Our Fourth Quarter Fiscal 2008 Earnings Call. Today on The
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Tricia: Welcome to our fourth quarter fiscal 2008 earnings call. Today on the call we have John Riccitiello – Chief Executive Officer; Eric Brown – Chief Financial Officer, John Pleasants – Chief Operating Officer; and Frank Gibeau – 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 intangibles, • 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 PS3 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. 1 John: 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. • 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 Feb 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 M to $700 M 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, which we reduced by 5 cents 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. 2 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 $1B 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 UK 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 BN in non-GAAP revenue*. In achieving this target, we will have added $2B 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. 3 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 -- • 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 -- 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 FY08, MySims, with two sequels. We’re also introducing a new IP, SimAnimals, and launching the highly anticipated Sims 3.