Electronic Arts Inc. Q3 FY 2014 Results
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Electronic Arts Inc. Q3 FY 2014 Results January 28, 2014 Safe Harbor Statement Please review our risk factors on Form 10-Q filed with the SEC. • Some statements set forth in this document, including the information relating to EA’s fiscal year 2014 guidance and title slate, contain forward-looking statements that are subject to change. Statements including words such as “anticipate”, “believe”, “estimate” or “expect” and statements in the future tense are forward-looking statements. These forward-looking statements are preliminary estimates and expectations based on current information and are subject to business and economic risks and uncertainties that could cause actual events or actual future results to differ materially from the expectations set forth in the forward-looking statements. Some of the factors which could cause the Company’s results to differ materially from its expectations include the following: sales of the Company’s titles; the Company’s ability to manage expenses; the competition in the interactive entertainment industry; the effectiveness of the Company’s sales and marketing programs; timely development and release of Electronic Arts’ products; the Company’s ability to realize the anticipated benefits of acquisitions; the consumer demand for, and the availability of an adequate supply of console hardware units; the Company’s ability to predict consumer preferences among competing platforms; the Company’s ability to service and support digital product offerings, including managing online security; general economic conditions; and other factors described in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2013. • These forward-looking statements are valid as of January 28, 2014 only. • The preliminary financial results set forth in this document are estimates based on information currently available to Electronic Arts. While Electronic Arts believes these estimates are meaningful, they could differ from the actual amounts that Electronic Arts ultimately reports in its Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2013. Electronic Arts assumes no obligation and does not intend to update these estimates prior to filing its Form 10-Q for the fiscal quarter ended December 31, 2013. 2 EA Growth Trends Net Revenue 1 Gross Profit 1 ($ in Millions) $4,159 $4,186 $3,828 $3,793 $3,907 66% 66% 63% 61% 2,959 2,130 2,207 Packaged 55% 3,589 2,995 1,663 1,700 Digital 1,227 570 833 FY10 FY11 FY12 FY13 FY14E FY10 FY11 FY12 FY13 FY14E Operating Cash Flow Diluted EPS 1 ($ in Millions) ~$600 $1.30 $324 $0.85 $0.84 $320 $277 $0.70 $0.44 $152 FY10 FY11 FY12 FY13 FY14E FY10 FY11 FY12 FY13 FY14E 1 On a non-GAAP basis. FY14 non-GAAP tax rate is 25%. Through FY13, the non-GAAP tax rate was 28%. 3 Q3 FY14 Guidance vs. Actuals Ending December 31, 2013 GAAP Non-GAAP Guidance Actuals Guidance Actuals Net Revenue $775 $808 $1,650 $1,572 Gross Profit Margin 30% 36.0% 68% 68.1% Operating Expense $646 $583 $600 $540 Tax Expense $15 $10 $129 $133 Net Income/(Loss) ($439) ($308) $388 $398 Diluted Earnings/(Loss) ($1.42) ($1.00) $1.22 $1.26 Per Share Diluted Shares 309 309 318 317 In millions, except per share data. 4 Q3 FY14 Financial Summary GAAP Non-GAAP Q3FY13 Q3 FY14 Q3 FY13 Q3 FY14 Net Revenue $922 $808 1,182 $1,572 Gross Profit Margin 53.5% 36.0% 65.7% 68.1% Operating Expense $532 $583 $529 $540 Operating Income/(Loss) ($39) ($292) $247 $531 Operating Margin (4.2%) (36.1%) 20.9% 33.8% Diluted Earnings/(Loss) ($0.15) ($1.00) $0.57 $1.26 Per Share Operating Cash Flow $363 $685 EBITDA $60 ($199) $277 $564 In millions, except per share data. 5 EA Digital Revenue1 by Platform PC Console Smart Phones / Feature Phones / Tablets Other YOY YOY QuarterlyGrowth Trailing 12 Months Growth ($ in Millions) ($ in Millions) 1,861 27% 517 27% 71 (26%) 15 (32%) 1,470 366 41% 407 110 39% 96 377 22 26 79 1,070 259 58 657 34% 195 23% 119 149 492 108 158 324 767 23% 185 197 33% 623 148 478 Q3 FY12 Q3 FY13 Q3 FY14 Q3 FY12 Q3 FY13 Q3 FY14 1 In millions, on a non-GAAP basis. PC includes browser. 6 EA Digital Revenue1 by Type Full Game Extra Subs / Ads / Mobile/HH Downloads Content Other YOY YOY QuarterlyGrowth Trailing 12 Months Growth ($ in Millions) ($ in Millions) 1,861 27% 517 27% 437 24% 1,470 407 125 26% 352 377 380 6% 99 66 (16%) 1,070 84 268 358 67 79 213 15% 216 741 27% 123 585 185 391 103 113 157% 303 73% 44 195 175 Q3 FY12 Q3 FY13 Q3 FY14 Q3 FY12 Q3 FY13 Q3 FY14 1 In millions, on a non-GAAP basis. 7 FY 14 Titles and Services HD Subscription PC Client/Browser Mobile/Tablet Social FY14 Releases Others to be announced Existing Live Services 8 Guidance – Q4 FY14 Ending March 31, 2014 GAAP Non-GAAP Net Revenue $1,070 $800 Gross Profit Margin 77% 71% Operating Expense $569 $525 Tax Expense $15 $10 Net Income (Loss) $230 $29 Earnings (Loss) Per Share $0.72 $0.09 Diluted Shares 318 318 In millions, except per share data. Non-GAAP Tax Rate: 25%. These forward-looking statements are valid as of January 28, 2014 only. Electronic Arts assumes no obligation to update these forward-looking statements. 9 Guidance – Full Year FY14 Ending March 31, 2014 GAAP Non-GAAP Net Revenue Publishing and Other Net Revenue $1,922 $2,107 Digital Net Revenue $1,500 $1,700 Distribution Net Revenue $100 $100 Total Net Revenue $3,522 $3,907 Gross Profit Margin 61% 66% Operating Expense $2,209 $2,041 Tax Expense $44 $137 Net Income (Loss) ($130) $411 Earnings (Loss) Per Share ($0.42) $1.30 Diluted Shares (Basic for Loss) 308 316 Operating Cash Flow ~$600 In millions, except per share data. Non-GAAP Tax Rate: 25%. These forward-looking statements are valid as of January 28, 2014 only. Electronic Arts assumes no obligation to update these forward-looking statements. 10 Guidance - Phasing FY14 Quarterly Revenue1 Non-GAAP Q1 Q2 Q3 Q4E Net Revenue Non-GAAP 13% 27% 40% 20% GAAP 27% 20% 23% 30% 1 These forward-looking statements are valid as of January 28, 2014 only. Electronic Arts assumes no obligation to update these forward-looking statements. The difference in GAAP and non-GAAP quarterly phasing is due to the change in deferred net revenue (online enabled games). 11 FY14 Announced Titles Q1 Games Fuse (1) Console Q2 Sports FIFA 14 Console Handheld/Mobile PC Madden NFL 25 Console Handheld/Mobile NCAA Football 14 Console NHL 14 Console Q3 Sports FIFA Manager 14 PC NBA Live 14 Console Games Battlefield 4 Console PC Need for Speed Rivals Console PC Q4 Games Titanfall (1) Console PC Plants vs. Zombies: Garden Console Warfare (1) Co-Published Title 12 Supplemental Financial Information Guidance1 Currency Assumptions • Exchange rates remain volatile • Current guidance FX assumptions: • $1.37 USD/Euro • Revenue and EPS decreases if the Euro weakens v. USD • $1.63 USD/British Pound Sterling • Revenue and EPS decreases if the British Pound Sterling weakens v. USD • $0.94 USD/Canadian Dollar • R&D costs increase if the Canadian Dollar strengthens v. USD • Using spot exchange rates as of January 27, 2014: • Neutral to FY14 non-GAAP EPS • Negligible impact for remainder of FY14 non-GAAP Net Operating Income 1 These forward-looking statements are valid as of January 28, 2014 only. Electronic Arts assumes no obligation to update these forward-looking statements. 14 Non-GAAP Financial Measures • To supplement the Company’s unaudited condensed consolidated financial statements presented in accordance with GAAP, Electronic Arts uses certain non-GAAP measures of financial performance. The presentation of these non-GAAP financial measures is not intended to be considered in isolation from, as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the Company’s results of operations as determined in accordance with GAAP. The non-GAAP financial measures used by Electronic Arts include: non-GAAP net revenue, non-GAAP gross profit, non-GAAP operating income (loss), non-GAAP net income (loss) and historical and estimated non-GAAP diluted earnings (loss) per share. These non-GAAP financial measures exclude the following items, as applicable in a given reporting period, from the Company’s unaudited condensed consolidated statements of operations: • Acquisition-related expenses • Amortization of debt discount • Certain non-recurring litigation expenses • Change in deferred net revenue (online-enabled games) • College football settlement expenses • Loss (gain) on strategic investments • Restructuring charges • Stock-based compensation • Income tax adjustments Through fiscal year 2013, the Company used a fixed, long-term projected tax rate of 28 percent internally to evaluate its operating performance, to forecast, plan and analyze future periods, and to assess the performance of its management team. Accordingly, the Company applied the same 28 percent tax rate to its non-GAAP financial results. Beginning in fiscal year 2014, the Company has applied a 25 percent tax rate to its non-GAAP financial results. Electronic Arts may consider whether other significant non-recurring items that arise in the future should also be excluded in calculating the non- GAAP financial measures it uses. Electronic Arts believes that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding the Company’s performance by excluding certain items that may not be indicative of the Company’s core business, operating results or future outlook.