Our Second Quarter Fiscal 2009 Earnings Call. Today
Total Page：16
File Type：pdf, Size：1020Kb
Tricia Gugler: Welcome to our second quarter fiscal 2009 earnings call. Today on the call we have John Riccitiello, our Chief Executive Officer; Eric Brown, our Chief Financial Officer and John Pleasants, our Chief Operating Officer. 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 this 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 the following items: • amortization of intangibles, • stock-based compensation, • acquired in-process technology, • restructuring charges, • losses on strategic investments, • certain abandoned acquisition-related costs, • the impact of the change in deferred net revenue related to certain packaged goods and digital content. In addition, starting with its fiscal 2009 results, the Company began to apply a fixed, long-term projected tax rate of 28% to determine its non-GAAP results. Prior to fiscal 2009, the Company’s non-GAAP financial results were determined by excluding the specific income tax effects associated with the non-GAAP items and the impact of certain one-time income tax adjustments. Our earnings release provides a reconciliation of our GAAP to non-GAAP measures. 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. Please see our supplemental information on our website for our trailing twelve month segment shares and a summary of our financial guidance. 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-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 October 30, 2008 and disclaim any duty to update them. Now I would like to turn the call over to John. 1 John Riccitiello: Thanks, Tricia. Let me touch briefly on our agenda today – • I’m going to start on Q2, our back-half, the economy, and an update on how things are going at EA. • Eric will review our Q2 results in detail and provide our specific guidance for FY09. He will also discuss our cost reduction initiatives. • John Pleasants will discuss key learnings from Q2, the current retail environment, our holiday slate and our progress in our digital direct-to- consumer businesses. • Then I’ll wrap up with a few closing thoughts. • After that – Eric, John and I will be happy to take your questions. Q2 Results: We came in as expected on the top and bottom line. Our Sports franchises, especially Madden, performed well. SPORE and Warhammer Online met our high expectations. And, I want to call out the teams behind Madden, Tiger, NHL, FIFA, SPORE, Dead Space and Warhammer for creating some incredibly innovative, high-quality titles. Looking forward, we believe we have an outstanding slate of great titles for the second half of our fiscal year and especially for the crucial holiday quarter. Despite this strength, we believe it is now prudent to lower our guidance for the balance of the fiscal year. As you know, we have moved Harry Potter to FY10 with the slip of the movie, which is particularly hard -- costing us $0.13 EPS -- as we have completed and expensed a solid game but won’t see revenues until next year. And in recent weeks, we have experienced sharply adverse FX – the recent spike up in the dollar compared to where it was when we provided guidance in May and July, if it holds, will reduce our earnings per share by approximately $0.12. Third, we are seeing continued weakness with catalog sales and are starting to see weakness at retail in October. These factors, balanced against our total set of puts and takes, have us reducing our range by $0.30 EPS both at the top and bottom end. There are four areas I would like to address before turning the microphone over to Eric: • First, the broad economic environment • Second, EA’s recent operational performance • Third, the flow through of top line revenue at EA to bottom line EPS • And, fourth, the reduction in force we announced earlier today and other planned future cost reductions. In addressing the economic environment, I’ll start by telling you what I believe most of you know. The game industry has been very resilient in past recessions. History shows us that the technology driver of new consoles has outweighed the negative of a recession. And, this time we have three strong and well differentiated consoles, each in growth mode – having three strong players at 2 one time is unprecedented. And, I am sure you know just how good a value games are to the consumer. A single $60 game can deliver 50 to 100 hours of play, a far better consumer value than a trip to the movies or a live music or sports event. We also note just how strong games sales have been thus far this year, up 30% in North America and we estimate 22% in Europe. Retailers, both in Europe and North America, have added space for the game industry. Still, we recognize that these times are unprecedented, and so far in October, there are indicators that consumers and retailers are being more cautious. We remain optimistic for our sector longer term, but cautious in the short term. Turning to EA’s operational performance. Let me start with some of the negatives. We’ve experienced a few slips and kills. Recently, we killed Tiberium, a move we made for quality reasons. And Saboteur is moving to FY10. And, as I mentioned, we are also seeing continued weakness in our catalog sales. On the positive side, we are seeing across-the-board improvements in innovation and quality of our games, whether on PC, consoles, mobile phones or in Sports or with our new IPs. Overall, our metacritic scores are up. This is translating to solid front line sales for both our sequel titles and new IPs. On-time delivery of games is up in all four of our labels. And EA Partners (EAP) continues to perform well in sales and in signing new profitable deals. Now on to the question of how revenue flows thru to our margins. If you look at our growth year-over-year, we expect to add over $1.0 BN in revenue this year, with overall operating margins increasing up to 300 basis points. There are three aspects of this performance that I would like to peel apart for you: our core business, our EAP business and our investments in digital direct initiatives. EA’s business, excluding co-publishing and distribution, is expected to grow from $3.3 BN in FY08 to over $4.0 BN in FY09. We’re expecting at least 500 basis points of operating leverage year-over-year. We’re not yet where we want to be – but we expect a doubling in operating margin year-over-year. We expect to deliver this performance even while making significant up-front online investments. These investments include our spending on the Star Wars: The Old Republic MMO, developing seven of our franchises into mid-session games, the infrastructure to self-publish micro-transaction games in Asia, our Nucleus online registration and billing system and other platform technologies to build direct-to-consumer business models for our core packaged goods games. We think these investments are crucial to EA’s long term success because in the future we see slower growth in the basic packaged goods business and higher margins, greater growth and reduced cyclicality with these new D2C businesses. We’re investing approximately $150 M in these activities. We believe this investment, while compressing near term results, sets us up for success longer term. Our EAP business is growing very rapidly, increasing our co-pub and distribution revenue from approximately $700 M in FY08 to over $1 BN in FY09. Operating margins in this business, while solid, are less than our own business and, this year are expected to be single digit. The FY09 negative for the P&L is the result 3 of the recent success we’ve had in signing new properties from some of the best developers in the world. Each of these new co-development deals involves some up-front investment, and in FY09 we’re running about $35M ahead of FY08 on these investments, with no associated revenue. This development is expensed now with significant returns expected in the future. If we were to cut short our investments in EAP and digital direct, our operating profit would look much better today – with approximately 350 points of more operating margin. Although that would help for the short term – cutting these investments is not the right answer for the long term. Now I’d like to turn to the cost actions we announced today. Given the uncertain economic environment and the ever present need to drive greater efficiencies, earlier today we announced that we are reducing headcount. We are taking costs out – both now and as we progress thru our FY10 planning.