P&L in a straight-line fashion instead of being recognized in proportion to quarterly profitability. This impacts the quarterly phasing of our bonus expense. This change will negatively impact operating expenses in Q1, Q2 and Q409 and have a corresponding favorable impact on expenses in Q309.

Our expectations for profits in the first half of the year are significantly lower than current consensus expectations. There are a number of key factors impacting our expected first half of fiscal ’09.

One, the change in bonus phasing will result in an increase of approximately $70 million to $80 million of operating expense for the first half; two, we expect that gross margin in the first half of the year will be in the low 50s due to mix and timing of our EA Partners business. In the second half of the year, we expect gross profit margin will rise to the low 60s; three, we also expect approximately $25 million in other income and expense in the

first half of the year.

These changes, combined with the earlier comments means that profitability in the first half of the fiscal year will be significantly lower than current street expectations.

For our GAAP guidance, for the full year, we expect revenue to be between $4.9 billion and $5.15 billion; we expect GAAP EPS to be between $0.25 and $0.52; gross margin to be between 55% and 58%; and diluted share count to be approximately 331 million shares. This year, we expect 63% to 68% of our total GAAP revenue in the second half of the year. We expect to end the year with roughly $500 million in deferred net revenue related to online-enabled packaged goods.

Now, our non-GAAP guidance. For the full year, we expect, non-GAAP revenue to be between $5.0 billion and $5.3 billion; non-GAAP EPS to be between $1.30 and $1.70 per share; non-GAAP gross margin to be between 57% and 59% -- we expect gross margin to increase year-over-year primarily due to a favorable mix of EA Studio revenue; diluted share count to be approximately 331 million shares; and we assume a non-GAAP tax rate of 28% for the year.

Please note that we expect to roughly double our non-GAAP operating income in FY09 versus FY08. This year we expect 63% to 68% of our total non-GAAP revenue in the second half of the year.

Please see our press release for the difference between our expected GAAP and non-GAAP guidance.

Now our Q1 releases -- we have 19 EA SKUs slated for Q1 compared to 14 a year ago. To date we have shipped: Boom Blox on the Wii; Sims 2 Double Deluxe and Sims 2 Kitchen & Bath Design for the PC; we’ve also started to ship Euro 2008 in Europe on 5 platforms -- PC, Xbox 360, PS3, PS2, and PSP, which will be followed by the North America launch later this month.

We also expect to ship: Battlefield Bad Company on the Xbox 360 and PS3; Mass Effect for the PC; SPORE Creature Creator for the PC; NASCAR 09 on 3 platforms -- Xbox 360, PS3, PS2; Sims 2 Ikea Stuff Pack for the PC; Sim City Societies Destinations for the PC; Sim City Box for the PC; and Command and Conquer 3: Kane’s Wrath for the Xbox 360.

From EA Partners, to date we have shipped: Half Life 2: Episode 2 for the PC; Portal for PC; and Team Fortress 2 for the PC. In addition, we expect to launch Rock Band for the Wii in North America and in Europe for the Xbox 360.

EA Mobile plans to launch nine games on cellular handsets, including Boom Blox and Monopoly, and four games on the iPod.

That concludes our guidance and outlook commentary.

I would like to now turn the call over to Frank Gibeau, President of the EA Games Label.

Frank D. Gibeau

Thanks, Eric. Good afternoon, everyone. On behalf of my team at EA Games, we welcome this opportunity to tell you about some of the great titles we’re looking to deliver in the year ahead.

First, EA Games is a great reflection of how John’s label structure and the city/state model works. We have fundamentally restructured our business from a top-down and highly-centralized organization to a confederation of autonomous creative teams, each with their own culture and vision.

The geographic and creative diversity packed into our Label is impressive. To name a few, we make Warhammer at Mythic in Virginia; Need for Speed at Blackbox in Vancouver; Battlefield and Mirror’s Edge at DICE in Sweden, Burnout at Criterion in London; Command & Conquer in Los Angeles, Spore at Maxis in Emeryville, and Dead Space in Redwood Shores.

Second, we have successfully integrated the BioWare and Pandemic Studios into EA. These two unique and highly respected creative teams will be launching six titles in fiscal ’09, including Mercenaries 2, Lord of the Rings Conquest, Saboteur and Dragon Age.

Third, EA Partners is back as an integral part of our team. We did a great business with Valve on the Orange Box and from our partnership with MTV Networks and Harmonix Studios, we’re shipping Rock Band in Europe as well as debuting it on the Nintendo Wii this quarter in North America. Look for more big news from EAP later this year.

Fourth, our fiscal ‘09 plan calls for dramatic improvement in our operational efficiency. The goal is to increase product quality, schedule predictability, and double our contribution margin this year.

Last and most important, we have an incredible title plan for fiscal 09. We expect to ship over 20 titles, including nine new IPs. I’d love to go deep on each but given time constraints, I’ll mention just a few. I’ll start with three games from our award-winning DICE Studios in Sweden.

First, Battlefield Bad Company launching this June is about a squad of renegade soldiers on a quest for gold and revenge in an open world war zone. With both infantry and vehicle combat, battlefield expands it's best-in-class online multiplayer game play.

Second, Mirror’s Edge -- this is an innovative first person action/adventure with truly a unique look and feel. We are introducing a new videogame heroine, Faith, a young but skilled runner responsible for delivering highly sensitive information in a city closely monitored by authorities.

Third, Battlefield Heroes is an all-new play for free cartoon-style shooter that will bring classic Battlefield game play to an all new mass market. It’s free to play with plenty of cool downloadables available as microtransactions.

Next, from Pandemic Studios is Mercenaries 2. This is a sequel to the 2005 hit. This time, it is about payback, Mercs style. A massive open world action game that delivers over-the-top action, big explosions and world-class production values in a fully destructible environment.

Dead Space is the next product that we will be releasing, launching in Q3 from Redwood Shores -- a sci-fi survival horror game that frankly put will scare the living hell out of you. We are expecting big things from that this Halloween.

Dragon Age, from the BioWare team in Edmonton, is a deep new PC property that is already generating a lot of enthusiasm among the large community of hardcore RPG fans.

And finally there’s Spore from Will Wright and the Maxis studio in Emeryville, which gives players their own personal universe to play in. We’re shipping the Creature Creator in June so players can start building and sharing their creatures long before the worldwide launch this September.

This is a very exciting time at EA. The EA Games label had a great Q4 and we are excited about our lineup in fiscal ’09. Frankly, we can’t wait to get our games in the hands of gamers. With that, let me turn it back to John.

John S. Riccitiello

Thanks, Frank. Before we take your questions, I want to emphasize a few key ideas. First, fiscal ’08 was a year of huge change for Electronic Arts. As we stated a year ago, we had a plan to bring EA back to top-line growth and to show our path to improved operating margins going forward. On these fronts, we are pretty much right where we said we’d be.

Second, on February 12th of this year we publicly disclosed our three-year plan. We laid out goals to increase our top-line nearly 2x from fiscal 07 to fiscal 11 and to increase our operating income by over 500%. Today we provided guidance for FY09 that is entirely consistent with these goals.

With that, we would be happy to take your questions.

Question-and-Answer Session


(Operator Instructions) We’ll take our first question from Brent Thill with Citigroup.

Brent Thill - Citigroup

Thanks. John, can you just remind us the contribution of Bioware Pandemic for fiscal ’09?

John S. Riccitiello

The contribution for fiscal ’09 -- I’ll try to interpret that question as best I can. I think when we announced the transaction last year, we said that it would be adding $300 million approximately in revenue and relative to our then expectations, in which Bioware and Pandemic had been included or part of [each] was included in our EAP business, we said it would be neutral on the income line.

Frankly it is a very profitable business for us. It’s consistent with our -- it’s consistent with the model we had when we completed the transaction, so consistent with our own internal models and accretive for us but very much as expected.

Brent Thill - Citigroup

And just a quick follow-up on R&D, you mentioned 16% is in low cost countries or locations, up four points. Do you expect you can gain further leverage than that through fiscal ’09?

John S. Riccitiello

The answer to that question is yes. What we’ve been doing, for those of you that may not be following along with the question is we’ve been expanding our presence in Shanghai and India and in Romania and Montreal, which due to its tax structure is also a very low cost location, trying to move heads there in a way so we can get better R&D leverage and yes, we expect to continue to progress in that area, particularly on the art front.

Brent Thill - Citigroup



We’ll take our next question from John Taylor with Arcadia.

John Taylor - Arcadia

I’ve got a couple of questions, if I can. The first one, I wonder if you could un-bundled the forecast for software into PC and video and talk about the PC. You guys know as well as everybody else that the PC business has really been soft from a box standpoint, and I just kind of wonder what those two pieces look like and how that fits with your ramped up PC line, and then I’ve got another question after that. Thanks.

John S. Riccitiello

We actually made a conscious decision to simplify our industry guidance, so we are not actually going to un-bundle it for you on the call, apologies for that. We showed 15% to 20%.

I will tell you that I certainly recognize the box side of PC as soft and has been soft for some time. Frankly were it not for The Sims and the World of Warcraft PC box sales, it would be a pretty dismal sector.

I would point out, however, that part of the -- the fastest growing part of this industry is in subscription and microtransaction and in casual games, many of which are pretty much centered on the PC. So one of the things that we try to look at at EA is the total business that’s represented on PC game software and we are seeing a growth business there. And in fact, it’s been growing for several years. It’s just been categorized I think wrongly by looking simply at the box side of the equation.

John Taylor - Arcadia

Okay. All right and then what was catalog as a percent of sales in the fourth quarter, please?

Eric F. Brown

It was 36% in Q408 compared to 40% in Q4 last year.

John Taylor - Arcadia

Okay, and last question -- when you look at the affiliate label business, driven largely by Rock Band or by the Valve products it seems like, can you give us a sense of what that geographic mix is going to look like for either the fiscal year or the calendar year between North America and the rest of the world? Thanks.

John S. Riccitiello

I apologize for this one, but for a variety of reasons we’re not giving out geographic splits on any of our units, whether it be the games label in total or a part of it, which is EAP. I would say that North America is a very, very important market for the music genre for Rock Band and its competitors, whereas Valve titles tend to perform exceptionally well overseas.


We’ll take our next question from Mike Hickey with Janco Partners.

Mike Hickey - Janco Partners

Thank you. Great job on the quarter, guys. Curious -- at your analyst day, you gave a lot of insight into your label structure and provided specific performance goals for each of your labels. Would you guys be willing to break down your fiscal ’08 sales per label as well as your fiscal ’09 guidance per label?

John S. Riccitiello

Well first off, thank you for recognizing the depth of our presentation on February 12th. We are very pleased with that. It’s an important internal milestone for progress and bonus and the rest and we do anticipate updating our analyst presentation at some point in the future and we will be announcing dates for that.

In terms of the year over year, I will give you a rank order for growth -- on the absolute basis, the games label is showing the largest growth, followed by casual, followed by sports, followed by The Sims. The Sims, while showing strong growth, is in a transition year as we introduce Sims 3 towards the end of the year, and it’s really off the back of the big step up on Sims 3 that we see the follow-on expansion pack and downloadable business that we are counting a great deal on.

Mike Hickey - Janco Partners

Okay, and I’m a little perplexed at why you are not providing quarterly guidance. I mean, as long as you guys provide release dates for your games, we are still going to take a shot at building up sales projections per quarter and a game delay would certainly impact street consensus, so if you could provide a little bit more color on that.

And then I think you said first half, the street was too high in terms of earnings estimates. What about sales?

Eric F. Brown

In terms of the rationale in terms of shifting away from quarterly guidance to just annual guidance, that we’ve received input from a number of our institutional investors and there’s more of a trend towards annual only guidance versus quarterly, and so we’ve been paying attention to that. And secondly, the nature of our business, it is fairly variable quarter to quarter as you noted, based on release schedules. We’ve adopted a multi-year business plan for the first time. We are looking out three-plus years as opposed to just three-plus quarters and we think it’s appropriate to align the way that we are planning and also reporting and guiding to this multi-year structure so that we are making good decisions for the long-term. So that is the rationale for moving to annual guidance. And to be clear, each quarter when we speak to you, we will be providing an update on that full-year guidance, so there will continue to be that 90-day checkpoint but we’ll just be speaking to our full-year expectations as opposed to 90-day expectations.

John S. Riccitiello

In terms of the revenue split, we guided pretty significantly above the street consensus for the overall year. If I were to touch on the split half to half, the analysts were, or at least the consensus was a little higher in the first half than we would have expected it to be. Given the strong title slate that we’ve got starting with Spore really in September where we really pick up sort of in spades, and I believe in our script we said 63% to 68% of our revenue is expected in the second half.

Mike Hickey - Janco Partners

Okay, great. And then last question on Spore, do you have any sense at this point the market demand for this game?

John Pleasants

The early release demand indicators are very positive. We are going to be releasing the creature creator soon here in June, which I expect will take that up another notch. This is a game that’s been in development for a very long time. It’s an epic product. It’s from Will Wright and the Maxis team, so we are very excited about it and feel very good about the early indicators of demand worldwide.


We’ll take our next question from Colin Sebastian with Lazard Capital Markets.

Colin Sebastian - Lazard Capital

Let me try on the guidance a little different way -- I think you mentioned the percentage of revenues expected in the first half of the year. In case I missed it, did you break out the portion of operating income you expect over the same time period?

Eric F. Brown

No, we did not explicitly break that out but we did note that there was some pretty important changes to the way that -- for example, we’re accruing kind of the corporate annual bonus that will have the impact of adding $70 million to $80 million of additional expense into the first half of the year versus what would otherwise be expected, so that’s a pretty important commentary about the first half of the year. The other important comment would be our expectations for other income and expense. We are expecting about $25 million in the first half of the year versus consensus, which is more than double that in the first half, so that’s going to impact EPS. And also, we think there’s an important phasing notion about how our gross profit margin evolves throughout the year and so we are guiding to non-GAAP gross profit margins in the low 50s for the first half of the year versus the low 60s for the second half of the year, given our slate of titles and the introduction of new wholly-owned franchises.

John S. Riccitiello

Just to expand on that a little bit, some of you may be confused about our bonus. We are not actually increasing the size of our bonus programs at Electronic Arts. This is something I’ve been talking about for the better part of a year. Effective April 1, we introduced two new bonus programs replacing prior programs. Within the labels, we moved to a -- essentially a share of profitability programs designed to provide the label and development strong incentives to drive profitability and not, if you will, benefit from increased expenditure or increased hiring. We think that’s a right way to line incentives.

And then secondly, we introduced, for those folks that are in corporate and publishing and other staff functions, a program that is driven by individual MBOs in addition to hard financial metrics, including cash flow, operating income, and revenue. And these are written objectives designed to drive increased accountability.

Because of the fact that this is a new written program, we felt a better accounting treatment was to look at both of them as occurring throughout the year where we recognize the expense in each of the four quarters, where previously because it was purely a year-end, P&L driven measure and most of our profit was in Q3, we recorded the lion’s share, if not the entirety of our bonus in Q3. So it’s simply a rephasing and it’s a pretty dramatic rephasing but it’s not a cash flow issue and it’s not a change in expense.

Colin Sebastian - Lazard Capital

Okay, and then in terms of the new franchises for the year that you talked about, I was wondering if you could put that in the context of breaking that out as a portion of revenues for the fiscal year on a non-GAAP basis.

John S. Riccitiello

I don’t think we’ve actually prepared an answer for that particular question but I can give you an insight. I’d say that our 15 new wholly-owned IPs in Electronic Arts is frankly about half [again greater], if not double of anything in recent memory, and my memory goes back to ’97, so it’s a big step-up in new IP. Part of is it driven by the VGH acquisition where we get Mercenaries 2 and Dragon Age and Saboteur, but a great deal of it is just pure investment in new intellectual properties in our core studios. This is where we are getting Face Breaker, where we are getting Sim Animals, where we are getting Spore, where we are getting Tiberium. These are very, very important franchises, including Warhammer.

And then lastly, there’s the Hasbro partnership, which is yielding several new titles for us, including Littlest Pet Shop and Nerf. And they may not sound as exciting to you on the phone if you are a core gamer but trust me, these are really, really strong games.

So it’s hard for me to give you a specific on that. John may want to comment a little bit about how this is developing through the year. John is our Chief Operating Officer.

John Pleasants

Thanks, John. I think that we are very bullish looking at the slate of new IP and being new to the business and having spent most of my time out talking to customers for the last few weeks, or last few months, thinking about it from a genre perspective, action and family are the two biggest categories and areas where we’ve really doubled down with strength. So with Mirror’s Edge, Mercenaries 2, and Dead Space being new IP coming out that we feel really great about. And then family, the continuation and extension of the Rock Band franchises, Harry Potter with the release of the movie, and all the Hasbro suite of titles that we’re releasing, and Boom Blox.

So we’ve really taken the two biggest genres and tried to focus on great new IP in those areas. We’ve also spent a lot of time on the Nintendo Wii platform, so while we expect to pick up one to two points across all of the major three growth platforms this year, Nintendo Wii was a particular focus and I think you heard some of that from John and from Eric in their earlier comments around what we are doing in the sports category with the all play work, as well as a lot of things happening with the Hasbro suite and The Sims suite of titles as well.

So we feel great about that and again, just to reemphasize, much of this is kicking in from sort of Spore on, if you will, so from September to the back-end of the year. So there’s a lot of activity and we feel great about it.


We’ll take our next question from Shawn Milne with Oppenheimer.

Shawn Milne - Oppenheimer

Thanks. John and Eric, I wondered if we’d go back and talk a little bit about the R&D spending again. I know you provided a little bit of a breakout, but higher than we expected in the quarter and it looks like a little higher going forward than we thought. Has there been something or is there new properties, John, that you are investing more in? Is there investing more in the online business? If you could just add a little more color there. Thanks.

John S. Riccitiello

Sure. Just let me frame this for you -- year over year, we are expecting about 26% in R&D. That’s flat year over year but probably the first big piece to pick up is the impact on our P&L in terms of where all the line items in the P&L line up, and the impact of VGH.

So in our prior expectations or in the earliest expectations I think some of you may have had, VGH being Bioware and Pandemic was primarily and EAP partner and now we’re fully incorporating the cost of that business inside EA’s P&L. That’s essentially transferred about three full points into gross margin, so our gross margins are higher but that’s offset by an increase in R&D. If this was still an EAP business and we were publishing the same slate of titles, we would have expected R&D to be about $120 million lower, or put another way, we would have picked up about 300 basis points of operating leverage in the R&D line. It’s neutral. It just moves from one place to another if you assume that we would have had the same title slate, but it is a big shift.

The second issue you asked about is core and there’s both tangible real changes in core and then there’s some changes that I would view mostly as financial or recognition based. So our core spend is up about 17%, but seven full points of that is FX, which is a key part of it, and the bonus. So in this past fiscal year, we did not pay a full 100% bonus and FX has changed importantly for our studios in Sweden, in the U.K., and we do a great deal of development in Canada, where the dollar has decline slightly.

So if you pull out the if you will the pure financial measures where there is no real change, our spending in core studios is up about 10%. And if I take that 10% and give you a few more specifics on that, about half of it relates to new product innovation. Some of that is in mobile POGO and online and some of it is related to our core franchises where we are building new IPs like Mirror’s Edge. And if you want to divide that 50-50, think about half of it being in sort of new direct to consumer stuff and half of it being associated with brand new intellectual properties we hope to successfully launch in this year and years to come.

Shawn Milne - Oppenheimer

Thanks, that’s helpful. And Eric, you had mentioned the percentage you were expecting from EA Partners. Can I clarify; was it roughly 10% or greater than? Because it seems like it has to be greater than.

Eric F. Brown

To be clear, we said that we expect it to be greater than 10% of FY09 total revenue.

Shawn Milne - Oppenheimer

Can you bracket it any more?

Eric F. Brown


Shawn Milne - Oppenheimer

Okay. Thank you very much.


We’ll go next to Arvind Bhatia with Stern Agee.

Arvind Bhatia - Stern Agee Leach

Thank you. I just have a quick question on fiscal ‘11. I just wonder as we bridge the guidance from fiscal ’09 to fiscal ’11, could you comment on where we would see the maximum leverage points and which line items should we be building the most leverage as you go from this year to fiscal ’11?

John S. Riccitiello

Yes, I can give you a rough shape of that but to be honest with you, it’s hard for me to give you a lot more than we did on February 11th. What we guided to on February 11th was more than $6 billion in revenue. We felt highly confident in that and I expressed that very clearly to all those in the audience, and that we sought to get to income pretax of $1.5 billion or greater. We set those as sort of hard marks, sort of lines in the sand for us to meet or exceed.

To get there from where we are right now, I mean obviously the biggest issue is going to continue to be top line growth and we are very confident in that based on the quality of our studios and frankly how well our new label structure is working to generate new intellectual property and improve quality for existing intellectual property and franchises.

In terms of leverage, you can clearly look to the R&D line, which is something that we indicated we wanted to see below 25%. I believe we talked about a number between 20% and 25%, implying somewhere in the middle of that during the February 12th meeting. And we talked about G&A leverage of a couple of points and we pointed out that we’d get some of that from IT and some of that from pure scale benefit. Finance organizations don’t scale with the business, neither to fixed overhead and marketing or sales.

Arvind Bhatia - Stern Agee Leach



We’ll go next to Justin Post with Merrill Lynch.

Justin Post - Merrill Lynch

A couple of questions; first, it looks like your year is very back-end loaded towards the holidays. Do you feel like it’s a better competitive environment given some of the front-loading of big titles this year? And is there a reason for that?

And then secondly, in your plan it did look like you had some R&D leverage planned for this year, and I think the planned guidance was give after the Bioware acquisition, so just wondering if there’s been a change there in your thinking and whether that’s just been pushed out a little bit on the R&D side.

John S. Riccitiello

I’m not exactly -- Justin, what you are referring to about R&D guidance for FY09 because we didn’t actually provide any FY09 guidance at any point. We were very careful not to. And I can also tell you that the shape of our P&L for FY09 is frankly astonishingly consistent with what was underpinning our presentation on February 12th. So in terms of broad guidance, I don’t really feel like there’s a gigantic change.

I do recall though when we gave our call on Bioware Pandemic acquisition, we were quite explicit that relative to otherwise normalizing and declining trends from what we spend in R&D as a percentage of revenue, that the Bioware Pandemic deal would in fact increase that. If you look to the script from our call from last August, I think you would find that’s the case.

What we were talking about there was exactly what I mentioned a few minutes ago, which is R&D expense when it’s an EAP partner shows up in royalties, which is part of cost of goods. Now that the royalties are gone, gross margins are higher but R&D is also higher as a direct offset.

You also asked about the phasing through the year. I guess any one of us can handle that. John, do you want to pick up on that?

John Pleasants

Sure. I think that obviously we studied rather closely what we think the competitive set is out there and when our titles are launching and we are confident that we are going to pick up share not only in each of the four quarters but that we are going to gain share and gain momentum in that share pick-up throughout the four quarters, so the back-end of the year, we are picking up more share than we are in the first part of the year, and that is consistent, by the way, both in North America as well as Europe.

Justin Post - Merrill Lynch

Do you see --

John S. Riccitiello

One observation on that just to add -- we implemented the label structure, which is really I think the starting point for most of our new IP in terms of acceleration in drive and quality really last summer, or last July we put it in place. And what we are talking about is sort of the first of our titles that are coming from that reorganization and attention to content that previously had been run a different way, sort of hitting the slate starting in September and October of this coming year.

So I guess one of the points I’d want to make is when you are going through a dramatic change agenda, some of these things have a longer fuse than others. I would love to have been able to put a renewed emphasis on innovation and product quality in place in July and have it show up for us a few months later, but most of our games have a 12, 15, 18 month gestation period, if not longer.

Justin Post - Merrill Lynch

Thank you.


We’ll take our next question from Edward Williams with BMO Capital Markets.

Edward Williams - BMO Capital Markets

Good afternoon. Just a couple of quick questions for you; can you give us some color as to what the owned versus licensed revenue split was in FY08, how you see it breaking out in FY09? And then looking at R&D again, how many points do you think you could pick up on that 16% level that’s in low cost area throughout FY09? And then lastly, if you can give us some color on the relationship with Harmonix at this point and how long-term should we look at the Rock Band relationship?

John S. Riccitiello

Well, you are not going to like any of our answers because part of what we can’t talk about it because of NDA and part of it we don’t have the answer prepared for you. So on the owned IP, we are going to have to get back to you on that. We’ve been more focused on doing those calculations within labels as opposed to overall, which we can do. But I think it is quite clear that the owned IP percentage is rising in the year, given the strength of The Sims, what’s going on with casual titles like Boom Blox but most importantly what’s going on in the games label with a huge slate of new IP. So it’s up. We’re going to have to get back to you.

When we had our analyst meeting on February 12th, we descried a trend that would get us to the low 20s on R&D. We pointed out that would a combination of the actual R&D being more productive, i.e. generating greater unit volumes and better cost leverage. And this year, we talked about 16% of our heads in R&D being in these low cost locations. There is a rather substantial pick-up planned for the year and we would expect to continue that trend. And it’s the combination of the two which over the two following fiscal years should get us in the range of -- the level of R&D leverage you’d anticipate if you are going from 26% to low 20s.

Frank might want to comment on the MTV Harmonix.

Frank D. Gibeau

Sure. When we signed the deal, we said that it was a multi-year relationship. I think the teamwork between the two organizations, or all three of the organizations -- MTV Networks, Harmonix, and EA -- has been terrific. The results speak for themselves in terms of how we’ve gone into the market with such an innovative product and with such a complicated launch. We are very bullish and the teamwork is great.

Edward Williams - BMO Capital Markets

Okay, and when should we get any color as to a European release of say the Wii and the PS3 for Rock Band?

Frank D. Gibeau

We’re not prepared to announce that at this time. What we’ve told you about our release in Europe is as far as we’ll go on the call.

Edward Williams - BMO Capital Markets

Okay. Thank you.


And we will take our last question from Evan Wilson with Pacific Crest.

Evan Wilson - Pacific Crest

I’ve got two; first, John, could you update us on your thoughts relative to Take Two? I know that’s a hot button with investors and even if you’ve got nothing to say, I think everybody would like to hear some commentary.

And secondarily, relative to your -- the actions in the last three or four quarters regarding game delays for the benefit of quality, could you give us some level of confidence about the titles that you’ve talked about today and whether or not you think -- you know, what the probably is that they will hit the year and be able to contribute in the quarter as you currently have them slated? Thanks.

John S. Riccitiello

On the Take Two, we are obviously contained pretty clearly in what we are allowed to talk about. I would tell you that our offer currently stands at $25.74 a share, roughly $2 billion; that our valuation took fully into account the success of GTA. We had anticipated a result much like has happened in the market and frankly it’s a spectacular game. I’m enjoying playing it and we can offer enormous congratulations to the Rock Star team for the work they’ve done on the game. It’s truly spectacular.

In terms of next steps, we are continuing to work with the FTC. We don’t believe our proposal is in any way anti-competitive. The timing is in their hands and we are waiting on that. And to the extent that there are material new developments, we will of course let you know in due course. That’s really all I can comment on at the moment.

In terms of game delays, I think what I would do is give you Frank on this one, frankly because it was his area, although it wasn’t his area at the time, where the largest portion of our delays took place in prior years and he may want to comment on that.

Frank D. Gibeau

Sure. If you’ll recall from the analyst day, I talked a little bit about the schedule predictability problems that were challenges inside of our label. In fact, we had been running at 50%-plus slip rate in terms of what we had committed to. And that was job one to change as we’ve restructured into the label and as we focused our energies on building great games. And we’ve done a lot of things, both from a management standpoint, from a culture standpoint, from control systems in terms of validating the dates and the resourcing against these projects.

And we feel very good about the slate and the predictability that we’ve committed to to John and the board here at EA with regard to our label. The first half of the year, our product plans that we talked about are very tight, and as we move through Christmas, again very tight. Q4 is a little further out and there’s always titles there that have challenges, but we took an approach this year where we looked at the slate all the way through March and we were very realistic and honest with ourselves about how we were resourced, how we were tracking, what was going on with the project’s velocity, and as a result we believe that we can take our scheduled predictability way up in terms of being accurate.

We’ll be more than cutting in half that percentage that I highlighted earlier. We will definitely be shipping the large majority of our titles on time and it’s a clear goal for us to do that going forward. We’ve enhanced the transparency of the systems and we’ve enhanced the accountability of the teams to making those days.

John S. Riccitiello

Just to expand, EA wide, I’ll give you a quick judgment -- I would say without hesitation that our quality is going to be up this year versus prior year. I would say without hesitation that our ship timing is going to be improved versus prior year. If I had to tell you which will give, ship time will give before quality. So if there’s any hesitation in my voice, it’s that I think we are sort of getting into the better part of our ability relative to quality. We are making big improvements on timeliness but there is still more work to do.

Evan Wilson - Pacific Crest



And I will turn the conference back over to our speakers for any additional closing comments.

Tricia Gugler

Okay. Thank you very much for joining us.


And that does conclude today’s conference call. We thank you all for your participation. You may now disconnect.

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