Electronic Arts Q2 2011 Earnings Call Transcript

Electronic Arts (ERTS)

Q2 2011 Earnings Call

November 02, 2010 5:00 pm ET

Executives

John Riccitiello - Chief Executive Officer and Executive Director

John Schappert - Chief Operating Officer

Eric Brown - Chief Financial Officer and Executive Vice President

Analysts

Michael Hickey - Janco Partners, Inc.

Eric Handler - MKM Partners LLC

Brian Pitz - UBS Investment Bank

Jess Lubert - Wells Fargo Securities, LLC

Andrey Glukhov - Brean Murray, Carret & Co., LLC

Arvind Bhatia - Sterne Agee & Leach Inc.

Peter Ausnit

Colin Sebastian - Lazard Capital Markets LLC

Edward Williams - BMO Capital Markets U.S.

Justin Post - BofA Merrill Lynch

Atul Bagga - ThinkEquity LLC

Anthony Gikas - Piper Jaffray Companies

Presentation

Operator

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Good afternoon. My name is KC, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter Fiscal Year 2011 Earnings Conference Call. [Operator Instructions] I will now turn today's call over to Peter Ausnit, Vice President of Investor Relations. Sir, you may begin.

Peter Ausnit

Thank you. Welcome to EA's Fiscal 2011 Second Quarter Earnings Call. Today on the call we have John Riccitiello, our Chief Executive Officer; Eric Brown, our Chief Financial Officer; and John Schappert, our Chief Operating Officer. Please note that our SEC filings and our earnings release are available at investor.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 the future financial performance of the company. Actual events and results may differ materially from our expectation. 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 November 2, 2010, 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 Riccitiello

Thank you, Peter. We are pleased to report a strong Q2 with revenues and EPS above expectations. This completes a strong first half of fiscal '11. EA continues to focus on three strategic objectives to drive shareholder value: producing fewer, bigger better packaged good games; driving growth in digital; controlling costs and creating operating efficiencies. In Q2, we delivered against all three objectives.

A great example of fewer, bigger, better games is FIFA 11. The title owes its success in the marketplace to our ability to deliver top quality games, on time, with effective marketing support. FIFA sales are up 20% versus last year on a comparable basis with sell-in approaching 8 million units. We grew Digital revenue by 35% year-over-year in the first half of fiscal '11 through a combination of paid downloadable content, social games and our success in the iPad and iPhone. We are also making excellent progress on Digital revenue derived from our core packaged goods titles.

DLC revenue on packaged goods is up 200% year-over-year. In Q2, we also implemented EA's SPORTS Online pass, which creative yet another Digital revenue stream from games that start with a disk. We remain on track to reduce annualized operating expenses by $100 million this year thanks to a better leveraged product portfolio, more efficient marketing, global sourcing and shared technologies. EA is focused on cost containment, and Eric will discuss our restructuring plan to reduce key licensing and development costs further starting in fiscal '12.

While we are ahead of our plan at the mid-year point, we still have most of the year ahead of us in terms of revenue and earnings. We are maintaining full year guidance top and bottom line. Now let me step back and offer a take on the industry.

The games industry is growing. Digital is growing by 25% to 30%, and we're seeing solid double-digit growth in the High-Definition Packaged Good segments. Packaged software sales for PC and High-Definition consoles are expected to be up in mid-teens in the current calendar year, whereas standard definition software for the Wii and dedicated handhelds are expected to be down sharply. What we are seeing is three distinct market segments: strong growth in Digital, strong growth in High-Definition package and declines for Wii and handheld software. This distinction is highly relevant for investors that often lost in the broader headlines about packaged goods trends as reported by NPD.

Before I turn it over to Eric, I want to thank our studio and publishing team for great execution in Q2. Eric?

Eric Brown

Thank you, John. Q2 results exceeded our expectations for both non-GAAP revenue and non-GAAP EPS. Non-GAAP revenue of $884 million reflects our efforts to build Digital revenue and drive Packaged Good hits, with notable contributions from the worldwide launch of FIFA 11 and strong catalog sales. Combined with higher gross margins and delayed expense phasing, Q2 revenue upside translated to non-GAAP EPS of $0.10, which was better than our expectations of a non-GAAP loss of $0.15 to $0.10 per share for the quarter.

Q2 non-GAAP net revenue is $884 million, down 23% year-over-year as expected on fewer titles. On a GAAP basis, net revenue was $631 million. Non-GAAP revenue was down on a lighter title schedule compared to Q2 last year, which had nine titles, including The Beatles: Rock Band and Need for Speed SHIFT in its launch schedule. Q2 GAAP net revenue of $631 million was down by 20% year-over-year. The effect of foreign exchange rates on non-GAAP revenue year-over-year was an adverse impact of $23 million this quarter.

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