Notice of 2008 Annual Meeting of Stockholders Proxy Statement Annual Report on Form 10-K for the Fiscal Year Ended March 31, 2008
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Notice of 2008 Annual Meeting of Stockholders Proxy Statement Annual Report on Form 10-K for the Fiscal Year Ended March 31, 2008 Stockholder Letter Stockholder Letter (This page intentionally left blank) To Our Stockholders, FY08 was a good year for both the interactive entertainment industry and for EA. In the past calendar year, Stockholder Letter total software sales grew 26 percent to more than $33 billion. A few short years ago, gaming was almost entirely about packaged goods games made for four or five platforms. Today, games generate revenue on over 10 platforms including consoles, PCs, handhelds and mobile phones. In addition to purchasing discs in stores, consumers pay for content via downloads, subscriptions and micro-transactions. Systems like the Wii from Nintendo are leading the way for the industry to capture new audiences — tens of millions of women, seniors and children who were largely unreachable just three years ago. Sony’s PLAYSTATION 3 and Microsoft’s Xbox 360 enable graphic fidelity that is beyond what many imagined possible five years ago. Accessible games like Rock Band and EA’s Pogo service are reaching whole new communities of players. Online games are burgeoning around the globe and particularly in Asia where millions of players meet, compete and form communities in rich massive multi-player worlds. We believe these trends suggest the audience for interactive games can grow from a few hundred million today to as many as two billion in the next decade. Fiscal 08 Review EA’s performance in FY08 tracked, and in some respects exceeded, the industry’s growth. We delivered improved financial results, made good progress on operational imperatives and set a strategic framework for dynamic growth in the next three years. Our performance was particularly encouraging in that some key negative trends were reversed. After three years of flat sales, we added $574 million in GAAP revenue, an increase of 19 percent, and nearly $1 billion in non-GAAP revenue, an increase of 30 percent. We exceeded our top-line revenue guidance for the fiscal year and delivered within our bottom-line guidance range. We are very pleased with the strength of our revenue growth in FY08, however, there is room to improve on profitability. After experiencing segment share losses in early FY08, we reversed that trend in the back half of the year. This was done in part with the introduction of new intellectual properties such as Army of Two, an innovative game from our Montreal Studio which sold more than 1.8 million copies in its debut. Another success was Burnout Paradise, a critically acclaimed game from our Criterion Studio which sold 1.5 million copies in the fiscal year. A major contributor to EA’s improved segment share performance in the second half of the year was the resurgence of our EA Partners business, which combines EA’s powerful publishing capacity with the creative output of innovative independent game developers. In FY08 we launched critically acclaimed games like Crysis with Crytek and The Orange Box with Valve. Rock Band, which we released in partnership with MTV Networks and Harmonix, was a huge hit. Our digital direct-to-consumer business, which includes mobile and online, delivered $342 million in revenue — up over 25 percent. Within that, online revenue was up with the continued expansion of digital downloads and micro-transactions, including the launch of EA SPORTS FIFA Online 2 in Asia. Our Pogo online service is a particularly bright spot in our direct-to-consumer story, generating $100 million in revenue last year. In mobile, despite challenges in the first half of the year, we got the business back on track. Our revenue was up seven percent for the full year with the back half up 11 percent year-over-year. We rebuilt our relationship with T-Mobile and launched new games under our Hasbro license. Like other platforms, success on mobile is defined by big hits and we’re pleased that our title, MONOPOLY HERE AND NOW, is a top-ten seller on each of the four largest carriers in North America. We also took steps to address EA’s cost structure. We closed a studio facility in Chicago and consolidated our UK development operations into one facility. We moved headcount to low-cost locations and increased the focus on outsourcing. And we consolidated our online technology initiatives into a centralized team that will service each label with a common platform. Finally, we executed on two major strategic initiatives. We completed the acquisition of BioWare and Pandemic Studios, which together brought to EA 10 new intellectual properties and added to our team of incredibly talented people. We also announced a long-term partnership with Hasbro whereby EA will develop content from Hasbro’s incredible stable of properties such as MONOPOLY, NERF and LITTLEST PET SHOP. We expect each of these initiatives to add to EA’s profitable growth for years to come. Net, we’re pleased with our progress on the top line and put in place strategies that we believe will accelerate profitable growth in the future. Our Change Agenda We began FY08 with the recognition that recent business trends — technology transformation, shifting consumer preferences and the competitive landscape — called for a big change at EA. To address these, we outlined four clear strategic objectives for the next three years. 1. Increase Segment Shares — We set a long-term goal to increase our packaged goods segment share from the mid-teens to the low 20’s on a global basis. 2. Improve Margins With Cost Efficiency and Increased Productivity — We established goals to substantially increase our operating margins. 3. Expand Digital Revenue — While we will continue to build our traditional packaged goods business, digital direct-to-consumer business models of subscription, digital downloads, micro-transactions and advertising will be a major part of EA’s revenue mix in the years to come. 4. Execute Smart Mergers and Acquisitions — Smart M&A brings new creative teams and intellectual properties which can be leveraged by the unique strength of EA’s global publishing infrastructure. In addition, we are also targeting transactions that will accelerate our move to digital direct-to-consumer revenue streams. To deliver on these strategic objectives, we re-organized our Company and brought in key new leaders. We created four labels, each focused on a particular set of consumers, properties and development teams. The key here is focus — each label brings together studios and product marketing teams with a common mission of creating great content and growing the business in a profitable way. EA CASUAL ENTERTAINMENT LABEL — led by industry veteran Kathy Vrabeck, is responsible for establishing a leadership position in the fast-growing market for games played by families, women and kids. They are focused on lighter games and platforms like mobile and casual online gaming. EA GAMES LABEL — Frank Gibeau, an executive with an incredible eye for games, is responsible for growing our largest label. EA Games includes powerhouses like Need for Speed, massive multi-player games like Warhammer Online, new properties like SPORE and independent games published through EA Partners. This label is chartered with making blockbuster titles that appeal to core gamers around the world. THE SIMS LABEL — led by 24-year EA veteran Nancy Smith, is the group that established the template for our re-organization. The Sims team is focused on expanding the brand by creating experiences that allow our users to be creative and social in their game play. The Sims brand recently sold their 100 millionth disc — a huge milestone for our industry. EA SPORTS LABEL — led by another industry leader and innovator, Peter Moore, is focused on extending the reach and profitability of the most widely recognized brand in interactive entertainment. With both league licenses and original properties, they start every season with a new game packed with innovation and updated features, players, teams and stadiums. Every year, EA SPORTS games just keep getting better. We also appointed John Pleasants, an executive with deep experience in both traditional and online businesses, as EA’s COO and President of Global Publishing. This role consolidates responsibility for our global publishing business and provides leadership to drive the Company’s digital transformation. Finally, we welcomed a new Chief Financial Officer, Eric Brown. Eric will lead our efforts in Finance and IT globally and will be a driver of initiatives to improve efficiency and deliver better margins. Stockholder Letter While it’s too soon to declare victory, there are early signs that the new structure is working. There are more new games in development at EA than at any other time in our history. Quality scores are trending up. And a recent employee survey confirmed that EA is now a better place to work. Looking Ahead — FY09 EA is projecting FY09 to be another year of big growth on both the top and bottom line. This growth will be enabled by the new team and organization approach and by the strongest and largest slate of titles ever delivered in EA’s history. In total, we are forecasting to ship over 150 SKUs in FY09 — up more than 35 from last year. This year’s game portfolio includes innovative sequels and extensions to some of our most popular franchises, including: • MySims Kingdom from the Sims team. This title follows last year’s successful launch of the MySims franchise which was exclusive to the Nintendo platforms. • NBA Live — this basketball title staged a big comeback last year. Breakthrough innovations being developed this year promise another great experience. • Battlefield: Bad Company — One of our most popular PC franchises is moving to the Xbox 360 and PLAYSTATION 3.