Electronic Arts Management Discusses Q1 2013 Results - Earnings Call Transcript

Electronic Arts (EA)

Q1 2013 Earnings Call

July 31, 2012 5:00 pm ET


Rob Sison

John S. Riccitiello - Chief Executive Officer and Executive Director

Kenneth A. Barker - Interim Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Frank D. Gibeau - President of The EA Labels

Peter R. Moore - Chief Operating Officer


Neil A. Doshi - Citigroup Inc, Research Division

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

Brian Karimzad - Goldman Sachs Group Inc., Research Division

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

Sean P. McGowan - Needham & Company, LLC, Research Division

Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division

A. Justin Post - BofA Merrill Lynch, Research Division

Atul Bagga - Lazard Capital Markets LLC, Research Division

Douglas Creutz - Cowen and Company, LLC, Research Division



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 2013 First Quarter Earnings Call. With me on the call today are: John Riccitiello, our CEO; Ken Barker, Interim CFO; and Frank Gibeau, President of Labels. 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 the 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 expectations. We refer you to our most recent Form 10-K for a discussion of risks that could cause actual results to differ materially from those discussed today. Electronic Arts makes these statements as of July 31, 2012, and disclaims any duty to update them.

Throughout this call, we will discuss both GAAP and non-GAAP financial measures. The comparable GAAP measures for certain non-GAAP measures to be discussed are: Q1 net revenue of $955 million; digital revenue of $342 million; gross margin of 78.5%; operating expenses of $535 million; and resulting EPS of $0.63 per diluted share.

During this call, unless otherwise stated, the financial metrics will be presented on a non-GAAP basis. 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, our CEO.

John S. Riccitiello

Good afternoon. EA delivered a solid performance in our first fiscal '13 period, hitting EPS guidance for the quarter. The EPS loss of $0.41 was at the high end of our guidance and $0.01 ahead of the Street. The quarter was marked by a series of puts and takes that reflected the strength and diversity of our business across multiple brands, channels, business models and geographies.

The disappointing results of Star Wars: The Old Republic were largely offset by a powerful performance from Battlefield 3 Premium service, although revenue recognition rules will push this very significant EPS driver into our fourth quarter. Industry weakness in packaged goods was offset for EA by share growth on console and continued strength in digital, including on our own Origin platform. In the first quarter, 66% of our revenue was generated by online games and services.

And finally, a sector-level slowdown in social network games was more than offset by share gains for EA. And we also saw double-digit growth in mobile driven by games on smartphones and tablets. What you're seeing is a strategic balance that none of our peers can duplicate. We have strength in a dozen great brands, strength in strong market positions across multiple channels and business models.

In general, the hits offset the misses, allowing us to keep our promises, meeting or exceeding guidance for 10 consecutive quarters and maintaining strong guidance of double-digit EPS growth in a very dynamic transition market for games. We have established solid fundamentals and a clear strategy for future growth. We're bullish on EA's future. And today, we are announcing that our Board of Directors has authorized a share buyback totaling $500 million.

With that, I will turn the call over to our interim CFO, Ken Barker.

Kenneth A. Barker

Thanks, John. Starting with a review of Q1. EA's overall performance was in line with the guidance we provided on our last earnings call.

Total Q1 non-GAAP net revenue was $491 million, roughly in line with our guidance of $500 million. Note that this quarter's non-GAAP revenue does not include revenue from our recently launched Battlefield 3 Premium subscription service. $37 million of Battlefield 3 Premium sales were generated in June, beating our expectations by a wide margin. However, we will recognize these sales as revenue in the fourth quarter when we release the fifth expansion pack entitled End Game. Our prior non-GAAP guidance had been based on Battlefield 3 Premium revenue being recognized when the sale is made.

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