Electronic Arts' CEO Discusses Q3 2012 Results - Earnings Call Transcript

Electronic Arts (EA)

Q3 2012 Earnings Call

February 01, 2012 5:00 pm ET

Executives

Rob Sison -

John S. Riccitiello - Chief Executive Officer and Executive Director

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

Frank D. Gibeau - President of The EA Labels

Peter C. Ausnit - Vice President of Investor Relations

Analysts

Brian J. Pitz - UBS Investment Bank, Research Division

Justin Post - BofA Merrill Lynch, Research Division

Brian Karimzad - Goldman Sachs Group Inc., Research Division

Edward S. Williams - BMO Capital Markets U.S.

Douglas Creutz - Cowen and Company, LLC, Research Division

John Taylor

Atul Bagga - Lazard Capital Markets LLC, Research Division

Arvind Bhatia - Sterne Agee & Leach Inc., Research Division

Neil A. Doshi - Citigroup Inc, Research Division

Presentation

Operator

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Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Mr. Rob Sison, Vice President of Investor Relations. You may begin.

Rob Sison

Thank you. Welcome to EA's Fiscal 2012 Third Quarter Earnings Call. With me on the call today is John Riccitiello, our CEO; Eric Brown, CFO; Frank Gibeau, President of Labels; and Peter Moore, our COO will be joining us for the Q&A portion of the call. Please note that our SEC filings and our earnings release are available at ir.ea.com. In addition, we have posted earnings slides to accompany our prepared remarks. Lastly, after the call, we will post our prepared remarks, an audio replay of this call and a transcript.

This presentation and our comments include forward-looking statements regarding future events and future financial performance of the company. Actual events and results may differ materially from our expectations. We refer you to our most recent Form 10-Q for a discussion of risks that could cause actual results to differ materially from those discussed today. Electronic Arts makes these statements as of February 1, 2012, and disclaims any duty to update them.

Throughout this call, we will discuss both GAAP and non-GAAP financial measures. Our earnings release and the earnings slides provide a reconciliation of our GAAP to non-GAAP measures. These non-GAAP measures are not intended to be considered in isolation from, as a substitute for, or superior to our GAAP results.

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 in the prior year unless otherwise stated.

Now I'll turn the call over to John Riccitiello. John?

John S. Riccitiello

Thanks, Rob. We are pleased to report a strong third quarter on both the top and bottom line. Our results reflect a great performance by Battlefield 3, Star Wars: The Old Republic, our entire EA SPORTS lineup, especially FIFA and a nice boost from our digital games and services.

This was the kind of quarter a CEO loves to report. It is one which generated our highest operating cash flow in 31 quarters and reaffirms our strategy of creating big hits, digital revenue streams that extend the revenue, profitability and consumer engagement in our brands. We gained share in packaged goods in both North America and Europe on the strength of 2 titles, each of which sold more than 10 million units, Battlefield 3 and FIFA 12. We were the #1 publisher on high-definition systems worldwide for all of calendar year 2011.

We also hit an important milestone at the end of the calendar year. We delivered more than $1 billion in non-GAAP digital revenue on a trailing 12-month basis.

At the end of the quarter, we launched Star Wars: The Old Republic, recording strong initial results with this very important digital service. 2 million people have purchased the game from our retail partners and via direct digital downloads on Origin. This great launch makes Star Wars: The Old Republic the fastest-growing subscription MMO in history. We're incredibly pleased to see this great game from BioWare off to a very strong start. Both Frank and Eric will share further details in their prepared comments.

In terms of guidance, the midpoint of our fiscal year range remains unchanged from the raised guidance on our last call. This implies a more conservative outlook for Q4. Eric will provide detailed guidance in his comments, and our revised Q4 outlook is based on 3 factors.

First, retail demand for Star Wars: The Old Republic was strong, and we shipped units right at the end of December that we had anticipated shipping in early January. Second, we are moving an important social game launch from Q4 F'12 to Q1 F'13, and with it the associated profit. We believe this move will enable us to launch a more highly polished and ultimately more successful title in early FY '13. And third, we are concerned with the financial condition of one of our major European retail partners, which could lead to both increased bad debt and lost sales.

Some of these issues are material or consequential for any periodic beyond fiscal '12, but taken together, these may have an impact of as much as $0.15 EPS in Q4. All in, we've delivered another strong quarter and expect to finish the fiscal year consistent with our original and our recently raised guidance.

Next, I want to give you a progress report on our 3 strategic initiatives: brands, platform and talent.

Brands. EA has a powerful advantage with our more than a dozen globally recognized brands. Our mission now is to transform each of these powerhouse brands into year-round businesses, with steady flow of downloadable content, extensions on new platforms like mobile and social. More content for our consumers, more revenue and better margins for our investors.

Leading the way were 2 brands that sold more than 10 million copies each in FIFA and Battlefield. Each of these global brands is succeeding on multiple platforms, ranging from PC to social and console to mobile from a packaged goods and purely digital channels and business models. This is the template for all of our major brands.

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