Full Transcript of Electronic Arts' 2Q06 Conference Call
Thank you, sir. At cheap air max shoes this time, if you have any comment or any questions, please press "" "1", on your touchtone telephone. If you are using a speakerphone, please turn your mute function off to allow your signal to reach us. Once again, if you have question or any comment, please press "" "1" now. And, we will pause for just a moment to assemble our roster. Your first question comes from Gary Cooper from Banc of America. Please proceed sir.
All right, thanks. So a couple of questions, guys. First, the competition, particularly in NBA basketball. Looks like, they are probably going to cut their price. I am wondering if you anticipate you will cut your pricing on sports games, and specifically do you think that you will take Madden down to $39.99 by, say, Thanksgiving. I got a couple more. Thanks.
In terms of the Madden price break, we have not made that decision to move to $39. We are looking at all titles in our mix right now and the timing of price moves versus what's going on in the marketplace. We feel very good about our sports positioning overall. All of our titles are performing extremely well. Specifically if you look at NCAA and Madden they are up double digits year over year. In basketball we feel very good about our competitive positioning and on the 360 we have four new sports launching in the channel that we believe will set a momentum in November and December that will be very positive for our sports brand for the rest of the line.
Okay. Two more. So it looks like the Q4 guidance is pretty robust here. Godfather still in there. Can you get us in the ballpark of how large you expect that game to be and secondly your advertising line. Last year in the holiday quarter, the advertising spend was way down due to the price reductions and we heard from several people in the industry that EA is not being aggressive in terms of its advertising spend. Can you get news the ballpark of what you think your second half advertising will be like?
I will take the question on Godfather. We will not give you a specific number but we're feeling very good about the title and it is progressing well in the development process, and, again, we are very bullish about that title and its prospects during Q4 in the launch period.
I will take at least the first part, the first part of the question, Gary and then I will ask Frank to provide a little bit of color. I think the good news is, as we look into Q4, we like what we are seeing. When you look at where the PSC is, how it is launching in Europe, and how well our titles are performing, we think that is a positive. I think, discount mlb jerseys you know, by way of, it is more of a factoid as opposed to a trend per se, but for the month of September I believe our segment share on the PSP was over 40. Last week looking at chart track in the UK, six of the top ten games were EA's games on the PSP. So, one, we like what we are seeing in terms of the entertainment quality that we are providing. We like the increased momentum of the PSP. Two, is we like what we are seeing from our Xbox 360 titles. So whether it's the addition of the next three titles in looking ahead to Q4, we like what we are seeing. So we think there are, there are several positives that bode well hopefully for the fourth quarter. I don't know, Frank, if would you like to add any color to that.
The ray ban sunglasses outlet only color I'd like to add on the advertising and sales and marketing support front is that wWe are very confident in the span and positioning that we have for our holiday releases. If you look at the Xbox 360 rollout plan, we will be supporting that with dedicated advertising and marketing that will trumpet the high quality of the titles, as well as the deep and innovative game playing technology. If you look at Harry Potter, James Bond and our Need for Speed Most Wanted launch, all of those are premium titles with very substantial media spends and support across the board.
Our next question comes from Brian Pitz from Morgan Stanley.
Hey, guys. Congratulations on a good quarter. Can you talk about what you have learned from the development of the Xbox 360 platform? Are efforts and costs coming in better than your expectation? And then, just a quick comment on, thoughts on possible price cut for existing consoles this holiday season. It doesn't seem likely, but can you maybe handicap the chance for that? Thanks.
I think it is unlikely that you will see price cuts on the current generation consoles. And I would add to that, I think it is really good news that the channel seems like we will be fully supplied with Playstation 2s this year which was not the case last year. I think that is a positive for the overall business. With regard to development costs on Xbox 360, it is a little too early to draw any conclusions. The first round of titles is probably costing us in the range of $10 million to $15 million, but, again, I don't think that is predicted for the long term. It is too early to make any predictions about exactly what next Gen is going to cost.
Our next question comes from Glen Reid from Bear Stearns.
Hi, good afternoon. A couple of quick questions. You mentioned you are seeing some softness North America. I was wondering if you could be a little more specific in whether that is any specific, you know, market or types of games, and then following up on the Xbox 360 and maybe the Playstation 3, I wondered if you could comment. There's been a few game delays and I am wondering if perhaps, we all know costs are going up, but if there's been any sort of learning curve that's been steeper than was thought and we might see more delays and then finally R spending, you know, if we could, if you could comment on the rate of growth and whether or not this will be the peak year in terms of percent of revenue or maybe we have some more spending in next year. Thanks.
I'll take a cut at the softness in retail. I don't think it is any surprise that retail in general has been off to some degree in the month of October. I think that is across the board in all categories. It has a lot to do with the continuing aftermath of the national disasters that have occurred and $3 per gallon gas. I think in our particular category, there are also some people sitting on the sidelines saving their money for the launch of Xbox 360. So having said all those things, I think there are some real positives ahead for the overall, for the overall industry in our category, and as I mentioned earlier Playstation 2 hardware will be fully supplied. We have the PSP platform we didn't have last year, and once the Xbox 360 launches, there is going to be a lot of excitement around that in the channel both in North America and Europe. There are many positive things that we will see happening in the months of November and December and through the holiday season.
I would add just one thing to that plan, and I will jump into the second part of your question. The other thing to make note of is, is Europe is also performing very, very well, whether it is the month of September or the month of October for that matter. They are pacing strongly and in a great position across the board, so whatever that weakness is that we are seeing in North America that has not been evident in Europe. Secondly, on, on the delay side. First, I would say that, look, we are always cautious, but yet we are, we believe in what we said relative to our SKU plan for the year, and, and we are cautiously optimistic and feel that our titles will ship as planned. Could there be future delays or delay? You bet. This is entertainment. It's software. And also as it relates to these next generation titles, we are really inventing how to build a title today for the Playstation 3. On the cost side for next year looking at our fiscal year, I, I won't, I don't think we are in a position that we can be pinned down today. We really haven't, we are just really ramping into the full scale development of the Playstation 3. If you had to, if I had to put a number around it, I would sort of say that 10% to 15% year over year growth, but again that's just sitting here today well ahead of our planning process and well ahead of really understanding what it will take to build a Playstation 3 game.
Great. Can you get a little more clarity on the fourth quarter? It looks like a pretty big revenue growth quarter on a year over year basis. Can you talk a little bit about what the key titles are for that beside Godfather. Anything else, in that quarter?
The other title we are very excited about is Black, which is being developed by our Criterion Studios. That is finishing extremely well. We have high expectations for that. That is wholly owned intellectual vorts that makes it doubly important for us. FIFA Street will be launched on five platforms in Q4. Fight Night III will be launched on four platforms. That product looks extremely strong as well. Expansion Pack on, The Sims 2. NCAA Baseball in that quarter. So it is a very strong line up with some exciting new products that are debuting from Electronic Arts. I think Frank mentioned that earlier, Godfather, Black, arena football, coach, and NCAA Baseball is all brand new and the two that we are focused on are Godfather and Black. We think those are going to be home runs.
Great. Okay Larry and one more, on Playstation 2, when nhl jerseys outlet that launched you guys came out with I think 40% market share, really had industry leadership which would carry through for a couple of years. Can you discuss any similarities and differences you are willing to talk about the Xbox 360 launch as it kicks off the cycle?
We intend to be prolific in terms of the number of titles that, that we will publish for that platform. I think we mentioned we will have five during the launch window. We will have eight in the marketplace by the end of our fiscal year. And I would say that next fiscal year, although we haven't finalized our planning process, you can expect something in the range of 20 to 25 titles on the Xbox 360 platform next year. We expect to be aggressive, we expect to be prolific. We think our products are very high quality relative to, to everybody else that is launching in the introductory window, and I am not going to predict that we will have market share that begins with a 4, but we expect to have a significant market share.
Thank you, we go next to Anthony Gikas with Piper Jaffray.
Hi, guys. A couple of questions. Has there been a profitability drive for some of the Playstation Portable products that you put in the market. It looks like you captured the market share that you were looking for and I guess I was wondering how development expenses are playing out. Are they coming in below plan? Second question. You talked about the Xbox 360 titles. Do you anticipate that all of those will launch at the $59.99 retail price point and then I have a quick follow up?
Tony, I'll take the first part. I would say, you know, overall pretty much as planned on the PSP. Growth margin wise, we are pretty much in line, slightly ahead of the average for the quarter. On development side, as you know, one of the things that our studio team did very early on was we built an organization that we call Fusion. And the reason that we did that was we wanted to figure out ways to build economies of scale around the development of high quality titles for the PSP and I think that early investment while painful from an income statement to make early on continues to pay dividends in terms of overall long term profitability. Development costs, I would put titles on average sort of in the $2 million to $3 million a copy. And that's where we stand today and look to get, continue to drive more synergy and higher quality as we go forward.
What I would add to that with regard to market share. First, for year to date in North America we are running about a 26% market share. That actually exceeds our internal expectations when we originally planned the business on the PSP. I think Warren mentioned we had six out of the top ten titles, most recently in the UK. We also have the top four. So, our PSP titles are performing very, very well in Europe and North America. We are very happy about that.
The second question on the 360 price point, we will be launching our lineup at $59. When you look at the titles and the incredible breakthrough quality that they have, the $59 price point does match against what we are providing as entertainment. On a broader, broader response, our form of entertainment is still the most competitive that there is out there on a price per hour basis even at the $59 price point.
Thank you, we go next to Edward Williams from Harris Nesbitt.
Good afternoon. A couple of questions. First of all, Frank, can you give us a little more color of the retail environment going into the holidays, specifically if there are platforms that are at risk, such as, how is the Xbox performing with the 360 launch is about to come and then other couple of long hedging questions.
Okay. In terms of platform mix right now, year to date the Xbox platform is performing very well. You do see a bit of cross ownership between the Playstation 2 owners and Xbox owners. What they are doing is buying the Xbox version of games. Now how the 360 introduction changes that, we don't know yet, but to date that's where we have seen some strength. In terms of the handheld, the PSP is doing quite well with the recent releases of Liberty City and Madden and we anticipate a strong Christmas with the handheld mix but the NDF is doing very well with the product and hanging around very competitively at several accounts.
We move next to Evan Wilson from Pacific Crest Securities.
Hi there. Thanks for taking the call. I was hoping you could give us a little more detail on the catalyst for moving FIFA in Europe into the quarter. I know that we always like to think on this side of the Street because the quarter is light, but I know that is not the case. Also I wanted to know what the primary driver was for lowering the bottom of the revenue guidance. Would you say that was specifically the weakness in the North America retail environment?
I will take the first part of that question. It is really simple. The product was finished. It was, we thought it was extremely high quality, and we wanted to get to the market place first ahead of Pro Revolution Soccer and that strategy has worked extremely well for us. We are exceeding expectations an the title is performing extremely well but it was simply get to the market first.